Dec 5, 2025
As Costa Rica seeks to attract Israeli investment and strengthen its own service-export platform —a position recently reaffirmed by the Minister of Foreign Trade— businesses will increasingly enter into contracts involving software licensing, algorithm use, technical support that embeds intellectual property, and transfers of specialized know-how. These arrangements require a more rigorous transfer pricing analysis, commonly referred to as TP or Transfer Pricing, to determine whether the economic substance aligns with the payments made.
From the OECD perspective, one of the most critical aspects is the correct identification of the DEMPE functions —development, enhancement, maintenance, protection and exploitation— which dictate where value is truly created in relation to an intangible asset. Costa Rican taxpayers must therefore demonstrate how these functions are performed within their operations; otherwise, the DGT may deny deductions, characterize transactions, or reallocate profits.
International practice provides strong reference points. The Israeli Hexadite–Microsoft case highlighted the importance of treating contingent payments or holdbacks as part of the total intangible value and applying arm’s-length interest rates to any intra-group financing linked to technology acquisition or development. Companies in Costa Rica entering transactions with Israeli counterparts will need to align their contractual and financial arrangements with these principles to avoid challenges from the DGT.
Given this evolving environment, it is crucial for companies to adopt a preventive compliance approach as they prepare for 2026. This involves clearly mapping DEMPE functions across jurisdictions, applying internationally recognized valuation methodologies for intangible assets, reviewing withholding tax exposure on cross-border technology payments, and updating intercompany agreements to distinguish between licensing rights and related services. Maintaining robust, OECD-aligned transfer pricing documentation will be essential.
Ultimately, the Costa Rica–Israel FTA presents important commercial opportunities, but it also raises the compliance bar. Businesses that proactively document, value and support their intangible-related transactions will be better positioned to mitigate tax risks and operate with confidence in this increasingly sophisticated regulatory landscape.