Costa Rica: Domestic Corporate Taxation
The general rule is that irrespective of whether the recipient is a resident or non-resident entity, 15% withholding tax is levied at source on all dividends remitted to shareholders, all commissions paid to third parties, all loan interest repayments, all interest credited on bank deposits, all interest paid by a private or public entity on any kind of security (e.g. bonds), all distributions by business entities (e.g. partnerships & sole proprietorships) of profits to its members and all distributions of trust funds to beneficiaries.
The general rule is subject to the following exceptions:
- Dividends paid by companies registered on a public stock exchange attract a withholding tax rate of 5%;
- Loan interest paid by an enterprise registered in Costa Rica to a foreign bank which is recognized by the Central Bank of Costa Rica as being a bank that finances international operations is not subject to any withholding tax;
- Interest repayments on loans which have been made to finance industrial or agricultural projects in Costa Rica do not attract any withholding taxes so long as they paid to an institution which is recognized as such by the Central Bank of Costa Rica;
- Payments made under a contract for the leasing of capital goods do not attract any withholding taxes so long as they are paid to an institution which is recognized as such by the Central Bank of Costa Rica;
- Interest paid on bills of exchange, promissory notes and mortgage bonds is exempt from withholding taxes;
- An 8% withholding tax is deducted on interest payments made in respect of registered debentures which are listed on a recognized stock exchange or which are issued by certain financial institutions registered with the Central Bank;
- Remittances relating to the use of intellectual property rights such as royalties on trademarks, patents, franchises etc attract withholding taxes of 25%;
- Remittances to non-resident foreign entities engaged in the provision of technical, financial or administrative services in Costa Rica attract a withholding tax of 25%;
- Transport and communications services are subject to withholding tax of 8.5%;
- Reinsurance contracts attract a rate of 5.5%.
With the exception of stock corporations, any undistributed profits in the balance sheet of an enterprise at the end of a financial period are subject to withholding tax as if they had been distributed. Capitalisation of such undistributed profits (ie they cannot be distributed in future) avoids the tax.
Under law 7092 of 1988, the branch of a foreign corporation pays 15% withholding tax on profits which can be distributed as 'dividends' irrespective of whether those profits have or have not been remitted. The branch does not of course have the option of 'capitalisation'.
Dividends paid by businesses registered under the free zone legislation are free of withholding taxes for the period specified in the license.
Costa Rican withholding taxes are not comparable to most countries' equivalent taxes, since they are levied on post-tax business profits, and don't have any element of tax credit about them for the paying company. In effect, they mean that the marginal rate of corporate taxation is 30% plus 15% of 70% = 40.5%. This underlines the importance of the concessions under investment incentive programmes.