Migrating the residence of the target company from Costa Rican jurisdiction raises tax consequences
Contributed by Arias & Muñoz
13 November, 2014
A company registered as income tax taxpayer in Costa Rica that ceases to have economic activities must deregister with the tax authorities
If your company is registered as income tax taxpayer before the tax authorities in Costa Rica and it ceases to have economic activities in the country, you are obliged to inform the tax authorities of the latter termination within 10 labour days. Then, the company must proceed to deregister as taxpayer with the tax authorities, states article 24 of the Tax Regulations.
The migration of residence of the acquiring company or target company, raises tax consequences to the extent that such companies stop having economic activities in Costa Rica, or liquidation occurs.
If a taxpayer fails to comply with this obligation, it will be subject to a penalty equivalent to 50% of a base salary for every month or term within a month, with a maximum limit of three base salaries. The current base salary has been fixed at ¢399.400 Costa Rican. The figure is equivalent to almost $725.
What if you are not liquidating, rather buying?
If so, you must have in mind that an acquisition executed by an acquiring company established in Costa Rica might provide additional tax shelters, rather than having a foreign acquiring company executing the transaction.
When the buyer is a company or individual not resident in Costa Rica, the deductibility of its acquisitions expenses is determined by the laws of its home jurisdiction; but when the buyer is a Costa Rican taxpayer, acquisition expenses are deductible in Costa Rica, as far as the acquisition can be linked to its current operations.
Deductibility is legally possible to the extent that the expenses are considered necessary for the generation of taxable income.
Another advantage to having a Costa Rican acquiring company is that the latter company may become a holding company as a result of the transaction. Local holding entities can be exempt of dividend tax, whereas foreign holding companies are not.
Mergers or share exchanges?
In Costa Rica, company mergers are a common form of acquisition, whereas share exchanges are not as common.
Share exchange under Costa Rican law is not regulated, and does not provide specific benefits.
Although company mergers are common, they are usually implemented as a consequence, after the acquisition of shares.
Financing obtained by the acquiring company is not deductible under Costa Rican law; nonetheless, if a merger occurs, the acquiring company might transfer the debt to the prevailing entity, granting the possibility to consider the financing as related to the ongoing operation.
Company mergers provide investors the possibility of acquiring ongoing businesses in Costa Rica. Nonetheless, company mergers have the disadvantage that the liabilities pertaining to the companies subject to merger are transferred to the acquirer.
You must also keep in mind that, under Costa Rican law, the Antitrust Authority (Coprocom) must be notified of all mergers and acquisitions that meet certain criteria prior to the execution of the merger or acquisition agreement, or within a maximum of five business days from the signing of it.
Transactions in which the sum of the productive assets of both the economic agents and the headquarters involved in the transaction exceeds approximately $15 million - whether it is a single transaction or several made within two years of each other - must be filed to Coprocom.
Likewise, transactions in which the income generated in Costa Rica for all economic agents involved in the transaction during the last fiscal year exceeds approximately $15 million must be filed to Coprocom as well.
Partner, Arias & Muñoz
Associate, Arias & Muñoz
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