Simple Tax Guide for Americans in Costa Rica
US Expat Taxes - Costa Rica
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Costa Rica for over 6 years. Our clients hail from all parts of the country - San JosÃ© and Puerto LimÃ³n, San Francisco and Alajuela, Liberia and ParaÃso.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Costa Rica and know how to integrate your U.S. taxes into the local income taxes you pay. Any Costa Rican income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Costa Rica for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Costa Rican Tax System for the American Expatriates.
Costa Rica income tax rates are progressive between 0%-25%. There are 2 different types of income taxes in Costa Rica: income tax on wages, and income tax on profit generating activities.
Costa Rica Income Tax for Wages (Fixed Salary)
|Taxable Monthly Income||Tax Rate|
|CRC 0 - 619.000||no tax|
|CRC 619,000 - 929,000||10 %|
|Over CRC 929,000||15 %|
Any individual employed in Costa Rica pays a monthly withholding tax rate based on his salary. Employment income of individuals is subject to a progressive tax of 15% on a monthly basis as shown above.
All physical persons who receive salaries, pension or retirement - and any Corporations that are involved in commerce in Costa Rica - must pay Income Tax in Costa Rica. There is a tax scale and an amount due from the amount you earn from your employment, your professional services, and from whatever activity your Corporation performs. (There are individual exceptions depending on circumstances.)
Costa Rica Income Tax for Lucrative (Profit Generating) Activities
|Taxable Income||Tax Rate|
|CRC 0 - 2.747.000||no tax|
|CRC 2.747.000 - 4.102.000||10 %|
|CRC 4.102.000 - 6.843.000||15 %|
|CRC 6.843.000 - 13.713 000||20 %|
|Over CRC 13.713.000||25 %|
If you are self-employed because you have a professional degree, like a Doctor or a Lawyer, you will be subject to above taxation in Costa Rica as above.
Tax Credits for Individuals in Costa Rica
For Each Child:
monthly: CRC 1,170
annualy: CRC 14,040
By the Spouse:
monthly: CRC 1,730
annualy: CRC 20,760
Basis Â– Residents and nonresidents are taxed on their Costa Rican-source income.
Residents are subject to profit tax, while nonresidents are subject to withholding tax.
Residence Â– Costa Ricans, permanent residents and individuals that have been in the country for 6 months or more in a tax year are ordinarily resident.
Tax Filing status Â– Each individual must file a return. Joint returns are not permitted.
Taxable income Â– Income is taxed under a schedular system. Gross employment income is taxable. Net profits from the carrying on of a trade or profession are taxed in the same way as profits derived by companies. Investment income in the form of dividends is subject to a 15% final withholding tax.
Capital gains Â– Capital gains are exempt unless the gains are derived from the habitual activity of the seller (i.e. the normal trade of business) or the assets sold are tangible and can be depreciated. Such gains are taxed at 30%.
Tax Deductions and allowances Â– No deductions are granted in respect of employment income, although personal allowances are granted for the taxpayer's spouse and children. Taxpayers carrying on a trade or business are entitled to the same deductions as a corporation.
Tax Rates Â– Rates are progressive to 25%.
Other taxes on individuals:
Capital duty Â– No
Stamp duty Â– Stamp duty is only levied on private agreements, with the rate depending on the amount of the transaction.
Capital acquisitions tax Â– No
Real property tax Â– A 1.5% transfer tax and 0.25% municipal tax on real property apply.
Inheritance/estate tax Â– No
Net wealth/net worth tax Â– No
Social security Â– Individuals contribute 9% if employed and 9.5% if self-employed.
Administration and compliance:
Tax year Â– The tax year is the 12-month period from 1 October to 30 September, although the taxpayer may request a different period.
Filing and payment Â– Costa Rica operates a self-assessment regime. Advance tax is payable in quarterly instalments. The tax return must be filed and tax paid within 2 months and 15 days after the end of the tax year. Payroll taxes are withheld by the employer.
Penalties Â– Late filing is subject to a penalty of 1% of the total tax debt for each month, up to a maximum of 20%. The penalty for a tax deficiency is 25% of the amount due and 75% if fraud is involved.
