January 10, 2022 Costa Rica's Congress will discuss a bill that would modify PE definition If approved, the bill would eliminate the term "essential activity" from the permanent establishment definition. With this modification, a lower threshold would apply for triggering a permanent establishment. Costa Rica's Congress will discuss a bill that would amend the definition of permanent establishment (PE) in Article 2 of the Income Tax Law. To become law, Congress needs to approve the bill in two debates. Current law defines a PE as any fixed business site or place in which the essential activity of the domiciled person is totally or partially performed. However, the European Union determined, among other things, that the incorporation of the term "essential activity" in the definition sets a higher threshold for triggering a PE than the internationally accepted principles (i.e., OECD Model Convention). As a result, the EU included Costa Rica on the so-called "gray list" of non-cooperative jurisdictions for tax purpose. Because of its inclusion on the "gray list," Costa Rica's Executive Branch proposed the bill to modify the current PE definition. If approved, the bill would amend the PE definition by eliminating the term "essential activity." Therefore, the bill would define a PE as any fixed business site or place in which the domiciled person's activity is totally or partially performed. ———————————————
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