Deductible Costs and Expenses
Businesses and individuals engaged in profit-generating activities, as referenced in Article 2 of the Law, are entitled to deduct from their gross income the necessary costs and expenses outlined in Article 8 of the Law, provided they are essential for generating current or potential income subject to income tax.
In accordance with the statement above, the following are deductible from gross income:
As general rule:
All necessary expenditures to determine the cost of goods and services sold;
All necessary expenditures to determine the cost of goods and services sold;
The remunerations listed in subsection (b) of Article 8 of the Law; for
individuals with disabilities, an additional amount equal to the paid
remunerations can be deducted, provided this condition is verified
through certification issued by the National Rehabilitation Council;
The remunerations listed in subsection (b) of Article 8 of the Law; for
individuals with disabilities, an additional amount equal to the paid
remunerations can be deducted, provided this condition is verified
through certification issued by the National Rehabilitation Council;
Insurance premiums contracted with the mentioned Institution will always be accepted, provided they are authorized by it;
Municipal taxes, education and culture stamps, patents, and fees, when
they affect the goods, services, or negotiations of the company’s usual
business operations.
Interests and other financial expenses that have been paid or incurred by the taxpayer during the tax period, following the qualitative conditions and limitations set forth in subsection (d) of Article 8 of the Income Tax Law.
Interests and financial expenses that must be capitalized for accounting purposes shall not be deductible from gross income, nor those that are not linked to the generation of taxable income during the tax period.
For the purposes of the penultimate paragraph of subsection (d) of Article 8 of the Income Tax Law, it is understood that the taxpayer is obliged to maintain all evidence that demonstrates, in a potential control procedure, the link between the interests and other financial expenses intended to be deducted and the generation of taxable income for the respective period.
Exchange differences arising from foreign currency debts, invested in
income-generating activities. The Directorate must issue, through a
resolution before the fiscal year's end, the pertinent regulations in
this regard;
Debts in favor of the declarant, clearly uncollectible, provided they originate from operations of the business's usual turnover and the reasons justifying such classification are indicated. If the Directorate does not accept the deduction of an uncollectible debt, the declarant may deduct it in the following year, provided it demonstrates that the legal efforts corresponding to its collection were made before common courts, and always that a period greater than 24 months has elapsed since its due date, without any payment by the debtor. Nevertheless, the Directorate will have broad discretion in the appraisal, in highly qualified cases, to reject or accept the expense.
If a previously deducted uncollectible account is partially or totally recovered, its amount must be included as taxable income in the fiscal period in which the recovery occurs
Regarding depreciations and depletion referred to in subsections (f) and
(h) of Article 8 of the Law, the provisions set forth in Annexes No. 1
and No. 2 of this Regulation shall apply.
Losses originating from business activities may be deducted in the three fiscal periods following and consecutive to the one in which the loss occurred, applying the maximum possible each year without the sum exceeding one hundred percent (100%) of the original total loss.
This provision shall also apply to agricultural companies, with the difference that they may deduct their losses in the five fiscal periods following and consecutive.
The right to deduct losses is contingent upon them being duly accounted for as "deferred losses" in each tax period in which they occurred and only those related to the profit-making activity conducted by the taxpayer.
In the case of companies conducting combined agricultural and other types of business activities, separate accounts must be kept for each activity, to enable the deduction of corresponding losses in accordance with the deadlines established in the Income Tax Law.
Unused losses in the terms described in this subsection shall not be cumulative nor deductible outside the deadlines indicated in the Income Tax Law for the respective activity.
For the purposes established in subsection (k) of Article 8 of the Law,
technical or financial advice is understood to be any opinion, advice,
or specialized recommendation, provided in writing and resulting from
the detailed study of the facts or data available, of a situation or
problem posed, to guide action or procedure in a determined direction;
Regarding the organization expenses of companies, general investments,
the value of depreciable assets, intangible assets, or capital losses
shall not be deductible from gross income;
Donations referred to in subsection (q) of Article 8 of the Income Tax Law, provided they do not exceed ten percent (10%) of the net income of the donating taxpayer, without considering the donation, and that they are duly proven, provided they have been delivered during the fiscal period in exercise.
