Taxes in Costa Rica

In Costa Rica, the taxation of individuals is based on the principle of territoriality, meaning that all personal income that has a foreign source is tax-exempt. Only revenue earned by an individual within Costa Rica is subject to an assessment by the tax authorities. Any income you earned from working remotely with a U.S. company, for example, would not be taxed by Costa Rica currently.

The principle of territoriality is perhaps the most significant aspect of the country’s fiscal regime. Costa Rica does not discriminate between the taxes payable by residents and non-residents. The main taxes affecting an individual are income tax, employee social insurance, withholding taxes, capital transfer tax, and sales tax.

Your Obligation to Your Home Country

Regardless of your tax liability in Costa Rica, you’ll most likely have some sort of tax obligation to your home country. U.S. citizens, for example, owe tax on their worldwide income no matter where they live. Canadians, on the other hand, do not.

As an American expat, you will be entitled to some tax breaks on your income tax, but never Social Security tax. Since the U.S. administrations often change tax laws, it is imperative to consult international tax law experts.

Income tax

Income tax (Impuesto de Renta) is levied on both employment source income and non-employment source income.

Income tax payable by individuals is set out in the Income Tax Law. The fiscal year now mirrors the calendar year. Employment income includes the gross value of a salary, wage, pension, commissions, bonuses, expense allowances, and any benefits in kind. No expenses can be deducted in assessing employment income. However, in respect of non-employment source income (e.g., dividends on shareholdings, rental from a property letting, etc.), there is a difference in how residents and non- residents are taxed.

There are different ways of assessing income tax payable as follows: Personal income taxes: This group includes two categories:

• Persons whose income consists of a fixed salary or other remuneration.

• Persons with profit-generating activities.

1. Persons whose income consists of a fixed salary

Every individual employed in Costa Rica must pay a monthly withholding tax that is based on his/her salary. Employment income (on a monthly basis) of individuals is subject to a progressive tax of 15% as follows:

Incomes up to 842,000 CRC are exempt

• In excess of 842,000 CRC up to 1,236,000 CRC: 10%

• In excess of 1,236,000 CRC up to 2,169,000 CRC: 15%

• In excess of 2,169,000 CRC up to 4,337,000 CRC: 20%

• In excess of 4,337,000: 25%

There is a monthly tax credit applicable to each dependent that meets the following criteria:

• A minor (under 18 years).

• Handicapped (physically or mentally), and therefore unable to make his/her own living.

• A high school or college student, not older than 25 years.

• A monthly tax credit applicable to the spouse only if there is no legal separation between them. If both spouses are taxpayers, the tax credit can be deducted by only one of them.

2. Individuals with profit-generating activities (self-employed)

The following rates are currently applied to taxable annual profits:

• Profits up to 3,742,000 CRC are exempt

• 5% on the first 5,761,000 CRC

• 10% on the excess of 5,761,000 CRC and up to 8,643,000 CRC

• 15% on the excess of 8,643,000 CRC and up to 11,524,000 CRC

• 20% on the excess of 11,524,000 CRC

*The income tax rate doesn’t change; however, what does change on an annual basis slightly are the thresholds.

An annual tax credit per dependent can be applied, once income tax has been calculated.

• Non-employment source income includes payments related to bonuses, profit share schemes, dividends on shares, interest on loan deposits, and rental income.

• A number of non-employment sources of income are exempt from tax. They include Christmas bonuses (mandatory after 12 months service with the same employer), gains achieved on the sale of capital assets (e.g., the sale of a house at a profit), gifts, inheritances, and income from securities designated as either tax exempt or subject to a withholding tax in place of income tax.

• There are a number of allowances that can be deducted from non- employment source income by residents to reduce the taxable charge: an annual tax credit in respect of a spouse, or an annual tax credit in respect of a dependent under 25 years of age.

• A husband and wife are treated separately for the purposes of assessing income tax on the non-employment source income of residents. Income received by non-residents from a non-employment source is usually taxed at the source (e.g., withholding tax on dividends), and if it is not taxed at the source, it is not taxed at all.

Social Security Taxes

The employer pays a contribution of up to 26.5% of gross salary, and the employee pays a contribution of up to 10.67% of his/her gross salary. Self-employed people are also required to contribute to this fund. Foreigners temporarily working in Costa Rica are not exempted from this tax, even though it is evident they can never benefit from it. Immigration law imposes a requirement that all foreign residents register and contribute to the social security system. Employers are required to insure their employees against accidents at work, and depending on the monthly salary and the nature of the risks, premiums can vary from 0.5% to 22% of the employee’s salary.

Capital Gains Tax

Costa Rica didn’t have a capital gains tax (except for developers) until 2019. The capital gains charge is 15% for residential properties and 30% for commercial properties. This amount is calculated off the sales profit made over your original purchase price. You are exempt if you are selling your primary residence, but you do have to prove you lived in it for 183 days or more each year. If you have a titled property purchased prior to July 1, 2019, you have the one-time option of paying a flat 2.25% of the sale price rather than the capital gain.

Restaurants, stores, hotels, and vacation rentals are categorized as commercial real estate. Basically, anything that is income producing is taxed at 30%. This is something to keep in mind if you are buying a vacation rental condo/home. It is best to talk to your Costa Rican CPA or lawyer to be clear regarding the income-generating asset and your income tax obligations with a vacation rental property.

Property Transfer Tax

A property transfer tax of 1.5% is payable by the purchaser on the value of real estate purchased. This tax is triggered with the transfer of the property. For the purposes of capital transfer tax, “value” means the higher of either the purchase price recorded by the parties, or the value ascribed to the transaction by the relevant government department using a prescribed formula. In addition, there is a National Registry recording fee of 0.005% and a documentary stamps fee of 0.035%.

Sales Tax

IVA or sales tax (equivalent to VAT) stands at 13% and is levied both at the point of importation and at the point of sale (unless the sale is by way of export). It has a major impact on the standard of living and is now levied on all goods and services— including professionals, such as consultants, lawyers, hair stylists, chiropractors, etc. If you have a retail business in Costa Rica, including a vacation rental, you must collect this 13% IVA tax via electronic invoice and pay it to the government. If you are not collecting the IVA, you should consult your Costa Rican accountant to ensure no back taxes are due.