A new fiscal reform project in Costa Rica

Felipe Guevara

Felipe Guevara

On May 2nd, the President of the Republic announced the convocation of legislative file No. 23.760 entitled “Income Tax Law“, which has been in Congress for almost a year. It is important to note that extraordinary sessions are those in which the Executive Power dominates which bills the deputies discuss, a period that will cover the months of May, June, and July, so it is expected that these months will be loaded with tax discussions.

Now, unlike the fiscal reform approved in 2019, this bill proposes the total repeal of Law 7092, in force since 1988, to make way for a complete reform of our tax system, specifically regarding taxing the income of taxpayers. Under this understanding, the project separates taxation into three types of taxpayers:

    1. Income Tax for Individuals.
    2. Income Tax for Legal Entities.
    3. Income Tax for Non-Residents.

Regarding the taxation of individuals, the main variation is that the cedular system would be eliminated, that is, a different tax treatment depending on the type of income (salary, allowances, services), to migrate to a dual global income system, where it is proposed to separate the taxable base of individuals into two:

    • A general base in which the income from personal dependent work, retirements and pensions, income derived from the development of an economic activity, and real estate capital returns will be integrated.
    • A special base, in which the income from movable capital and capital gains will be grouped.

It is very interesting, and fair, that the project proposes a minimum vital income, which is established at the sum of ₡10,104,000.00 annually, thereby eliminating the distortion currently existing between employees and independent professionals, where the exempt base of the latter is lower. Now, regarding the general base, a progressive rate is proposed ranging from 10% to 30%, depending on the bracket in which the individual is located. The calculation of the special taxable base will be carried out by integrating the income from movable capital, on which certain expenses can be deducted, and the gains and losses of capital for the period, applying a rate of 15%.

As for corporations, the tax falls on the Costa Rican source income received by legal entities, including those derived from the exercise of an economic activity, as well as capital income and capital gains, which, because they are passive income, would also be taxed on those generated abroad without exception, unlike the current regulations that only tax extraterritorial income in specific cases.

As a more striking aspect and of obvious greater impact, the project proposes that corporations have a single rate of 30%, regardless of the gross income that the legal entity may have had during the fiscal year. That is, the progressiveness of the tax for companies is abandoned. As a positive novelty, the deduction of taxes paid abroad would be allowed to avoid double taxation and avoid loss of competitiveness.

It is necessary to point out that preferential tax treatment for micro and small companies registered with the MEIC or with the MAG is maintained, but the current period of benefit periods and the size of the tax incentive are reduced.

Regarding non-residents, whether individuals or legal entities, a single proportional rate of 15% is established, which will apply to the gross amount corresponding to the respective income, thereby eliminating the diversity of rates that currently exists, and simplifying the tax system.

It is important to note that the project also proposes a reform for taxpayers under the simplified regime.

The project proposes many more changes and specific regulations that must be analyzed and that will undoubtedly be widely discussed in the Legislative Assembly in the following months, where we hope that the focus will be on legislative technique, the common good, and maintaining economic dynamism with job creation.