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May 30, 2023

Costa Rican Executive Branch files comprehensive tax reform bills

  • The Executive Branch in Costa Rica has proposed four bills that would affect the income tax and property tax (on certain vehicles), as well as eliminate certain VAT exemptions and strengthen aspects of the government's tax control power.
  • Taxpayers and the general audience will want to closely follow the bills to determine the impact of the potential comprehensive tax reform.

On 18 May 2023, the Costa Rican Executive Branch filed several bills that seek to reform the current tax system. The bills include approving a new Income Tax Law, eliminating specific Value Added Tax (VAT) exemptions and granting greater control and inspection powers to the Tax Authority.

Income Tax Law bill, Bill No. 23.760

Personal Income Tax

The bill would establish a Personal Income Tax levied on the following Costa Rican-source income:

  • Salary (income from dependent personal work, i.e., general employment relationships)
  • Retirement and pension income
  • Income from economic activities carried out, including business and professional activities
  • Capital income and capital gains (including foreign-source passive income)
  • Income from exchange differences

Individuals who have their tax residence in Costa Rica will be considered taxpayers. In most cases, tax residence is established if an individual's period of stay in the national territory is equal to or greater than 183 days during the tax period.

The Personal Income Tax follows a global income tax methodology. To determine the taxable amount, all of the individual's taxable income makes up in a single tax base that will include: (i) a general base, including income from salary, retirement and pensions, economic activity and real estate capital (i.e., income from rentals), and (ii) a special base, which combines capital income (i.e., dividends, interests, royalties) and capital gains.

To determine the tax base, taxpayers may deduct certain costs and expenses from their income. Additionally, the general tax base will be adjusted by a deduction of a vital minimum amount included in the law (approx. CRC 10,104,000 per year). This vital minimum amount will be updated periodically.

A progressive tax rate ranging from 10% to 30% will apply to the resulting adjusted general tax base and a 15% tax rate will apply to the special tax base.

The full tax amount will be calculated by adding the two amounts (i.e., (general tax rate x general tax base) + (special tax rate x special tax base)). This amount can be reduced by any partial tax payments made and withholdings, as well as deductions for double international legal taxation.

Corporate Income Tax

The bill would establish a Corporate Income Tax levied on Costa Rican-source income received by legal entities, including income derived from the performance of an economic activity, capital income and capital gains (including foreign-source passive income) and income from exchange differences.

The Corporate Income Tax will have a single taxable base, calculated as all the income the taxpayer obtained during the fiscal year reduced by deductible costs and expenses properly linked to the economic activity carried out by the taxpayer.

The tax rate will be 30% in general. This amount can be reduced by partial payments made and tax withholdings, as well as deductions for double international legal taxation.

The bill's main changes to the current Corporate Income Tax include:

  • Taxing all passive income from foreign sources
  • Doubling the tax rate for capital income and capital gains, from a 15% to a 30%
  • Eliminating the 2.25% rate for capital gain on assets acquired before the 2018 tax reform entered into force
  • Eliminating the exclusion of bank interest for calculating the limitation on deductible interest
  • Eliminating the exemption for companies' dividend distributions within the Free Trade Zone Regime

Nonresident Income Tax

The bill would establish a tax on income that nonresidents obtain from Costa Rican sources. Costa Rican-source income includes income from salary, pensions, the exercise of economic activities with or without a permanent establishment, as well as capital income and capital gains.

If the income is obtained through a permanent establishment, taxpayers must be taxed under the Corporate Income Tax at the 30% general rate. If the income is obtained without a permanent establishment, a 15% withholding tax will apply.

Bill to strengthen tax control, Bill No. 23.759

The bill aims to provide greater tools to the Tax Authority for tax control. The reforms proposed to the Tax Code include:

  • Modifying the tax liability regime
  • Modifying the statute of limitations
  • Giving the Tax Authority power to inspect premises and seize documents and assets of interest for the tax control procedures
  • Reforming and simplifying tax audit procedure
  • Modifying the tax debts collection procedure

Bill on eliminating specific tax exemptions, Bill No. 23.762

The bill proposes to modify the following current tax exemptions and reduced VAT rate by:

  • Eliminating the exemption on sales or import of medical equipment and on equipment for people with special needs; the sales or import of these products will be taxed at a reduced rate of 2% of the VAT
  • Increasing to 13% the current 4% VAT reduced rate on purchases of airplane tickets originating in or with destinations in the national territory
  • Eliminating the reduction of three percentage points in the general rata of the VAT applied to sales of wood; sales of wood would be taxed at the 13% VAT general rate

Bill of the property tax on vehicles, vessels and aircraft, Bill No. 23.761

The Bill seeks to modify the current property tax on vehicles, vessels and aircraft. The changes include changes to how the tax base is determined and new sections associated with valuing motor vehicles, motorcycles and other taxed assets.

Payment of the tax must be made between November 1 and December 31 of each year, by the means determined by the Ministry of Finance.

Changes possible

It is important to note that the provisions included in the bills may undergo changes during the parliamentary process, discussion, and approval in the Legislative Assembly.

Taxpayers and the general audience will want to closely follow the bills to determine their potential impact.


For additional information with respect to this Alert, please contact the following:

Ernst & Young, S.A., San José, Costa Rica

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor