The corporation (sociedad anónima, or SA) and the limited liability company (sociedad de responsabilidad limitada, or SRL) are the most common types of companies in Costa Rica. Branches of foreign entities are also viable vehicles to engage in local operations, but are less commonly used because of potential non-tax-related liability considerations.

From a corporate perspective, one of the key differences is its administration. While an SA is managed by a board of directors, with a minimum of three members (president, secretary and treasurer), an SRL is managed by one or more managers and vice-managers.

There are further differences regarding stock capital. While share capital in an SA is composed of a determined amount of common shares, the stock capital in an SRL should be composed of a determined amount of nominative quotas.

From a corporate tax perspective, there is no difference between an SA, an SRL and a branch; all three entities are subject to the same rates and treatment. Nonetheless, in relation to dividends/earnings distributions, SRLs are subject to a deemed dividend distribution rule, whereby interest payments made in favour of quotaholders of an SRL are recharacterised as dividend distributions. The expense is therefore not deductible and the whole amount may be subject to dividend withholding tax (ie, 15%).

Except for very specific types of partnerships, there are no domestic transparent or disregarded vehicles for local tax purposes. All local legal vehicles duly organised under the laws of Costa Rica as well as any permanent establishments of foreign entities, engaged in a local taxable trade or business, should be treated as domestic taxpayers subject to all applicable filing and paying obligations.

For US investors, the local SRL should qualify as a domestic vehicle that may elect to make a “check the box election” for US tax purposes. Local SAs are characterised as per se entities.

Legal entities (ie, incorporated businesses) are considered residents for the fact of being incorporated according to the Costa Rican National Registry.

Other elements may be used as tests to determine the residence of said entities, such as where the entity is domiciled, the effective management location of its businesses, or any other element that allows the determination of residency.

Legal entities duly organised in Costa Rica – as well as branches, agencies or permanent establishments of entities non-domiciled in the country – are required to pay income tax as domiciled entities.

For the fiscal year 2022, legal entities with gross income exceeding CRC112,070,000.00 should be subject to a 30% corporate income tax rate. Smaller companies may be subject to a reduced rate of 5%, 10%, 15% or 20% depending on the amount of annual income derived.

There are no transparent entities. All local taxpayers are subject to tax at the entity level.

Taxable profits are calculated over net income, which is determined as gross income less deductible costs and expenses that are necessary to produce taxable income. Under the applicable generally accepted accounting principles (GAAP) rules (the International Financial Reporting Standards, or IFRS), taxable profits and deductible expenses have to be recorded using the accrual method of accounting.

In Costa Rica, the main foreign investment incentive is the Free Trade Zone Regime (the "FTZ Regime"). Specifically, the FTZ Regime is an incentive system offered by the Costa Rican government to companies that invest in the country in activities such as manufacturing, services, trading and logistics, and R&D, and meet certain minimum investment, employment, local added value, qualification as a strategic industry or operation, and other requirements and obligations.

Companies operating under the FTZ Regime are granted several tax holidays and exemptions, which, depending on the type and size of the investment project, may include a corporate income tax holiday of 100% for the first eight or twelve years and then 50% for the following four or six years (depending on whether the investment is made in a high or low development area). Reduced corporate income tax rates may also be available for certain projects. Additionally, FTZ companies are granted other benefits, such as a dividend withholding exemption, a withholding exemption on remittances abroad (eg, interest, royalties, technical advice, services and commissions), customs duties, VAT and real estate property tax (ten years).

There are certain industries, such as banking and finance, as well as insurance and professional services, that may not qualify for the FTZ Regime. Nonetheless, support and ancillary activities related to the activities may be authorised.

Please refer to 2.2 Special Incentives for Technology Investments.

Taxpayers may generally carry forward net operating losses for three years. Agricultural companies may carry forward net operating losses for five years.

Certain initial costs and expenses that do not have to be capitalised as specific assets for GAAP and tax purposes (pre-operational expenses) incurred by a local entity may be deducted for corporate income tax purposes within the first five fiscal years as of the start-up date of operations of the company.

