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On 14 September 2023 the President of the Republic of Costa Rica announced the partial veto of Legislative Decree No. 10.381 (Bill No. 23.581), which aims to incorporate amendments to the Income Tax Law necessary to achieve the exclusion of Costa Rica from the European Union's list of non-cooperative jurisdictions in tax matters.
Background
On 7 September 2023, Costa Rica's Congress approved the Bill No. 23.581 (Legislative Decree No. 10.381), amending the Income Tax Law, to achieve Costa Rica's exclusion from the list of non-cooperative jurisdictions in tax matters of the European Union.
Among other amendments, Legislative Decree No. 10.381 (Bill No. 23.581) included an amendment to the third paragraph of Article 1 of the Income Tax Law, which sought to address two points that the European Union had identified as harmful in its review of the foreign-source income exemption regime. These "harmful" elements are related to a lack of transparency in the legal provisions and administrative discretion that flows from the disparity between what the Income Tax Law provides (territoriality principle) and administrative and judicial interpretations that deem passive foreign-source income as taxable in Costa Rica to the extent it is linked to an economic structure in Costa Rica or the capital that generated the income originated in Costa Rica.
In that regard, the amendment introduced to the third paragraph of Article 1 of the Income Tax Law clarified the scope of the territoriality principle, indicating that income from Costa Rican sources is subject to the Income Tax, understanding Costa Rican sources are those within the national territory, in accordance with the geographical limits established in the Political Constitution.
For more information on the other provisions contained in the Bill, please refer to our Global Tax Alert, Costa Rican Congress approves bill to achieve exclusion from the European Union's list of non-cooperative jurisdictions in tax matters, dated 12 September 2023.
Partial veto
According to the press release issued by the President and Document No. PR-P-071-2023, the President of the Republic decided to partially veto the amendment approved under Legislative Decree No. 10.381 (Bill No. 23,581) to the third paragraph of Article 1 of the Income Tax Law, citing reasons of convenience and opportunity.
Next steps
Given that the President of the Republic has partially vetoed Legislative Decree No. 10.381, the Congress could override the veto with 38 votes in favor. To date, it is unclear whether there are enough votes to override the veto.
Similarly, the European Union's determination regarding whether to exclude or retain Costa Rica in Annex I of the List of non-cooperative jurisdictions in tax matters of the European Union is pending in the next review to be conducted in October 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young, Costa Rica
- Rafael Sayagues
- Randall Oquendo
- Daniel Quesada
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
