Costa Rica

Transfer Pricing Regulations in Costa Rica

As of September 13, 2013, Costa Rican taxpayers are required to report and value their transactions with both domestic and foreign related parties, and those who are classified as large taxpayers or large domestic companies, or who are individuals or entities operating under the free trade zone regime, through the Transfer Pricing Information Return, as established by Decree No. 37898-H, published by the General Taxation Directorate (DGT).

Article 1 of Decree No. 37898-H of Costa Rica’s Transfer Pricing Legislation defines the arm’s-length principle, which requires all taxpayers engaging in transactions with related parties, for income tax purposes, to determine their income, deductions, and costs based on the amounts and prices of consideration that would be agreed upon between independent parties in comparable transactions.

Subsequently, the transfer pricing regulations were supplemented by DGT-R-44-2016, with Article 4 of this regulation being amended by DGT-R-28-2017, thereby publishing the final version of what will become the Annual Transfer Pricing Return, which had previously been submitted for public comment. However, it should be noted that, to date, the DGT has not made available to taxpayers the electronic means through which this informative return will be filed.

In May 2018, Resolution DGT-R-25-2018, which regulates the implementation of the BEPS and OECD guidelines, entered into force. In 2019, Resolution DGT-R-49-2019 (repealing Resolution DGT-R-16-2017) established the documentation requirements for transfer pricing studies.

Likewise, Resolution No. DGT-R-001-2018, dated January 11, 2018, established the obligation to file the Country-by-Country Report for all parent companies resident in the country whose global revenue exceeds 750 million euros.

Related-Party Rules in Costa Rica

According to Article 4 of Decree 37898-H, related parties are defined as individuals (natural persons) or legal entities and other entities resident in Costa Rica, as well as those resident abroad, that participate directly or indirectly in the management, control, or capital of the taxpayer, or when the same persons participate directly or indirectly in the management, control, or capital of both taxpayers, or when, for any other objective reason, they may exercise a systematic influence on the taxpayers’ pricing decisions. Related parties are considered to exist in the following cases:

1. One of them directs or controls the other or holds, directly or indirectly, at least 25% of its capital stock or voting rights.
2. When five or fewer persons direct or control both legal entities, or collectively hold, directly or indirectly, at least a 25% stake in the share capital or voting rights of both entities.
3. When the legal entities constitute a single decision-making unit. In particular, a decision-making unit is presumed to exist when one legal entity is a partner or shareholder of another and is in one of the following situations with respect to the other:
   1. It holds the majority of voting rights.
   1. It has the power to appoint or remove the majority of the members of the board of directors.
   1. It can, by virtue of agreements entered into with other shareholders, exercise the majority of the voting rights.
   1. It has appointed, exclusively through its own votes, the majority of the members of the board of directors.
   1. The majority of the members of the governing body of the controlled legal entity are members of the governing body or senior executives of the controlling legal entity or of another entity controlled by the latter.
4. When two or more legal entities each constitute a decision-making unit with respect to a third legal entity, in accordance with the provisions of this subsection, all of them shall constitute a single decision-making unit. For the purposes of this subsection, a natural person is also deemed to hold a stake in the share capital or voting rights when ownership of the stake, directly or indirectly, belongs to the spouse or a person related by blood in the direct or collateral line up to the fourth degree of consanguinity or by marriage up to the second degree of affinity.
5. In a business collaboration agreement or a joint venture agreement, when any of the contracting parties or partners has a direct or indirect interest of more than 25% in the proceeds or profits of the agreement or of the activities arising from the joint venture.
6. A person resident in the country and an exclusive distributor or agent of that person, resident abroad.
7. An exclusive distributor or agent residing in the country for an entity residing abroad, and said entity.
8. A person resident in the country and its permanent establishments abroad.
9. A permanent establishment located in the country and its parent company resident abroad, another permanent establishment of the same company, or a person related to it.

Formal Obligations: Informative Tax Returns

Costa Rican taxpayers must file an annual informational return with the General Tax Administration. Taxpayers subject to this requirement are those who conduct transactions with related or cross-border entities and whose transactions, either separately or in aggregate, exceed 10,000 base salaries. (US$7.6 million) or who are classified as large domestic taxpayers or large territorial companies, or who operate under the free trade zone regime. To date, the software program or module for filing the aforementioned informative return has not been published.

Article 9 of Costa Rica’s Transfer Pricing Decree states in its first paragraph that the supporting documentation or technical transfer pricing study must be made available to the Tax Administration to verify compliance with the Arm’s Length Principle. This documentation should be available to ensure the correct completion of the Informative Return, which is due on the last day of June.

For its part, Article 9 of Decree 37898-H establishes the general guidelines for documentation, which must be sufficient to demonstrate to the tax authorities that transactions between related companies comply with the arm’s-length principle.

Deadline for Filing Annual Tax Returns.

The Transfer Pricing Study will only be submitted to the DGT if formally requested.

Penalties for Noncompliance

Penalties for noncompliance amount to 2% of revenue for the previous fiscal year, with a minimum of 10 base salaries and a maximum of 100 base salaries. In U.S. dollars, this would be approximately US$7,000 to US$70,000.