They say the only certainties in life are taxes and death. As bleak as that sounds, many people successfully manage to enjoy the space in between. If you’re seeking adventure, challenge, or new beginnings, you may be thinking about moving to Costa Rica – or you may already be here. Whether you’re looking to work, start a business, or simply ensure the best for yourself and your family, your money matters. The following paragraphs will inform you about the tax laws and rates within Costa Rica – minus the confusing jargon. This stuff isn’t always easy reading, so if anything starts to do your head in, there’s a mini glossary of some terms with extra information on the last page. This might help clarify points or answer further questions if you need it. Grab a cup of coffee and get comfy. Here we go!
Some background info to warm up:
In Costa Rica, you’re only taxed on what you earn in Costa Rica. This is known as the principle of territoriality. So any income you get from a foreign source, while in Costa Rica, is tax exempt.
For both individuals and businesses, the tax (or fiscal) year begins on the 1st of October and ends September 30th. If you have a business and want to file tax returns on the calendar of a different tax year, you can request permission to do this through the Ministry of Finance. Sales tax is fixed at 13% and is usually collected at importation and sale. Exceptions include foodstuffs, real estate, medicinal products, some services, the sale of wood (taxed at 10%), and the consumption of electricity for residential purposes (5%).
Compared to other countries, property taxes in Costa Rica are relatively cheap. Taxes for higher-end properties were recently increased to help fund anti-poverty programs in the hope of reducing crime. The new tax schedule doubles the old rate. So if you owned a $200,000 home, you’d be charged about $1,000 a year on it (The Tico Times, November 21, 2008). When you transfer a property, the incurred tax is 1.5% of that property’s registered value. Unless arranged otherwise, it’s customary for the buyer and seller to share this expense, plus the legal fees. Houses registered at a value of less than 6,147,000 colones (US $11,055.76 based on the approximate exchange rate of 556 colones to US $1) are exempt from the 0.25% municipal governmental property tax. A local community charge applies, but that cost varies depending on the location of the house and the community. Generally, the cost isn’t more than $10 a month per house. Go to www.therealcostarica.com to find out more about property, real estate, moving, and more.
What if I’m not a resident yet?
Costa Rica doesn’t really have a different tax system for residents and non-residents. It doesn’t matter what your status is, foreigners get taxed the same on employment sources of income. In other words, non-residents might find themselves paying full social security, even if it‘s not going to be of benefit. For both residents and non, gains made from the sale of a capital asset are exempt from income tax. However in the case of a business, they would probably be subject to paying business income tax.
There are slight differences in the way non-employment sources of income are taxed. If a non-resident receives money from a non-employment source, unless it was taxed already, it probably won’t end up getting taxed at all. Residents who make money from a non-employment source can get an annual tax credit in respect of a spouse or a dependant under 25 years old.
When it comes to personal income taxes, things taken into consideration include: whether you earn a fixed monthly salary, whether your activities are profit generating, how much money you make, whether you meet criteria for monthly tax credits, and what allowances may be deducted from sources of income to reduce the tax you have to pay. It’s not within the scope of this writing to get too caught up here, but for more details you may visit www.lowtax.net/lowtax/html/jcrpetx.html.
The taxes you are most likely (or inevitably) going to come up against are: Personal Income Tax, Employee Social Insurance, Withholding Taxes, Capital Transfer Tax, and Selective Consumption Tax.
Personal Income Tax is collected on both your employment and non-employment income sources. The table below indicates rates you can expect to pay depending on your income.
Tax Rates for any individual employed in Costa Rica earning a fixed monthly income:
Income up to 419,000 colones Income up to US $753.60* Exempt
Between 419,000 – 629,000 colones Between US $753.60 – $1,131.30* 10%
From 629,000 colones and up From US $1,131.30* and up 15%
This information sourced from www.lowtax.net/lowtax/html/jcrpetx.html.
*Based on the exchange rate of approximately 556 colones to US$1 dollar.
The Incentives to Tourist Development Law (No. 7293 of 1992) allows anyone who buys shares concerned with hotel services, car rental, air or water transportation to annually deduct up to 50% of the value of their shareholding from their income, for the purposes of income tax. This can help you save money. As long as the deduction isn’t more than 25% of your annual tax payment, then it’s allowed. You can’t get credits in Costa Rica for taxes paid in another country. Specific criteria for credits, plus other information is detailed at www.lowtax.net/lowtax/html/jcrpetx.html.
