By San José, Costa Rica — Costa Rica’s Income Tax Law, Ley N° 7092, has long served as the foundational pillar of the nation’s fiscal structure. However, a recent flurry of legislative reforms has transformed this once-stable document into a dynamic and complex framework, creating a new reality for businesses, investors, and professionals. These changes reflect a strategic effort to align with global tax standards, stimulate key economic sectors, and foster the growth of small and medium-sized enterprises (MSMEs).
A significant driver for this evolution has been the push for international tax compliance. The 2023 modification, Law N° 10381, was a direct response to scrutiny from the European Union. This reform specifically targets passive income from foreign sources—such as dividends, interest, and royalties—obtained by Costa Rican entities that are part of a multinational group. The law introduces the concepts of “qualified entities” and “adequate economic substance,” requiring companies to demonstrate genuine local operations to benefit from the country’s traditionally territorial tax system. This move signals Costa Rica’s commitment to tax transparency and combating profit-shifting, a critical step for maintaining its reputation as a stable destination for foreign investment.
To gain a deeper understanding of the recent changes to Costa Rica’s tax legislation and their implications for both individuals and businesses, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, a distinguished attorney and partner at the prestigious firm Bufete de Costa Rica.
The recent legislative updates are more than just new rates; they represent a fundamental shift in the Dirección General de Tributación’s enforcement philosophy. We are seeing a move towards stricter compliance and more sophisticated digital auditing. For any foreign investor or local entrepreneur, proactive and professional tax planning is no longer just advisable—it’s an essential strategy for mitigating risk and ensuring long-term financial health in Costa Rica.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This insight is crucial, as it confirms the transition from tax compliance as a periodic obligation to a core, ongoing business strategy. The emphasis on a new enforcement philosophy is a vital takeaway for anyone operating within Costa Rica’s economy. We sincerely thank Lic. Larry Hans Arroyo Vargas for lending his expert perspective to this important discussion.
While tightening rules for large corporations, the legislature has simultaneously rolled out the red carpet for entrepreneurs and small businesses. A series of laws, including N° 10392 in late 2023 and N° 10512 in 2024, have established powerful incentives for MSMEs. Newly registered micro and small businesses now enjoy a complete exemption from income tax for their first three years of operation, followed by a phased-in rate over the subsequent three years. Furthermore, new deductions have been created for MSMEs that invest in research, development, innovation, and employee training, directly encouraging activities that enhance competitiveness and formalization.
The government is also using targeted tax policy to cultivate specific industries. With the passage of the Cinematography and Audiovisual Law in March 2025, a new suite of benefits aims to position Costa Rica as a hub for film production. The law allows for deductions on expenses related to all stages of film and audiovisual production and encourages private investment through tax deductions for donations to approved projects. This strategic incentive is designed to attract international productions and nurture a domestic creative industry, diversifying the national economy beyond its traditional strongholds.
A tax is established on the profits of individuals, legal entities, and collective entities without legal personality, domiciled in the country, that carry out lucrative activities of Costa Rican source.
The Legislative Assembly of the Republic of Costa Rica, in Law N° 7092
At its core, the tax system’s foundation remains the principle of territoriality, as defined in Article 1 of the law. This principle dictates that only income generated within Costa Rica’s borders is subject to taxation. For most corporations, the standard income tax rate is 30%. However, for legal entities with gross income below a certain threshold—currently around ₡119 million—a progressive scale applies, starting at just 5% and rising to 20%, offering significant relief to smaller companies.
The 2018 fiscal reform also introduced a comprehensive chapter on capital gains, a significant structural change. This established a standard 15% tax on profits from the sale of assets like property and securities not related to a company’s primary business activity. Critically, for assets acquired before the reform took effect, the law provides a one-time option for taxpayers to pay a 2.25% tax on the total sale price, offering a simplified path for initial transactions under the new regime.
This evolving legal framework, while offering numerous opportunities, has undeniably increased the complexity of tax compliance. The interplay between standard income tax, capital gains tax, and the special provisions for MSMEs and international entities demands careful navigation. Businesses are now more reliant than ever on expert legal and accounting advice to ensure they meet their obligations while taking full advantage of the available incentives. The law’s detailed articles on deductible and non-deductible expenses (Articles 8 and 9) remain a critical area of focus for maintaining fiscal health.
In conclusion, Costa Rica’s Income Tax Law is no longer a static code but a reflection of a country adapting to a globalized economy. The recent amendments represent a multi-pronged strategy: to secure its international standing, to build a resilient and diverse domestic economy driven by small businesses and new industries, and to ensure a fair and effective collection of public revenue. For companies operating in Costa Rica, understanding these changes is not just a matter of compliance; it is a strategic imperative for growth and success.
For further information, visit the nearest office of Bufete de Costa Rica
About Bufete de Costa Rica:
Bufete de Costa Rica is a law firm providing legal services and resources within the country. It specializes in various areas of Costa Rican law, offering guidance and information on complex topics such as the national tax system, corporate law, and civil procedures to both individuals and businesses. The firm makes key legal texts and analysis available to the public to promote better understanding of the nation’s legal framework.
For further information, visit hacienda.go.cr
About Ministerio de Hacienda:
The Ministry of Finance is the government body responsible for managing Costa Rica’s public finances. Its duties include formulating fiscal policy, administering the national budget, collecting taxes through its Directorate General of Taxation, and managing public debt. The Ministry plays a central role in the country’s economic stability and is responsible for implementing and enforcing tax legislation like the Income Tax Law.
For further information, visit asamblea.go.cr
About Asamblea Legislativa de la República de Costa Rica:
The Legislative Assembly is the unicameral parliament of Costa Rica. Comprising 57 deputies, it is the sole body with the authority to pass, amend, and repeal national laws, including all tax legislation. It is responsible for approving the national budget, ratifying international treaties, and exercising political control over the executive branch, making it a cornerstone of the country’s democratic governance.