Carry-backs are not allowed for tax purposes.

Local companies may not deduct interest expenses derived from non-banking and financial institutions in excess of 30% of the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA) for 2021 and 2022 and then the percentage will be reduced by 2% each year until it reaches 20%.

Interest paid to local financial institutions supervised by the Costa Rican financial entities’ regulator or foreign financial institutions duly supervised in their country of residency should not be subject to this deduction limitation.

There are no specific consolidated tax group regulations. Each entity is deemed as an individual taxpayer. Therefore, there is no consolidated relief or alternatives to utilise company losses of entities within the same group of control.

Capital gains are subject to capital gains tax of 15%, which is levied on the net gain derived from the sale of tangible and intangible assets. For the first sale of goods and rights acquired before 1 July 2019, taxpayers are allowed to elect to use a special (one-off) capital gains tax rate of 2.25% of the gross purchase price.

Capital losses should be deductible against gains subject to capital gains tax provided certain requirements are met.

Nonetheless, capital gains may be characterised as ordinary income subject to corporate income tax (30%) in any of the following circumstances.

• The sale of the assets is part of the company’s ordinary trade or business. It is considered part of its “habitual” activity as defined in the law.
• The goods or rights transferred are used to generate taxable income; eg, assets are used for the production of the entity’s products or rendering of services.
• The asset being transferred is a depreciable asset. Depreciable property is in general subject to a “recapture” rule that will characterise the gain as ordinary income.

Real Estate Capital Income Regime

Companies engaged in real estate operations – such as leasing, subleasing and the constitution or transfer of rights, use or enjoyment of real estate – may elect to file and pay income tax under a special real estate capital income regime. Taxable income is computed based on a special taxable base that is determined by deducting from gross revenue a standard (fixed) deduction of 15% of said revenue. The standard deduction is 20% for non-financial investment funds. The resulting net income is subject to a 15% real estate capital income tax rate.

However, taxpayers that have at least one employee on their payroll who is dedicated to the entity’s real estate operations may elect to file under the ordinary corporate income tax regime and pay corporate income tax on their net taxable income (using all applicable tax deductions). In such cases, taxpayers are required to file and pay income tax under the corporate income tax regime for at least five years.

Dividend Tax

Local entities (eg, corporations, limited liability companies, branches and permanent establishments of foreign entities) should also be subject to dividend taxation at a rate of 15%. Dividend tax is withheld by the entity that would be jointly and severally liable for reporting and paying said tax to the tax authorities. Dividend distributions between local entities may not be subject to dividend tax withholding, provided the holding entity is engaged in a trade or business. Dividend withholding tax is deferred until earnings are distributed to domestic and foreign resident individuals, foreign entities or local passive holding companies. Once tax is paid in a local-to-local distribution, no further dividend taxation should apply on the following distributions.

Real Estate Transfer Tax

Direct and indirect transfers of real estate should be subject to real estate transfer tax. An indirect transfer of real estate is defined as a change of control of a legal entity that holds local real estate. However, the law does not define what, exactly, should be interpreted as a change in control and the corresponding regulations have not yet been issued. For purposes of applying this rule, this firm's interpretation has been that a change of control implies the transfer of more than 50% of the voting shares of a legal entity.

The taxable event is the indirect or direct transfer of real estate. The applicable tax rate is 1.5%. This transfer tax applies to the transaction value, which should be the higher of the purchase price and the property’s recorded value.

Stamp Tax

Stamp taxes are payable on every executed contract unless a specific exception is established by law. They should be paid by fixing the actual stamps to any given document or the receipt of payment of the stamp tax (which can be paid before local authorised banks) on said documents or certified copies of the documents.

In general terms, the taxable event is the signing of the corresponding agreement within the Costa Rica territory. This tax applies to all types of private contracts signed in Costa Rica. If the agreement is signed abroad, the taxable event is the filing of the agreement in any public office in Costa Rica. Therefore, it should be possible to defer payment until such moment if the signing occurs abroad.