Costa Rica Corporate TaxationCosta Rica corporate tax rates are progressive between 10% - 30%.
|Taxable Gross Income||Tax Rate|
|CRC 0 - 41,112,000||10%|
|CRC 41,112,000 - 82,698,000||20%|
|Above CRC 82,698,001||30%|
Under the Costa Rica tax system, residents and corporations are taxed only on income earned in Costa Rica. The tax year begins on October 1st and ends on September 30th, for both individuals and corporations in Costa Rica. Companies may request filing returns on a different tax year, subject to the approval of the Ministry of Finance. Unless proof to the contrary exists, the Ministry of Finance establishes a presumptive net income for professionals as well as corporations, and constitutes a minimum taxable base.
Costa Rica corporate income tax system is based on the "territoriality principle" which means that only income derived within the Costa Rica territory and from Costa Rica sources is subject to income tax. Costa Rica is not considered to be an offshore centre. Foreign source of income is exempted from taxes. Corporation tax is levied at different rates on income derived in Costa Rica, depending on the total amount of a company's income.
Residence Â– A corporation is resident if it is incorporated in or has a fixed place of business in Costa Rica.
Basis Â– Residents and nonresidents are taxed only on Costa Rican-source income. Residents are subject to profit tax, while nonresidents are subject to withholding tax. Branches and permanent establishments are taxed in the same way as subsidiaries.
Taxable income Â– Income tax is imposed on net income (i.e. profits or economic benefits resulting from services provided, goods located or investments made in Costa Rica) of a company. Unrealised gains are not part of gross income (including capital gains in specific cases).
Taxation of dividends Â– Dividends received from domestic entities are exempt from corporate tax. A 15% withholding tax is levied on dividends paid to individual shareholders and 5% for dividends paid by stock corporations whose shares are registered on an officially recognized stock exchange.
Capital gains Â– Capital gains are exempt unless derived from the habitual activity of the seller (i.e. the normal trade of business) or the assets sold are tangible and can be depreciated. Such gains are taxed at 30%.
Losses Â– Industrial losses may be carried forward for 3 years (5 years for agricultural losses). Capital losses are deductible only if a gain on the disposal is taxable in the current year.
Tax Rate Â– The rate is 10% for corporations earning less than USD 69,080; 20% for corporations earning more than USD 64,809 and less than USD 139,000; and 30% for companies earning more than USD 139,000. The tax rate is 30% for trading and non-trading companies.
Surtax Â– No surtax
Alternative minimum tax Â– No Alternative minimum tax
Foreign tax credit Â– No
Participation exemption Â– No, but an exemption from withholding tax is available in respect of dividends that are not credited by the recipient's country of residence.
Holding company regime Â– No
Tax Incentives Â– Industrial, processing and service companies located in free zones are entitled to a full exemption from income tax in the first 8 years of operation and a 50% exemption in the next 4 years. Forest sustainability incentives and tourism incentives also are available.
Dividends Â– A 15% withholding tax is levied on dividends paid to individual shareholders and a 5% rate on dividends paid by stock corporations whose shares are registered on an officially recognised stock exchange.
Interest Â– The general withholding tax on interest is 15%, with a 0% rate applying to interest paid to "first rank" approved banks and financial institutions.
Royalties Â– Royalties are subject to a 25% withholding tax. An exemption is available for royalties that are not credited by the payee's country of residence.
Branch remittance tax Â– Remittances from local branches to their nonresident parent companies are taxable in the same way as dividend distributions.
Other taxes on corporations:
Capital duty Â– No, but stamp tax is levied on capital contributions.
Payroll tax Â– Employers act as withholding agents for employees, deducting 0% to 15% from the salary.
Real property tax Â– The municipal authorities levy a 0.25% tax annually on the value of real property.
Social security Â– Employers must contribute 26% of the gross salary paid to an employee.
Stamp duty Â– A culture and education stamp tax on the net capital of entities is payable annually (ranging from USD 1.50 to USD 18).