For the purposes of the final paragraph of the mentioned Article 8, the donor must comply with the following conditions:
i) Verify, through consultation on the website of the Ministry of Finance, that the donee is authorized by the Tax Administration to receive donations.
ii) Request and retain the respective proof of the donation made.
iii) In case the donations are made to different donees, ensure that these in their entirety do not exceed the limit set by law.
Additionally, the donee must comply with the following general requirements:
i) Be registered and authorized by the Tax Administration to be subject to deductible donations for this tax, for which the request for authorization or renewal thereof must be managed, following the procedure that the General Directorate of Taxation shall provide by means of a resolution of general scope. The use of false information and data to manage the authorization will leave it without effect, without prejudice to the administrative or criminal sanctions that may correspond.
In case the beneficiary is the State or any of the state-chartered institutions mentioned in subsection (q) of Article 8 of the Income Tax Law, the aforementioned authorization to receive donations will not be necessary.
ii) Be up to date in all their tax obligations with the Tax Administration and in the payment of social charges to the Costa Rican Social Security Fund.
The Tax Administration will keep available to the public, on the website of the Ministry of Finance, an updated list of entities that meet the tax requirements indicated above and that can receive deductible donations from gross income. This information will be updated monthly by the General Directorate of Taxation. Donations made in favor of beneficiaries not listed will not be accepted as deductible.
Regarding sports committees appointed by the Costa Rican Institute of Sports and Recreation in rural areas, these will be referred to those areas of the country considered as such according to the classification of districts by degree of urbanization, carried out by the National Institute of Statistics and Censuses.
In the case of donations in kind, the donor must provide a certification of the value of the good, issued by an authorized public accountant, who must be accompanied by the work of an expert who is incorporated into the respective professional college, as applicable. This under the regulations of the Law Creating the College of Public Accountants, No. 1038 of August 19, 1947, and its amendments.
Losses due to the destruction of goods referred to in subsection (r) of
Article 8 of the Income Tax Law, resulting from fire, criminal acts,
force majeure, or unforeseen events, to the detriment of the taxpayer,
are deductible. Such events must be substantiated by certification from a
public accountant, supported by conclusive evidence.
Sums allocated for creating estimates, reserves, and provisions, authorized by supervisory bodies affiliated with the National Council for Financial System Supervision or that must be compulsorily maintained by financially supervised entities as mandated by these supervisory bodies, are deductible.
Regarding the final paragraph of subsection (v) of Article 8 of the Income Tax Law, the National Council for Financial System Supervision must consult the Ministry of Finance prior to issuing any regulation containing tax-related aspects, especially concerning the establishment of additional estimates, reserves, and provisions that may affect the determination of the profit tax.
The Ministry of Finance is required to issue a general scope resolution on the consultation procedure
The VAT incurred on the acquisition of goods and services, which is not
eligible to be applied as a fiscal credit under the VAT Law and its
regulations, is deductible. This also applies to VAT that has been
provisionally applied, only until it has been definitively settled in
the VAT return, in accordance with Article 24 of the VAT Law and item 3)
of Article 34 of its Regulation.
Losses arising from exchange rate differences due to the payment of liabilities or the receipt of income from assets, as well as those originating from the balances of assets and liabilities at the end of the tax period, are deductible. For the purposes of this provision, the possession of foreign currency is considered an asset, and the exchange difference is calculated when:
- The currency is exchanged, or
- Another asset denominated in that foreign currency or another is acquired.
Remunerations, salaries, commissions, fees, or allowances paid or credited to members of boards of directors, councils, or other governing bodies acting abroad, as referred to in subsection (h) of Article 50 of the law, are deductible.
Other cases stipulated in Article 9 of the Law, among others, that will
not be deductible from the gross income for the respective tax period
include:
Costs and expenses arising from economic operations or transactions that
are not properly supported by electronic vouchers authorized by the Tax
Administration and in accordance with the conditions and requirements
it defines.
