Additions and modifications to Income Tax Regulations
February 26, 2016
By Decree Nº 39376-H, officially published on February 23rd, 2016, the Costa Rican Government modified the articles 1, 64 and 65 of Income Tax Regulations.
The following is a summary of the main modifications included:
As a result of the Decree, the following definitions are of relevance for the purposes of the application of paragraph h) of article 59 of Income Tax Law:
Foreign Banks that are part of a group or Costa Rican financial conglomerate regulated by CONASSIF:
For the purposes of phased reductions under the second paragraph of subsection h) of article 59 Income Tax Law, those banking financial institutions which remain tax resident in a foreign jurisdiction but maintain economic bond relations with a group or costa Rican financial conglomerate that is regulated by the National Council of Financial System Supervision (CONASSIF).
Such bond relations imply management, common functional and property control established in the applicable regulations and approved by CONASSIF.
Tax Authorities will consider as a Costa Rican group or financial conglomerate those that make up the official list of groups and conglomerates supervised by the Superintendence of Financial Institutions (SUGEF), which is published on the web site of that supervisory body.
Foreign entities subject to the supervision and inspection in their respective jurisdiction:
For the purposes of the 5,5% rate established in the third paragraph of subsection h) of article 59 Income Tax Law, those non-Costa Rican financial institutions that are subject to surveillance and inspection by ay public entity in their respective countries, with objectives, ranges, powers and functions similar to those performed by SUGEF in Costa Rica for the national financial system.
For the purpose of the tax exemption on remittances abroad, under the fourth paragraph of subsection h) of article 59 Income Tax Law, a non-profit organization under private law, established on a foreign jurisdiction, where the economic gains is not distributed directly or indirectly among its members, but is intended to comply with a corporate purpose.
Article 65, related to the settlement and payment of tax, is modified, establishing that payment deposits should be made on authorized collecting institutions within 15 calendar days of the month after the withhold is performed, using the authorized form for that purpose.
Moreover, the procedure for the special treatment of profits established by abolished article 61 of Income Tax Law is eliminated.
Article 64 introduces to the Income Tax Regulation what was already stipulated on Banking System Development Law, regarding the application of paragraph h) of article 59 Income Tax Law. Also, it introduces as taxable, other financial expenses made to suppliers abroad for the import of goods.
Article 64 A: Tax benefits
Article 64 A is added for the implementation of exemptions to the ordinary rate of 15% provided in paragraph h) of article 59 Income Tax Law:
- Natural or legal persons domiciled in Costa Rica that pay, credit interests, fees and other financing costs to foreign banks that are part of a costarican group or financial conglomerate regulated by CONASSIF, shall apply a reduced rate of 5.5% during the first year of application of the General Amendment of Banking Development System Law, 9% in the second year and 13% during the third year of effectiveness. On the fourth year, the ordinary rate of 15% shall be paid.
- Entities subject to the supervision and inspection of SUGEF, which pay or credit interest, fees and other financial expenses to foreign entities that are subject in their jurisdiction to the supervision and inspection of a public body with functions similar to those performed by the SUGEF, shall apply a tax rate of 5.5 % of the amount paid or credited. With the reform of the Regulations it is established that this reduced rate only applies when the payment constitutes an own financial expense for the costarican paying entity.
- Payments, credits or the provision of interests, fees and other financial expenses on behalf of the beneficiaries, incurred in loans from multilateral development banks, multilateral or bilateral development agencies and non-profit organizations, are exempted.
Natural or legal persons domiciled in Costa Rica, who made the remittance or credit the income or taxable benefits, must verify the compliance of the legal requirements to enjoy those benefits.
Article 64 B:
Article 64 B establishes an obligation for the withholding agent to preserve documentary and accounting support of transactions, which shall be available for the Tax Authorities in order to identify exempted remittances or reduced rates. The following information shall be available:
- Contractual agreements and payment vouchers to support the transaction that gives rise to the financial expense between the withholding agent and the beneficiary.
- For exemptions requested by non-profit organizations, as established in paragraph four of subsection h) of article 59 Income Tax Law, suitable proof must be available to demonstrate that the organization is exempted.
- As for the reduced rate established in the third paragraph of subsection h) of article 59 Income Tax Law, there must be available a certification issued by the competent authority in the correspondent jurisdiction to demonstrate that the beneficiary is subject to the supervision and inspection of its financial activities by a public body with authority and purposes similar to those enrolled by SUGEF for the national financial system in Costa Rica. Documents issued abroad must be legalized by the competent authority at the place of origin.
The Decree is effective upon its publication.
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