Costa Rica: new Latin American center for tax structuring of businesses

Colombia has already ventured into the field of international fiscal transparency. This is due to the country's need to adopt the standards of developed nations in order to be included as a member of the international community. During the last few years, Colombia has signed numerous treaties to avoid double taxation; tax information exchange treaties; free trade treaties and treaties for the bilateral protection of investments, many of which are already in force. In addition to this, Colombia, following the approval of the last tax reform (Law 1607 of 2012), has adopted in its domestic legislation institutions specific to international taxation such as: the permanent establishment, the seat of effective administration to determine the tax domicile of companies, the expansion of the criteria for economic linkage and the rules for international restructuring of companies.

The country has strengthened the rules on the determination of tax havens by the Government, making it easier for the Government to include certain jurisdictions in the (forthcoming) "list of tax havens" and has made it difficult to carry out transactions with such jurisdictions by subjecting them to the transfer pricing regime and obliging the Colombian taxpayer to a duty of dubious constitutionality:

To document and demonstrate the detail of the functions performed, assets employed, risks assumed and the totality of the costs and expenses incurred by the person or company located, resident or domiciled in the tax haven for the performance of the activities that generated the mentioned payments, under penalty that, such payments are treated as non-deductible from income and complementary taxes.

Although the government has not yet issued the regulatory decree through which it defines which jurisdictions will be part of the list of tax havens, it is important to study alternative jurisdictions for conducting international business that allow the Colombian businessman a legitimate tax optimization in the development of such transactions.  When carrying out this study, it is usual to opt first for jurisdictions that have a double taxation agreement in force with Colombia, such as Spain and Switzerland, among others. These jurisdictions may be, in the light of each treaty and under the fulfillment of its requirements, interesting for the creation of holding companies (through, for example, a Foreign Securities Holding Company -ETVE) or to carry out international financing structures (through Swiss companies or banks). However, the costs associated with the incorporation and maintenance of companies in countries such as Switzerland, Spain or Chile make it necessary to review the goodness of other jurisdictions that do not necessarily have signed treaties to avoid double taxation with Colombia. It is here where it becomes interesting to study Costa Rica as a jurisdiction, which is undoubtedly attractive for the incorporation of companies for the reasons that will be studied below:

1. Costa Rican corporations may have as their corporate purpose the performance of any lawful activity anywhere in the world and may carry out financial transactions in any currency.

2. Costa Rica has adopted the territorial tax system, which means that only income generated within the national territory is taxed in Costa Rica. There are no capital gains taxes.

3. The capital structure of the companies is quite flexible; shares may be issued in registered or bearer form. It is not necessary to have a minimum capital, nor is it necessary that such capital be paid at the time of incorporation.

4. Regarding shareholders and directors, the commercial law is flexible since it allows them to be natural or juridical persons, national or foreign.

5. It is not necessary to file or prepare financial statements, nor to hold annual meetings, nor to file annual tax returns, if the corporation exclusively carries out activities outside the national territory.

6. Due to its international environment, Costa Rica has personnel trained in several languages for the attention of business, enjoys a stable political climate and a safe and reliable legal regime for foreign investors.

7. The Costa Rican corporate regime allows the migration or re-domiciliation of its companies. In this sense, companies already existing in other countries that in turn allow the migration of companies can be re-domiciled in Costa Rica (without solution of continuity). Among the countries that allow the international re-domiciliation of companies are Panama, the British Virgin Islands, Spain, among others.

Notwithstanding, the mention of the above mentioned advantages, there is still uncertainty as to whether Costa Rica will be included in the list of tax havens that the national government is about to issue. For the author, it is unlikely that such jurisdiction will be included there for the following reasons:

1. Colombia and Costa Rica have completed the negotiation of the free trade agreement between both countries.  According to a Colombian newspaper "In the last ten years, bilateral trade between Colombia and Costa Rica has tripled: while in 2001 imports and exports totaled US$135 million in 2011 these reached US$435 million" (Vox Populi, 2012). This seals an effort that has been more than 20 years in the making, so it is unlikely that the government has the political will to close the doors to trade between these two nations.  Also, according to the World Economic Forum's Global Competitiveness Index, Costa Rica ranks 50th out of 104 countries, including developed countries, in terms of technology in the economy, quality of institutions and macroeconomic environment.

2. Costa Rica is a signatory, together with Colombia, of the "Convention on Mutual Assistance in Tax Matters". This, according to the OECD, "is the broadest multilateral agreement that exists regarding tax cooperation and exchange of information". This entity has also stated, through its Secretary General Angel Gurría, that "Costa Rica continues to make good progress in transparency and exchange of information", reason why, if Colombia chooses to follow the OECD parameters for the creation of its "black list", Costa Rica would most likely not be part of it.3. Costa Rica has publicly stated its intention to participate in the Pacific Alliance, a trade bloc of which Chile, Peru, Mexico and Colombia are part, reason why it would become a strategic international ally in foreign trade matters.