Costa Rican double taxation relief is really dead?
Tax Flash | December 2012
With the approval in first debate on November 26th of Bill # 18.602, and subsequent approval in second reading on November 29th, the National Congress gave a deathly hit to the current Section 61 of the Income Tax Law (ITL), legislation that allows the removal or relief from double taxation by providing foreign taxpayers and/or local withholding agents to request full or partial exemption from withholding tax on remittances made abroad from Costa Rica ("CR") for concepts such as dividends, interest and royalties (most common ones) to countries like US, Mexico, Canada and in some cases Spain, among other possible destinations where foreign recipients are not granted with credit for taxes paid in CR.
Although, there´s still pending the sanction by Costa Rican President office and subsequent publication of the Law in the Official Newspaper, in order to get in force the elimination of Section 61, pro-active and preventive actions must be taken in cases where your company operational scheme involves remittances to foreign countries where are currently covered by this exemption.
Do I currently have an official resolution that grants me the waiver? What´s the ending date? The exemption is granted for a specific period of time (a year), if I do have the exemption in place (valid) and my Financial Statements reflect retained earnings it is highly recommended to evaluate making the necessary steps/inquiries to distribute dividends, Can my CR subsidiary or branch do remittances (payments) exempt from withholding tax based on a valid and in force resolution granted prior to the enactment of the new law? Yes, because it is already an established right for the taxpayer and the exemption is in force for the length of time that current resolution is valid.
It is really Section 61 the only option to lower the burden of double taxation? NO. An alternative in place since late 2010 is the application of the Tax Treaty between CR and Spain ("SP"), to mention just one potential case: dividends paid from CR to SP, provided that Spanish Parent Co. holds directly at least 20% of CR subsidiary´s social capital the treated WHT tax is a reduced rate of 5% (instead of ordinary 15%). We find here a relief, in addition to the fact that the ultimate or up-level Parent Co. might be an US legal entity, where a "check-the-box" selection can take place for the Spanish Sub., resulting in the end, in a new scheme for CR operations with a "tax efficient" structure from the U.S. perspective, subpart F income rules might be analysis on case-by-case basis. The aforementioned is just a simple example of several possible approaches to international taxation, including but not limited to payments of dividends, interest and royalties.
Countries receiving funds from CR might have the opportunity to apply as tax credit or deductible expense (due to foreign tax laws) the taxes paid here, but when that opportunity is limited on its practical application for any possible scenario of related foreign legislation, this is where Section 61 used to have such much relevance –importance-, andnow will be helpful to take preventive actions to keep getting the double taxation relief. CR is just a drop in the vast sea of globalcorporate structures.
For more information, please contact
Deloitte Costa Rica