Unveiling the Decree:
In an unprecedented move on October 4, 2023, Costa Rica’s Legislative Assembly gave its stamp of approval to Legislative Decree No. 10.381 (hereinafter referred to as ‘the Decree’). This comes despite the partial veto exercised by President Rodrigo Chaves Robles, marking a crucial turning point in Costa Rica’s financial landscape.
Aim of the Decree:
The Decree, meticulously crafted and presented, serves a cardinal purpose: extricating Costa Rica from the notorious EU list spotlighting non-cooperative jurisdictions in tax matters. This legislative masterpiece is Costa Rica’s ticket to financial repute, ensuring it smoothly aligns with international taxation standards and practices.
Background of the Inclusion:
2023 saw Costa Rica making its debut on the EU’s list. This inclusion, far from being a badge of honor, was attributed to the nation’s reluctance to renovate or entirely discard elements in its foreign-source income exemption regime, deemed detrimental by the EU. With the list due for another review this October, the clock was ticking for Costa Rica to institute necessary reforms.
Decree Decoded:
A deep dive into the Decree unveils its key components. Firstly, it orchestrates amendments to the existing income tax law, providing much-needed clarity on the territoriality principle’s scope. Secondly, it introduces a fresh set of rules dedicated to the taxation process concerning foreign-source passive income. This income, garnered by entities not meeting qualification standards (inclusive of Costa Rican entities and permanent establishments), now falls under the Decree’s purview.
Criteria for Qualification:
Entities aspiring to qualify must pass the stringent test of economic substance requirements set out in the Decree. This involves maintaining an appropriate count of employees who are adept and aptly compensated, making pivotal decisions and bearing a risk profile within Costa Rica’s borders, and incurring expenses related to asset acquisition, holding, or disposal.
Taxation Mechanics:
The Decree envisions a scenario where foreign passive income flowing into the pockets of entities lacking economic substance will be treated and taxed as income originating from Costa Rica. The types of income falling under this bracket are diverse, ranging from capital gains and dividends to interest, real estate profits, and royalties.
Anti-Abuse Measures in Place:
With an aim to fortify the taxation framework, the Decree incorporates anti-abuse provisions. These provisions empower tax authorities to reassign an entity’s status to non-qualified if non-compliance with the foreign-source income exemption regime is detected.
Journey of the Decree:
The Decree’s journey has been nothing short of dramatic. After initial approval on September 7, 2023, it faced a partial veto from the President a week later. However, with the required 38 Legislative Assembly members casting their vote in favor, the Decree triumphantly re-emerged victorious on September 26, 2023.
Next Steps:
With re-approval secured, the Decree is set for publication in the Official Gazette, the final step before it morphs into an active, enforceable law, ushering in a new era of financial transparency and cooperation for Costa Rica.