In the event that the contract is agreed in foreign currency, the stamp tax will be paid by converting such currency to colones at the exchange rate established by law, regardless of the exchange rate in effect on the date the legal stamps are cancelled.

The parties to the agreement are equally liable to pay the stamp tax unless otherwise agreed between them. The “general” rate applicable to this tax is CRC5 per CRC1,000; in other words, 0.5% of the estimated value of the contract. This tax applies to every contract signed (eg, principal contract and subcontracts).

Legal Entities Tax

Legal businesses are subject to an annual legal entities tax (Impuesto a las Personas Jurídicas). All business entities (eg, corporations and individual limited liability companies) and branches of a foreign company duly registered in the Mercantile Registry are subject to pay this annual tax. The tax has to be paid by January 30th of each year.

The amount of the tax for 2022 onwards depends on whether the entity is registered as a taxpayer or inactive (eg, an asset holding company with no operations) and the entity’s gross income for purposes of determining its corporate income tax bracket. The tax is determined by applying a specific percentage to a local reference basis that was defined as the base salary of an administrative assistant of the Judicial Authority (for 2022, the base salary is CRC462,200.00). The applicable rate and amount are determined as follows:

• inactive entities – 15% of base salary (BS), CRC69,330 to be paid for 2022;

• active but with no reported revenue – 15%, CRC69,330;

• active and with revenues below 120 BS – 25%,        CRC115,550;

• income taxpayer under the Simplified Income Tax Regime (small companies)       – 25%, CRC115,550;

• active and with revenues between 120 and 280 BS – 30%, CRC138,660; and

• active and with revenues equal to or exceeding 280 BS – 50%, CRC231,100.

Most closely held local businesses operate under a corporate form, either through an SA or an SRL.

There are no rules that regulate or limit individual professionals from earning income at corporate rates. Individuals may elect to engage in business activities personally or through a business entity. If they are duly registered as individual taxpayers with an economic activity with the tax authorities, they should be subject to the corresponding income tax rates applicable to individuals engaged in business activities and the self-employed.

There are no applicable rules in this jurisdiction.

Dividends paid or credited by business entities to individuals or entities are in general subject to a 15% withholding tax. Dividend distributions paid to another entity domiciled in Costa Rica are exempt, provided that the recipient is an entity that carries out an economic activity and is subject to income tax or is the holding company of a financial conglomerate or group duly supervised in Costa Rica. Dividend tax is deferred until earnings are distributed to individuals, foreign entities or non-operating local holding companies.

Dividend distributions paid with shares of the same company are also exempt.

Domiciled companies include companies incorporated in Costa Rica and companies that have a permanent establishment in Costa Rica.

The aforementioned rules should apply to dividends from, and gains derived from the sale of shares of, a local publicly traded company.

Remittances abroad or any payment in general that qualifies as local-source income should be subject to withholding taxes.

The withholding tax rates applicable to payments abroad for interest, dividends and royalties in Costa Rica are:

• profits or dividends – 15%;
• interest, commissions and other financial expenses – 15%; and
• royalties, trade marks, franchises, formulas, technical and financial services, and similar payments – 25%.

It is important to note that payments by a local entity directly to its parent company for certain types of charges – such as technical, financial and other types of advice, as well as for the right of use of intellectual property – shall be subject to a deduction limitation of 10% of the local entity's gross revenue.

The primary tax treaty country that foreign investors use to make investments in local corporate stock or debt is Spain.

Costa Rica also has tax treaties with Germany, Mexico and the United Arab Emirates, and has multiple tax information exchange agreements.

The tax authorities may, in general, challenge the application of tax benefits derived from double tax treaties (DTTs), in which case local taxpayers are required to properly document the transaction and provide supporting documentation of their international structure (eg, certificates of tax residency, economic substance requirements, and legal documentation related to the operations).