Why start a business in Costa Rica?
The Costa Rican government offers incentives to encourage foreigners to set up business. In a study, some American University graduate students found that motivations included:
• Total tax exemption on the import of raw materials, capital goods and components.
• Total tax exemption on exports and local sales.
• Total tax exemptions on your business profits throughout the first 8 years and then a 50% exemption on your profits for the following 4 years.
• Total exemption on municipal and capital taxes.
• Permission to sell to other exporters in Costa Rica and permission to sell up to 40% locally.
(These incentives were put together by the American University MBA course “Impacts of National Information Technology Environments on Business.” You can access this or find out more about business at http://www.costarica.com/Business/.)
Requirements for a new Business:
Every person or business must register as a taxpayer with the General Income Tax Office (or Dirección General de Tributación Directa). This Office is part of the Ministry of Treasury and you register through the Tax Administration offices. Any money-making endeavours require you have a municipal license, or permit, from the district you are operating in. The steps needed to obtain this license can vary depending on the municipality, their legislation, administration, and the activity you plan to pursue. This license also requires you to pay a tax. As an employer, your business must also become incorporated with the Caja Costarricense de Seguro Social (CCSS) so that you can contribute to social security. To become incorporated you can go to any of the regional offices, however a good accountant would most probably sort a lot of this stuff out for you. You must become registered within the first 8 days after hiring people. The following table details the obligatory contributions the CCSS collects:
Mandatory Benefits Employer Contribution Employee Contribution
– Health & Maternity Benefits 9.25% 5.50%
– Disability, Old Age & Death Benefits 4.75% 2.50%
Family Allowances (Welfare Benefits) 5.00% —–
National Training Institute Tax (INA) 1.50% —–
Banco Popular Workmen’s Compulsory Savings Bank 0.50% 1.00%
Eradication of Extreme Poverty (IMAS) 0.50% —–
Worker Capitalization Fund 3.00% —–
Compulsory Complementary Pension 1.50% —–
Social Charges 26.00% 9.00%
The information for this table was sourced from a great publication, “Investing in Costa Rica – Setting up a business in Costa Rica” (July, 2008). Access it yourself at http://www.cinde.org/?page_id=144
You can find out more about the CCSS at www.ccss.sa.cr (if you go to Google first the page can be translated into English). Employers also have to insure employees against possible accidents in the workplace. Rates can vary from 0.5% – 22% of the employees salary depending on the element of the risk involved.
For people generating an annual profit within Costa Rica, the tax rates are given as follows:
Tax Rates for people generating a profit annually within Costa Rica:
Income up to 1,858,000 colones Income up to US $3,341.72* Exempt
Between 1,858,000 – 2,775,000 colones Between US $3,341.72 – $4,991.00* 10%
Between 2,775,000 – 4,629,000 colones Between US $4,991.00 – $8,325.54* 15%
Between 4,629,000 – 9,276,000 colones Between US $8,325,54 – $16,683.45* 20%
From 9,276,000 colones and up From US $16,683.45* and up 25%
Table information sourced from www.lowtax.net/lowtax/html/jcrpetx.html.
*Based on the exchange rate of approximately 556 colones to US$1 dollar.
The Costa Rican Ministry of Finance has a minimum taxable base which they came up with through establishing a likely net income for professionals and businesses. So unless you provide them with evidence to refute their framework, that’s what they work off. The table below captures rates for different taxes:
TAX RATE TAX BASE
General Sales Tax (G.S.T) 13.0% Value added
Stamp duty 1.0% Transaction value
Tax on interest 8.0% Interest income
Property tax (land) 0.25 Rental value
Property transfer tax 1.5% Sale price
Municipal patent license 0.3% Turnover
Corporate income tax 30.0% Taxable profit
Import duties Varies Import value
Vehicle tax Varies Vehicle value
Table information sourced from “Investing in Costa Rica – Setting up a business in Costa Rica”
(July, 2008). Accessed from http://www.cinde.org/?page_id=144
Businesses can make a submission for a special export system. If approved, then tax rates can differ. For further reading see “Investing in Costa Rica” at http://www.cinde.org/?page_id=152.
What are “Free Zones”?
