Living and working in a foreign country does not mean that you do not have to pay taxes. Here is an overview of the Costa Rican tax system.
Regardless of the purpose of your stay in Costa Rica, you will have to pay different types of taxes. You better be aware of that, especially if you are retiring or working in the country. But beforehand, make sure to inquire whether your home country has signed any non-double taxation agreement with Costa Rica.
According to local tax provisions, residents and companies operating in Costa Rica are required to pay income tax on their income earned in the country.
The tax year for individuals and companies starts on the 1st of October to end on the 30th of September. Companies can apply for filing returns during a different tax year upon the approval of the Costa Rican Ministry of Finance.
In the case of income of some professionals and companies, unless proven otherwise, the net result is determined by the Ministry of Finance and is considered as a minimum base for imposition.
Two tax reform laws have been introduced in 1995, namely the Ley de Justicia Tributaria and the Ley de adjusts Tributario. These two laws impose severe administrative fines, sanctions and even criminal proceedings against those who do not comply with the tax return requirements.
Income tax applies not only to individuals but also to legal persons, that is companies whose income come from Costa Rican sources. Indeed, local tax laws do not apply to income coming from foreign sources. Hence, income tax applies to the following: legal persons, de facto companies, professional companies, public companies operating in the country, branches, subsidiaries, agencies operated by non-residents, trusts, inheritance (when they are indivisible), residents in Costa Rica (regardless of their nationality), employees, natural and legal persons that are not specifically mentioned and engaged in profit-making activities in Costa Rica .
Tax exemptions apply to the following: the government, local governments, autonomous and semi-autonomous organizations which are excluded from specific laws, religious institutions (regardless of their belief), associations, foundations, chambers, unions, political parties and other non-profit organizations, employers and workers sponsored who are sponsored by the Associaciones Solidaristas, workers' cooperatives and companies operating within the Free Zone.
Taxable income is based on net income. Therefore, it is necessary to establish the corresponding gross income of the taxable entity.
In Costa Rica, total income added to the profits made in the country during the tax year are considered as gross income. This includes earnings coming from real estate transactions, capital investment and other business activities. These also involve a value increase during the tax year, being justified only via declared or registered income.
Note that the following is not considered as gross income: donations in cash or in kind, the revaluation of fixed assets (except depreciating fixed assets, though depreciation allowances may be considered if approved by the tax authorities) profits, dividends, participation and any other form of distribution of benefits credited on the taxpayer's income as a result of contracts or agreements on goods or capital located abroad - even when it comes to contracts that have been negotiated in Costa Rica, capital gains obtained as a result of the transfer of real or personal property as long as does not a represent a usual operation, inheritances, bequeaths, community properties, national lottery prizes, approved charitable donations.
Gross income is eligible to deductions in the following cases provided the taxpayer can prove that the deduction was necessary. Therefore, deductions apply to the following cases:
Costs: necessary costs that incurred during the production of income (eg. raw materials, parts, components, or services which are needed to produce goods or services).
Salaries: salaries, bonuses, gifts, benefits actually paid, provided that the recipient's income tax has been withheld and paid to the Treasury.
Taxes: all taxes levied on goods, services, and normal business transactions.
Insurance premiums: premiums on contracts covering fire, theft, earthquakes and other similar risks.
Interest: no deduction is allowed for interest payable to shareholders of limited liability companies.
Unrecoverable debts: if these claims are related to normal business transactions and if all legal efforts to recover the debt have been exhausted.
Business loss: deductions are allowed in case of commercial loss. Losses incurred during a tax year can be carried forward for 3 years (5 years in the agricultural sector).
Social security contributions: contributions established by law and paid to employees.
Board of Directors' compensation: deductions are allowed for wages, salaries, commissions, fees paid to board members who are abroad.
Payments to non-resident companies in Costa Rica: payment for technical and financial support, as well as for the use of licenses, trademarks, franchise fees, or royalties. If payments are made to an agent or to the subsidiary of a permanently established company in Costa Rica, then deductions should not exceed 10% of the company's gross annual sales.
Travel expenses: as long as these do not exceed 1% of the declared gross income.
Start-Up expenditure: deductions are allowed for expenses related to the start of taxable income.
Advertising: costs related to advertising and promotion sales in Costa Rica or abroad.
Victims of accidents, thefts and losses who are not covered by insurance.
Donations to the state.
Individual income tax
Individual income tax applies to two categories of taxpayers: those whose income consists of a fixed salary or other remuneration, and those whose activities generate profits.
Fix salary income tax
Tax is withheld at source every month for all employees in Costa Rica. The rate is calculated according to the amount of income received, ranging as follows up to a maximum of 15%:
- up to 323,000 colones a year - 0%
- from 323,001 colones to 485,000 colones - 10%
- beyond 485,000 colones - 15%.
Once income tax has been calculated, the following tax credits can apply as follows:
- a tax credit of 560 colones per month for each dependent provided they are less than 18 years old, physically or mentally disabled, and therefore unable to make a living, or they are less than 25 years old and are high school or university students
- a tax credit of 830 colones per month for one of the spouses whereby they have got divorced legally.
Individuals with profit generating activities
The following rates apply to taxable annual profits:
- up to 1,434,000 colones per year - 0%
- from 1,434,000 to 2,142,000 colones a year - 10%
- from 2,142,001 to 3,573,000 colones a year - 15%
- from 3,573,001 to 7,160,000 colones a year - 20%
- beyond 7,160,000 colones per year - 25%.
Once the income tax rate has been calculated, a tax credit of 1,800 colones per year for each dependent applies provided they meet conditions listed above. Indeed, conditions are the same as above.
In Costa Rica, taxpayers who do not produce a tax return are assumed to have earned income in accordance with the income schedule established by law. This theoretical income is calculated according to a government employee's basic salary, that is half-way up the salary grid published in the annual budget.
The following professions are assumed to have earned 335 times the basic salary if they do not produce an income tax return: doctors, dentists, architects, engineers, lawyers, accountants, economists and real estate agents. As regards the following professions, their theoretical salary is assumed to be 250 times the basic salary: evaluators, private accountants, technicians and all other technical professions.
Annual property taxes
The assessment of properties for calculating the appropriate annual property tax rate is the municipalidades' responsibility. Indeed, the tax rate is calculated on an annual basis and can be paid either every year, every semester or three times a year according to procedures established by each municipality.
During the next five years, property tax will amount to 60% of the property's estimated value. Finally, as from the sixth year, the municipality can set its own rates, but these must not exceed 1% of the property's estimated value.