German Ministry of Finance of 24 October confirmed that the double tax avoidance, the contract between Germany and Costa Rica, will be applied from January 1, 2017.
The agreement, which was signed on 13 February 2014, is the first such agreement between Germany and Costa Rica, and contains the OECD standard for the exchange of information between the tax authorities of the two countries.
The tax on dividends will generally be limited to 15 percent. However, the rate of five percent would apply if the dividend recipient is a company (other than partners), which directly owns at least 20 percent of the shares of the paying company.
Income tax on the interest payments, as a rule, is limited to five per cent. At the same time, the withholding tax on royalties will be capped at 10 percent.
President of Costa Rica, Luis Guillermo Solís, addressed to the deputies to approve plans for tax reform before the end of the year.
The head of state said at a press conference that the approval of the tax reform is a top priority. He noted that after a two-year moratorium on the tax increase, the time has come for the implementation of austerity measures.
Last year, the tax reform bill was forwarded to the legislature. The bill contains a proposal for the replacement of 13 percent tax on the general sales with a value added tax with an initial rate of 14 percent. The rate will be increased to 15 percent in the second year. The bill also includes an increase of individual income tax rate ranging up to 25 percent.
However, the rating agency said that Costa Rica is unlikely to hold significant fiscal reform in the near future due to the country's fragmented Congress and the protracted process for agreeing upon legislation.
As a result, the agency expects the general government deficit in Costa Rica will continue to rise and this year will exceed seven percent of the gross domestic product (GDP). The International Monetary Fund said in a statement in March that Costa Rica has to target a fiscal adjustment of 3.75 percent of gross domestic product in order to stabilize the ratio of public debt to GDP.