In addition to specific anti-avoidance and abuse provisions that may apply under the DTTs, the Costa Rican Income Tax Law and the Tax Code of Standards and Procedures include very broad anti-avoidance and abuse provisions as well as economic reality and substance over form provisions that grant ample powers of interpretation and action to the tax authorities to review and challenge transactions.

Intercompany transactions, both domestic and international, are generally subject to domestic transfer pricing regulations. There are no specific exclusions, or excluded amounts or types of transactions.

Transfer pricing is usually a tier one priority and a focus for the tax authorities in their examinations. The main issues that are usually reviewed include intercompany charges for, eg, headquarters costs, services rendered abroad, technical support, royalties and related-party financing. Another area of focus is buy and sale transactions between entities of the same corporate group; for example, transactions between foreign vendors or suppliers related to the domestic importer entity. Trading companies are also usually scrutinised, and, locally, transactions between, for example, companies engaged in various operations within a supply chain, such as a group that is engaged in the importation of raw materials, manufacturing, distribution and retailing through different legal entities and transfers of goods or services within the various companies.

There are no specific rules or limitations related to these types of arrangements. Limited risk distribution arrangements should be acceptable, as long as they are properly documented, the terms and conditions are at arm's length and reflect the economic reality and purpose of the business, and, in general, the overall functions, risks and activities are in compliance with the applicable transfer pricing regulations.

The local transfer pricing documentation requirements are generally very aligned with, and contain many of the requirements that apply under, the OECD standards. There are a number of specific deviations; for example, comparison of costs/expenses of intercompany transactions in prior years, and identification and documentation of other intercompany transactions that may affect the intercompany transactions under review. Costa Rica also recognises the use of the commodities-based pricing method.

Costa Rica only has DTTs with Spain, Germany, Mexico and the United Arab Emirates. Its overall experience in dealing with treaties is generally very limited and there have only been limited rulings or guidelines issued by the tax authorities.

There is no information available regarding the resolution of transfer pricing disputes through the application of those tax treaties and mutual agreement procedures.

There is very limited experience related to implementing dispute resolution mechanisms under tax treaties.

From a practical perspective, compensating adjustments are highly unlikely to be feasible outside situations where a DTT can be applied. Please refer also to 4.7 International Transfer Pricing Disputes.

In general terms, local branches of non-local corporations and local subsidiaries are subject to the same corporate income tax rules.

Capital gains derived from the transfer of local assets, such as stock in local companies, should generally be subject to taxation. However, only direct transfers of local stock should be subject to domestic capital gains tax (regardless of whether the seller is a resident or non-resident). There are no specific indirect transfer rules (except for real estate). Accordingly, gains derived from the sale of shares of, for example, a foreign holding entity that owns stock in a domestic company should not be subject to local capital gains tax. Nonetheless, there are broad anti-avoidance and abuse provisions that may eventually challenge transactions if they are deemed not to have substance or structures that were specifically implemented to avoid domestic taxation.

A 2.5% advance withholding tax may apply to the purchase price paid to non-residents from the sale of local goods and rights, provided the buyer is a Costa Rican income tax payer. The buyer should withhold and pay to the tax authorities the 2.5% as an advance payment of the non-resident’s capital gains tax liability.

Tax treaties may reduce/eliminate local capital taxation on gains derived from the sale of stock, provided the applicable tests and requirements set forth in each treaty are met.

There are, in general, no specific indirect transfer rules, nor any specific indirect change of control provisions that should be subject to local taxation. Only direct and indirect transfers of real estate are subject to taxation.

There are no special formulas to determine the income of foreign-owned local affiliates selling goods or providing services, except for certain industries, such as international transportation companies.

In principle, all costs and expenses necessary to produce taxable income as well as to protect investments should be deductible for income tax purposes. However, the tax authorities may disallow a deduction if, under their judgment, any of the following criteria are met:

• it is not necessary to produce taxable income;
• it is excessive or unreasonable;
• it pertains to a different tax year;
• it is not supported by appropriate documentation; and
• no withholding was applied (when applicable).

Additionally, related-party charges such as administrative or management services should comply with transfer pricing regulations.

