Costa Rica: Overview of tax reform law measures

17 December 2018

New tax reform legislation in Costa Rica was passed 4 December 2018. The tax reform law includes significant income tax law changes such as the introduction of rules on the taxation of capital gains and interest expense deduction limitations, as well as rules addressing hybrid mismatch arrangements and anti-tax haven provisions. The tax reform legislation also modifies the prior sales tax system and the transformation into a new value added tax (VAT) regime—an indirect tax system with broader application.

Changes under the tax reform law generally have an effective date of 1 July 2019.


Overview of tax reform

Income tax

Costa Rica’s territorial regime remains unchanged. Only Costa Rican-source income is subject to income tax. A new definition of “permanent establishment” is generally aligned with international standards:

A permanent establishment is defined as a “fixed place of business”; construction and services activities will be deemed to constitute a permanent establishment if the activities continue for 183 days in the aggregate over a period of 12 months. A dependent agent may also create a permanent establishment.


Passive income of movable and real estate capital

The new passive income regime imposes tax on capital gains at a rate of 15%. Taxpayers can deduct a fixed expense equal to 15% of the gross income from capital gains related to the sale of real estate. Taxpayers with one or more employees may elect to be taxed under the ordinary income tax rates (generally 30%).


Tax havens

The new law introduces the non-deduction of expenses paid to entities that are residents in a “tax haven” jurisdiction, unless the taxpayer can prove that the transaction “effectively took place” according to the following standards:

  • For Costa Rica tax purposes—jurisdictions with a corporate income tax rate lower than 18% (60% of Costa Rica’s rate or those that do not have an information exchange agreement with Costa Rica) are considered to be tax haven jurisdictions.
  • Global Income: Individuals and corporations must report in their income tax return all income subject to withholding tax, with the withheld amount considered an advance payment of tax. This applies only to the revenue derived from assets used in the taxpayers’ habitual trade or business.  However, the tax on dependent personal work (i.e., tax on salaries and allowances of directors) and income derived from assets that are not used in the taxpayer’s habitual activities are excluded from this rule.


New limitation on interest deduction

Interest deductions are limited to 20% of EBITDA* and excess interest expense can be carried forward. The limitation will start to apply “progressively” beginning in 2020.

*Earnings before interest, tax, depreciation and amortization


Hybrid mismatches

Payments with regard to hybrid instruments or made to a hybrid entity will be treated as not deductible in Costa Rica.


Compensation of operating losses

As a general rule, net operating losses (NOLs) can be carried forward for three years, and carried forward for five years with respect to agricultural activities.



In general, withholding tax on interest paid to Costa Rican residents is imposed at a rate of 15% (up from the previous 8% withholding tax rate). Withholding tax on payments for professional services to non-residents will be 25% (up from the previous rate of 15%).



Dividend distributions will be subject to a 15% withholding tax unless the beneficiary is: (1) a Costa Rican SA or SRL; (2) domiciled in Costa Rica; (3) one that engages in an economic activity; and (4) one that is subject to corporate tax. In practice, the tax reform measures render as inefficient those Costa Rican holding companies that do not engage on another activity.


Individual income tax

New income tax rates for individuals are as follows:

  • Up to CRC 817,000 – 0%
  • More than CRC 817,000 and up to CRC 1,226,000 – 10%
  • More than CRC 1,226,000 and up to CRC 2,103,000 – 15%
  • More than CRC 2,103,000 and up to CRC 4,205,000 – 20%
  • More than CRC 4,205,000 – 25%



The new VAT regime replaces Costa Rica’s sales tax regime. The prior sales tax regime only applied to the sales of goods, with credit provided for taxes paid on the sale of goods or services used in the production, marketing or distribution of certain activities. The new VAT system is much broader.

The rates of VAT are:

  • A 13% general VAT rate
  • A 4% rate for certain health services and tickets to travel to or from Costa Rica
  • A 2% rate for certain medicines or the manufacture of medicines, insurance premiums, private education services, and certain goods and services sold by educational institutions
  • A 1% rate for certain basic agricultural products

The VAT measures also provide:

  • VAT applies to all sales of goods, with very limited exceptions.
  • A service import regime or reverse charge mechanism is created when taxpayers must pay VAT on services acquired from abroad.
  • Purchases of services through the Internet are subject to tax, and credit card issuers must act as tax collectors.
  • A special regime is established for resellers of used goods.
  • Generally, there is a zero-rate system for exports, sales to public entities, and sales to exempt entities (when VAT can be recovered if incurred for the production, marketing or distribution of exempt services). However, producers of exempt or non-VAT goods or services will not have the right to apply the tax paid as credit.
  • Taxpayers can generally recover all VAT paid for the goods or services linked to their activity, with certain restrictions.
  • Service providers subject to a reduced tax rate may only credit the reduced rate relating to the provided service (4%, 2% or 1%).
  • If the goods or services are used in “mixed” creditable and non-creditable activities, the credit is determined proportionately under special rules.


Tax amnesty

The tax reform law provides a tax amnesty period that expires 5 March 2019. During the amnesty period, taxpayers may pay certain taxes without paying interest and with certain reductions in fines and penalties. The percentage reduction of penalties is reduced for each passing month during the amnesty period.

For more information, contact a tax professional with KPMG’s Latin America Markets practice or with the KPMG member firm in Costa Rica:

Alfonso A-Pallete | +1 (305) 913 2789 |

Sergio Garcia | +506 2201-4292 |

Alvaro Castro | +506 2201-4189 |


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