The Treaty includes a reduced withholding tax rate on certain transactions. Taxpayers should review the terms of the Treaty to determine how they might benefit from its provisions.

On January 11, 2016, the Costa Rican Congress approved the Double Taxation Treaty between Costa Rica and Germany for the avoidance of double taxation with respect to taxes on income and capital (the Treaty).

The Treaty was concluded on February 13, 2014. It was approved by the German Parliament on October 15, 2014, and by the German Federal Council on November 7, 2014. It will enter into force once both countries have exchanged their respective ratification instruments.

The Treaty generally follows the 2010 OECD Model Tax Convention.

Permanent establishment

The Treaty follows the traditional definition of permanent establishment (PE), i.e., any fixed place of business through which the business of an enterprise is partially or wholly carried on. It also includes a non-comprehensive list of PE examples, such as a place of management, branch, office, factory, workshop, mine, oil or gas well, quarries or any other place of extraction of natural resources.

In addition, a construction or installation project constitutes a PE if it lasts more than six months.

The following activities do not constitute a PE: (1) the use of facilities for the sole purpose of storage, display or delivery of goods owned by the enterprise; (2) the maintenance of a fixed place of business for the enterprise's sole purpose of purchasing goods or collecting information; and (3) the maintenance of a fixed place of business for the enterprise's sole purpose of carrying out preparatory or auxiliary activities.

The presence of a dependent agent can trigger a PE if the agent habitually exercises an authority to conclude contracts on behalf of the enterprise.

A PE will not be triggered when activities are carried out through an independent agent acting in the ordinary course of its business activities.

Business profits

Under the Treaty, the profits of an enterprise resident in a contracting State are only taxed in that State unless the enterprise has a PE in the other contracting State, with the exception of profits that constitute items of income subject to specific treatment under the Treaty, e.g., dividends, interest or capital gains, which are not considered business profits.

Dividends

Dividends may be taxed in the State of the beneficiary's residence. Dividends may, however, be taxed in the paying entity's country of residence with a withholding tax that should not exceed 15%. If the beneficiary is a company (other than a partnership) that directly holds at least 20% of the share capital of the company paying the dividends, then the withholding tax should not exceed 5%.

Interest

Interest may be taxed in the State of residence of the recipient. It may also be taxed in the contracting State from where it is paid with a withholding tax rate that does not exceed 5%.

Interest paid from Germany to the Costa Rican government is exempt from German taxes. Interest paid from Costa Rica under a loan guaranteed by Germany for exportation or foreign direct investment, or paid to the German government, the Deutsche Bundesbank, the Kreditanstalt für Wiederaufbau or the Deutsche Investitions-und Entwicklungsgesellschaft, is exempt from Costa Rican taxes.

When interest is paid in connection with (i) the sale of commercial or scientific equipment on credit, (ii) the sale of goods by an enterprise to another enterprise on credit or (iii) a loan of any type made by a bank resident in one of the contracting States, such interest can only be taxed in the contracting State of which the recipient is a resident.

Royalties

Royalties may be taxed in the State of residence of the recipient and in the contracting State in which they originate at a reduced rate that does not exceed 10%.

Payments made for the use of industrial, commercial or scientific equipment are included in the definition of royalties and are consequently taxed at source even in the absence of a PE.

Capital Gains

Capital gains derived from the transfer of real estate may be taxed in the contracting State where the immovable property is located.

Capital gains derived from the sale of shares in companies whose assets consist mainly of immovable property are taxed in the contracting State where the immovable property is located. Capital gains derived from the sale of shares in other types of companies are taxable only in the contracting State of which the seller is a resident.

Exchange of Information

The Treaty also includes an exchange of information clause that follows the OECD model.

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