Otherwise known as “zonas francas” these are areas where there is no resident population. Businesses base themselves there and depending on their size, don’t have to pay sales or consumer tax (among other benefits). The areas are equipped with electric power, utilities, and communication. Currently about 215 businesses are in free zones, employing around 50,000 people and generating more than half of Costa Rican exports – mainly to be purchased by the United States. To become a member, your business must make an initial investment of $150,000 in the Costa Rican branch of the business. The Tico Times reported (October 31, 2008) that the director of the Association of Free-Zone Businesses (AZOFRAS) has predicted exports from Free Zones to grow by 10% for 2009. More information about Free Zones is contained in the document “Free Trade Zone Regime in Costa Rica” available at http://www.cinde.org/?page_id=144.
What is the Fiscal Reform Bill and what does it propose?
In their October 31st edition 2008, The Tico Times talked about the latest State of the Nation Report. It was observed that even though tax revenue increased during 2007, the Costa Rican tax system fosters inequality through calling upon those least well off to support its weight. In comparison to other Latin American countries, state revenue is still reasonably low. Researchers are saying that unless tax reforms are passed, the government’s going to have to cut back on spending to keep finances in check. A Fiscal Reform Bill was presented to Congress in June of this year. This Bill could gradually increase taxes payable by Free Zone companies, switch sales tax to a Value Added System, and possibly discard the current territorial taxation system for world-wide income taxation. You can find a summary of the Bill plus a link to the document at http://www.deloitte.com/dtt/alert/0,1001,cid%253D164189,00.html.
GLOSSARY OF TERMS
Capital Assets An asset, such as real estate or equipment, that you usually hold onto for a while. Something that you don’t easily convert into cash.
Capital Transfer Tax When a piece of Real Estate is purchased, the buyer must pay Capital Transfer Tax. The amount paid depends on the value of the Real Estate. The law on these taxes payable is set out in the Income Tax Law.
Employment Source Income: The gross value of a salary, wage, pension, commissions, bonuses, expense allowances, and other benefits of any kind.
Income Tax: Tax that is levied, or collected, on both employment source income and non-employment source income. Residents and non-residents pay the same income tax on their employment source income but there is a slight difference on how they are assessed on their non-employment source income.
Non-Employment Source Income: E.g. dividends on shareholdings, rental from letting a property, payments related to bonuses, profit share schemes, interests on loan deposits, etc. A husband and wife, who are residents, are considered separately for the purposes of assessing income tax on this source.
Non – Residents: A foreigner staying in Costa Rica who does not have legal residency.
Residents: If a foreigner can show a sufficient income, be it from investments or a pension, they can acquire Costa Rican residence (see Law No. 6982 of 1984 “The Retirement Law”). It doesn’t matter whether their income is sourced from within Costa Rica or not. Residency awarded under this law allows people to work on the condition they are not putting out native workers. Residency is granted with the expectation that the foreigner will be staying in Costa Rica for at least 4 months out of every year. Residence may also be granted under Law No. 1155 of 150 (“The Residence Law 1950”). This doesn’t restrict economic activities a person might like to pursue, however usually this type of residency is reserved solely for business people and professionals.
You may hear of…
“Pensionado” residency: Attained through proving you have a monthly income of US $600 (or more) which you receive from a pension or retirement fund. Under this title you are allowed to own a company, receive an income from it, and claim a spouse and dependants under 18 years old. However you are not allowed to work as an employee and you must be in Costa Rica at least 4 months out of the year.
“Rentistas” residency: Attained through proving you make US $1,000 a month (or more), that this income has been consistent for at least 5 years, and you are guaranteed by a banking institution. The alternative is to make a US $60,000 deposit into a Costa Rican bank. Additional income is required if you have dependants under 18 years. Under this title you are allowed to own a company, receive an income from it, and claim a spouse (extra $1,000 per month) and dependants (extra $500 per month). However you are not allowed to work as an employee and you must be in Costa Rica at least 4 months out of the year.
Work Permits: Cannot be applied for until some form of residency has been granted. Work permits may take between 30-60 days to be approved. A company can apply for a general work permit if it has more than 30 employees. The permits are valid for a year and can be renewed annually. Under this permit foreign staff can be brought in without having to get individual work permits for every person. However the labour code specifies that at least 90% of the employees working for a company must be native, with at least 85% of the salaries going to locals.