Notwithstanding the provisions of Article 9 bis of the Law, interests and other financial expenses paid or incurred by the taxpayer during the tax period, when:
i) The interests and other financial expenses are paid in favor of partners of limited liability companies, considering them equivalent to shareholdings; or
ii) The obligation to withhold and pay the respective tax levied on the interests has not been complied with.
Regarding the operations referred to in section k) of Article 9 of the Law, costs and expenses arising from transactions carried out with non-cooperative jurisdictions. The determination of whether a jurisdiction is considered non-cooperative will be based on the list of non-cooperative jurisdictions issued by the Tax Administration, following the parameters set out in the Income Tax Law. For the preparation of such a list, the following conditions will be considered:
i) That the nominal rate of the tax equivalent to the Costa Rican Profit Tax, regulated in Title I of the Income Tax Law, is lower by 40% than the rate established in subsection a) of Article 15 of the Law, or
ii) That they are jurisdictions with which Costa Rica does not have an effective international agreement for information exchange or a convention to avoid double taxation that includes a clause for information exchange.
The agreements or conventions referred to in this last case may be bilateral or multilateral. Within the term "international agreement for information exchange," the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Law No. 9118 of July 7, 2013) and the Convention of Mutual Assistance and Technical Cooperation between the Tax and Customs Administrations of Central America (Law No. 8880 of November 1, 2010), as well as bilateral agreements for the exchange of tax information, whose details must be available and permanently updated on the website of the Ministry of Finance, are included.
The Tax Administration must update and publish the list of non-cooperative jurisdictions on the website of the Ministry of Finance, at least once a year.
- Payments of gifts, offerings, and, in general, any direct or indirect donation, in money or in kind, made by the taxpayer or companies linked to it for the benefit of national public officials or those of another State, or official or representative of an international organization with the aim of expediting or facilitating a transaction at a transnational or national level.
Under the objective of facilitating a transaction, it is understood that such officials, using their position, perform, delay, or omit any act or, improperly, assert before another official the influence derived from their position.
The non-deductibility of the gifts mentioned in the previous paragraph, in addition to covering the amounts paid by taxpayers for bribery, in any of its forms, also covers any other act or activity classified as illicit under Costa Rican legislation, even if such expenses contribute to the obtaining of lawful income.
Expenses that give rise to or may give rise to hybrid mismatches. In the case of these types of expenses, the taxpayer must verify that there are accreditations of expenses or payments made, derived from any type of transaction held between the taxpayer in Costa Rica and its related parties abroad, and that the tax treatment is divergent in both jurisdictions, resulting in double non-taxation situations.
Divergences can occur in the following two cases:
a) Divergence in the classification or tax treatment of an entity: It will be understood that there is a divergence in the classification or tax treatment of an entity when the related company is not a taxpayer of the profit tax or its equivalent in the other jurisdiction involved, or the corresponding income is exempt or not subject in the foreign jurisdiction.
b) Divergence in the classification or tax treatment of a financial instrument: It will be understood that there is a divergence in the classification of a financial instrument when these possess different characteristics in both jurisdictions that imply different taxation. Likewise, payments made will be considered associated with hybrid mismatches when they are not taxable or are exempt in the other jurisdiction involved in the operation, or when the payment in question is also deductible for the related party domiciled abroad.
The term "related parties" used in the previous paragraph should be understood in accordance with the provisions of Article 77 of this Regulation.
For the purposes of calculating the maximum deductibility of net interest expenses of twenty percent (20%) of the profit before interest, taxes, depreciation and amortization (EBITDA) for each tax period, the taxpayer must have duly identified in their accounting for bank interest expenses and other concepts, provided in the third and sixth paragraphs of article 9 bis of the Law, as well as those that are not.
The Tax
Administration is granted broad authority to qualify such costs,
expenses, and outlays, to accept their total or partial deduction, and
to reject unjustified items.