Friday 2 June 2023

Costa Rica and Mexico Abolish Double Taxation

With the new agreement published in the official government newspaper La Gaceta, double taxation is avoided and its effects mitigated, as well as helping to eliminate barriers to trade and prevent tax evasion.

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2 June 2023 - At The Banks - Source: BCCR

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On March 21, Ley 9644, the income tax treaty with Mexico, which avoids the double taxation of income and wealth taxes, was published.

According to KPMG, the new treaty defines certain terms and conditions for the country where income is to be taxed. For Costa Rica, the treaty applies to income taxes. For Mexico, the treaty applies for federal income tax. The treaty also addresses the tax treatment of business benefits, dividends, interests, royalties, capital gains, and salaries.

The treaty would begin to apply from January 1, 2020 (in case the countries notify each other of the approval of the convention during this year).

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This agreement turns out to be of importance for those taxpayers who have cross-border transactions between both countries, since the agreement defines differentiated tax treatment for the income obtained by the resident of one State in the other.

According to the BLP legal firm, within the conditions established in the agreement, is a 5% withholding is included for the distribution of dividends (when the participation exceeds 20% of the capital stock), 10% for royalties, 10% for payment of interest, among others.

A BLP statement reviews that “… The rate of withholdings for remittances abroad, will have a whole series of rules differences when the operation is with Mexican taxpayers. Similarly, added the BLP expert, Costa Rican companies entering Mexico will be able to take advantage of the benefits of the agreement.

Most of these withholdings are considerably lower than those established in our Income Tax Law. For example, dividends go from 15% to 5%, royalties from 25% to 10% among others. However, it should be noted that these agreements are only a legal instrument for there to be fiscal harmony between the commercial relations of both countries and there would always be tax obligations in Mexico.

This treaty was signed by both countries since April 12, 2014 and approved by Costa Rica’s Legislative Assembly in second debate on December 10, 2018.

This is the third agreement of this nature that has been approved by our Legislative Assembly, the other two with Spain and Germany.”

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See publication in La Gaceta.

Source Centralamericadata; KPMG; BLP

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