World Wide Tax News Issue 54 - March 2020

Tax reform: Income tax and Value Added Tax

Costa Rica has experienced the biggest Tax Reform of the last two decades. These changes (that were passed in July 2019) consist of important modifications to the Income Tax Law and a completely new regulation for VAT.

Income tax

Regarding Income Tax, the Law (effective since 1 July 2019) included various mechanisms to increase tax, such as:

  • Restrictions of deductible expenses (for example: restrictions on payments remitted to non-cooperative jurisdictions listed by the CR Government, or restrictions on financial expenses)

  • New taxable events (such as non-habitual capital gains or benefits derived from savings and investments kept by Associations of Workers).

The main addition consists of a new chapter dedicated to Capital Gains (previously treated as non-taxable events) and special cases of income (derived from rental property, or other kind of assets, such as income derived from the lease of vehicles or machinery, dividends, and interests derived from investments in securities).

This new chapter includes the following general rates:

  • Capital gains: 15% - based on the difference obtained as a result of the sale of an asset
  • Income derived from rental property: 15% out of the 85% of total monthly income
  • Income derived from the lease of movable property, dividends, or interests from investment in securities: 15% of the gross amount of the benefit.

Value Added Tax

The General Sales Tax was replaced by the Value Added Tax (from 1 July 2019), which covers all transactions of services and goods (with a closed list of exemptions). A territorial principle applies for VAT, meaning that only local consumption of services and goods is subject to taxation.

The use of online services or downloads by technological platforms are now subject to VAT (for instance, Netflix, Spotify, etc). The Tax Authority has issued guidelines about this kind of service, indicating that service providers may register for VAT purposes in order to withhold and report the tax, or credit card processing entities should withhold and report the tax on behalf of the consumers. Where the consumption of these services takes place outside Costa Rica, consumers may request a reimbursement. 

The general tax rate is 13%. Exemptions include finance operations, the use of banking platforms to make payments or change currency, the leasing of housing property to the extent that the lease does not exceed 1.5 x base salary, export of goods or services, transactions with certain public or welfare entities, etc. (listed in article 8 of the Value Added Tax Law).

Other important changes

As a result of this Tax Reform, other important changes were introduced in order to strengthen the Tax Authority:

  1. The use of electronic invoices as the only support documentation accepted for tax purposes (with few exceptions- the general use started during the second semester of 2018)

  2. A Registry of stockholders and beneficial owners of all CR Corporations and legal entities; including an obligation to report once a year-starting since September 2019.

  3. The obligation to register all CR Corporations (with no economic activity) under the Tax Authority and file an annual return, reporting assets and equity of the Corporation, starting registration since January 2020 and filing of returns will start next year.

Marianela Masis
[email protected]