Related-party financing and, in general, any type of financing that does not originate from a regulated banking or financial entity is subject to an interest deduction limitation of 30% of the local entity’s EBITDA. The limitation will be adjusted 2% per year as of 2019 until it reaches 20% of EBIDTA. Intercompany financing should also be subject to transfer pricing rules.

All financing arrangements need to demonstrate that the operation and the interest expenses are related to the entity's trade or business and the generation of taxable income.

The Costa Rican tax system is based on the “territorial principle”, whereby only income derived within the Costa Rican territory and from Costa Rican sources is subject to income tax. Revenues, income or benefits from Costa Rican sources include any income from services rendered, goods located or investments used within the national territory.

Therefore, foreign-source income should not be taxed in Costa Rica.

In principle, all costs and expenses necessary to produce taxable income as well as to protect investments should be deductible. In order for a cost or expense to be deductible, there must be a link between the expense and its utility, necessity and reasonability to produce taxable income. Other deductibility tests, such as those relating to expenses, need to be properly documented, pertain to the corresponding tax year, and not be deemed to be excessive or unreasonable (by the tax authorities), with the applicable withholdings and other specific deduction rules for certain types of charges complied with.

Any expense related to the production of exempt foreign income should not be deductible for local corporate income tax purposes.

The Costa Rican tax system is based on the “territorial principle”, whereby only income derived within the Costa Rican territory and from Costa Rican sources is subject to income tax. Accordingly, dividends originated from foreign subsidiaries owned by a local company should not be subject to corporate income tax.

There is ongoing litigation between taxpayers and the tax authorities related to some aggressive interpretations the tax authorities have made in relation to the territorial system. Even though the system is clearly defined in the law, the tax authorities are attempting to expand its scope and reach by recharacterising certain types of foreign-source income as local, and thus taxable.

The use of intangible assets developed by local corporations by non-local subsidiaries should be subject to transfer pricing rules. Accordingly, any arrangement between related parties should be negotiated under arm's-length terms, conditions and pricing.

Under the territorial tax system, foreign-source income should, in principle, not be subject to domestic taxation.

There are no domestic controlled foreign corporation (CFC) or similar rules. Each entity is deemed as an individual independent taxpayer. There are also no rules that should result in the foreign income of non-resident subsidiaries being accrued at the local level.

The tax authorities may, in general terms, challenge any foreign structure that they deem does not have the appropriated substance. Under the anti-avoidance and abuse provisions, as well as the economic reality and substance over form rules, the tax authorities may challenge transactions, charges, benefits, etc with foreign affiliates if they consider them to lack, for example, a business purpose or are solely intended to avoid local taxation.

Under the territorial tax system, capital gains derived from the sale of shares of a foreign company should be characterised as foreign-source income and, as such, should not be subject to taxation.

The Costa Rican Tax Code contains a general anti-avoidance rule (GAAR) that aims to challenge the use of transactions or arrangements intended to avoid local taxation. There are also broad economic reality as well as substance over form rules that grant ample powers of interpretation to the tax authorities.

Taxpayers in Costa Rica are not audited on a regular routine cycle. Taxpayers are selected for audits based on the criteria established in the Regulation of Objective Criteria for the Selection of Taxpayers for Tax Audits, which include being a large taxpayer, and a list of specific industries and economic activities.

Due to the commitment of the country to international tax standards and as a new OECD member, several BEPS recommendations have already been implemented. In 2018, a major tax reform was approved, and the following BEPS recommendations were included in the Income Tax Law:

• a mechanism to avoid hybrid mismatches (Action 2);
• limitation of deduction of non-financial interests (Action 4); and
• expanded permanent establishment rules (Action 7).

Other provisions regarding country-by-country reporting (Action 13) and mutual agreement procedures (Action 14), as well as the ratification of the Multilateral Instrument (Action 15), have been enacted. Also, the FTZ Regime has been amended in accordance with Action 5.

