Costa Rica takes complied with the requirements of the European Code of Conduct Group thanks to the approval of an amendment to the Income Tax Law after approving the Reform Law

As background, at the beginning of this year, the Council of the European Union updated its list of non-cooperative jurisdictions on fiscal matters, which included Costa Rica due to its lenient legislation regarding the taxation of certain passive incomes earned abroad. Last September, the Legislative Assembly proposed Bill No. 23.581 to comply with the European Union's requirements to be excluded from the "gray list" of non-cooperative jurisdictions in fiscal matters within that community of countries.

By the end of September, the Legislative Assembly applied the constitutional seal process, turning the project bill into law of the Republic. Law No. 10.381 became effective as of its publication in the Official Gazette La Gaceta on October 2, 2023, called “Amendment to Law No. 7092, Income Tax Law, of April 21, 1988, to Achieve Costa Rica's Exclusion from the List of Non-Cooperative Countries in Fiscal Matters of the European Union."

On October 17, the European Union confirmed the exclusion of Costa Rica from its list of non-cooperating countries in tax matters and recognized the progress made in updating the national tax regulations.

These are some of the most relevant modifications found in the reform of the Law:

• Change in the concept of territoriality for tax purposes.
• Including a tax on passive incomes earned abroad on the following:
• Dividends
• Interests
• Royalties
• Capital gains
• Income from real estate capital
• Other mobile capital income
• Including a "qualified entity" to tax companies that are part of a multinational group (MNE as per OECD regulations). Furthermore, it includes the definition of "adequate economic substance" to determine the qualification of certain entities for tax purposes.
• Accreditation of foreign taxes paid for the calculation of income tax in Costa Rica.
• Anti-abuse clauses.
• Modification of the concept of a "Permanent Establishment" to align with OECD standards.

Costa Rica’s removal from the "gray list" means positive news for Foreign Direct Investment and a sign of Costa Rica's commitment to meeting international fiscal standards.

However, for taxpayers, legislative changes entail new obligations, for which top-tier tax advisory is required to help them remain compliant with the law while incorporating these new obligations into their business operations.

At Dentons, we offer tax advisory services for businesses focused on growing their companies, always in conjunction with ensuring tax compliance. Feel free to contact us. It will be our pleasure to assist you.