In May 2021, Costa Rica became the 38th OECD member, which implies a greater commitment of the government and pressure in the adoption of international tax standards. Costa Rica has confirmed it intends to adopt recommendations to be approved by the Global Forum.

Regarding BEPS 2.0, Pillar Two, the government and business sector are analysing the potential impact it may have on the FTZ Regime, which grants a corporate income tax holiday to companies operating under the regime. The FTZ Regime is the primary generator of foreign direct investment in the country.

International tax has a high public profile in Costa Rica. International taxation has had an influence on domestic tax policies for several years, which has strengthened with the country’s accession to the OECD. Costa Rica has a strong commitment to international tax standards. As an example, please refer to 9.1 Recommended Changes, which reflects the great commitment that the country has towards the implementation of the BEPS recommendations, even beyond the minimum standards.

BEPS Pillar Two and the proposed global minimum tax is the key proposal that may have an impact on domestic tax policy. The FTZ Regime and the tax incentives it grants is a key component of the economy and it has been its most relevant growth component, especially since the outbreak of the COVID-19 pandemic. There are ongoing discussions between the government, business sectors, including multinational companies, and the OECD and its committees to determine how the proposed rules may impact existing incentives and investment structures.

The corporate income tax holiday granted by the FTZ Regime is potentially the most vulnerable feature of the domestic tax regime that may be impacted by BEPS Pillar Two.

Section 9.m of the Income Tax Law already includes a provision to deal with hybrid mismatches. When a hybrid mismatch results, in the other jurisdiction, in a double deduction or in a non-taxable income or an exempt income, the deduction of the payment should be denied in Costa Rica.

Costa Rica has a territorial tax regime. Income tax is levied on income derived within the country and from local sources, meaning services provided, goods located or capital used in Costa Rican territory.

In general terms, interest deductibility derived from local and/or foreign financing should be subject to the aforementioned deductibility rules. Interest deductions are subject to the same EBITDA limitation unless they derive from a bank or financial institution operation. General deduction rules and tests should also apply, irrespective of the origin of the debt.

There are no domestic CFC rules. There have been several legislative attempts by the tax authorities to introduce some form of CFC legislation but they have not gained traction. Nonetheless, it is possible that now that Costa Rica is a full OECD member and because of ongoing discussions with other organisations, such as the EU, regarding local tax policies, this may be a topic that may be considered again in the near future.

Regardless of the limitation of benefit clauses or anti-avoidance rules contained in the DTTs that Costa Rica has in force, it is highly likely that the tax authorities could try to apply the domestic GAAR when allowed by the DTT.

Costa Rica adopted OECD-based transfer pricing rules more than ten years ago, and as of today, the country has adopted most of the BEPS recommendations.

It is expected that intellectual property-related structures will be subject to increased scrutiny and enforcement from the tax authorities.

Costa Rica has already adopted country-by-country reporting obligations and requirements, and has implemented most of the transparency-related recommendations of the OECD. As an OECD member, it is expected that the country will continue to participate in these initiatives and adopt measures approved by the OECD and Global Forum.

There are no income tax-specific measures related to taxation of the digital economy. However, it is highly probable that Costa Rica will follow whatever results from the OECD's BEPS Pillar One initiatives.

Nonetheless, there are certain VAT-related rules that, as of 2019, have included certain types of digital transactions as taxable and subject to domestic VAT.

Please refer to 9.12 Taxation of Digital Economy Businesses.

There are no specific provisions related to offshore intellectual property transactions. Those types of operations should be subject to the ordinary income tax rules in relation to income recognition as well as deductions for payments; for example, abroad by a local entity.

There is, however, a distinction for transactions with jurisdictions that are qualified by the tax authorities as “low-tax jurisdictions”. In such cases, any payments by a local taxpayer to an entity resident in a low-tax jurisdiction would be disallowed as a local deduction for income tax purposes, unless the taxpayer demonstrates that the payment results from a structure and transaction that has substance and economic purpose, at the authorities' discretion. The rules provide broad interpretation powers to the tax authorities to determine if payments to said jurisdictions are valid.