Transfer tax Â– No Transfer tax
Other Â– A special annual tax of USD 125,000 is levied on offshore banking operations.
Transfer pricing Â– No, but the tax authorities may assess transactions at fair market value on the basis of the substance-over-form principle.
Thin capitalisation Â– No
Controlled foreign companies Â– No
Other Â– A general substance-over-form provision applies.
Disclosure requirements Â– No
Administration and compliance:
Tax year Â– The tax year is the 12-month period from 1 October to 30 September, although the taxpayer may request a different period.
Consolidated tax returns Â– Consolidated returns are not permitted; each company must file a separate return.
Tax Filing requirements Â– Costa Rica operates a self-assessment regime. Advance corporate tax is payable in quarterly instalments. The tax return must be filed and paid within 2 months and 15 days after the tax year end.
Tax Penalties Â– Late filing is subject to a penalty of 1% of the total tax debt for each month, up to a maximum of 20%. The penalty for a tax deficiency is 25% of the amount due and 75% if fraud is involved.
Costa Rica Free Trade Zone Taxation Regime
Costa Rica has a special program called the free trade zone regime, which grants a 100% exemption status to companies that meet minimum fixed-asset investment requirements and that are foreign-market oriented.Free zones are primary areas for offshore tax and customs operations. They are restricted zones with no resident population, authorized to serve as such by Costa Rica Government's Executive Branch. These facilities are intended to accommodate operations engaging in input and raw material imports, manufacturing and assembly or marketing of export goods and provision of export-related services.
Ease of operation, tax incentives, first-rate communications, electric power, utilities, and highly-qualified labor are the elements underlying the dynamic development of free-zone companies.
Beneficiary companies under the System can engage in park management as well as in handling, processing, production, repair, and maintenance of export / re-export goods and services.
Basic requirements to join the System include new initial investment on fixed assets of at least US$ 150,000 for companies inside industrial parks, and US$ 2,000,000 for those outside.
Companies meeting the following requirements can apply for Free Trade Zone status:
- Export processing industries engaged in processing or assembling raw materials to produce export / re-export finished goods.
- Export trade companies (not producers) engaged in handling, repacking, or redistributing non-traditional export / re-export products and merchandise.
- Service industries or companies exporting to natural or artificial persons abroad or serving to Free Zone companies, as long as these services are directly linked to those companies' production processes.
- Banking, financial, or insurance companies inside Free Zones will not be allowed to benefit from the System.
- Park-managing companies engaging in installing companies under the Free Zone System and to park management and maintenance.
- Companies or organizations engaged in scientific research to enhance technology levels of industry or agribusiness activities and Costa Rica's foreign trade.
- Companies operating shipyards and dry docks to build, repair, or service ships.
Benefits of the Costa Rica Free Trade Zone Regime
The companies operating under the Costa Rica Free Zone Regime shall enjoy the following incentives, with some tax exceptions detailed bellow:
a) 100% exemption from payment of all taxes and consular duties on imports of raw materials, manufactured or semi-manufactured products, components and parts, packaging and container materials, as well as other merchandises and goods required for their operation.
When there are national raw materials available, the company shall use them as a priority, if the General Directorate of Industry objectively determines that they provide the same conditions with regard to price, quality and timely delivery required for them. This evaluation shall be conducted if the local producer of the raw materials makes the respective request to the General Directorate of Industry and, after the grant of the Free Zone Regime benefits to the company in question.
b) 100% exemption from all taxes and consular duties affecting the imports of machinery and equipment, as well as those of their accessories and spare parts, and on imports of motor vehicles required for their operation, production, management and transportation.
c) 100% exemption from all taxes and consular duties on imports of fuels, oils and lubricants required for the operation of these companies. Such exemption shall be granted only when these goods are not produced within the country with the quality, in the quantity and within the time necessary. The Ministry of Economy, Industry and Commerce shall grant prior authorization for such importation and issue a reasoned resolution on the matter within no more than fifteen business days.
d) 100% exemption from all taxes associated with the exportation or re-exportation of products. This exemption shall be granted for re-exportation of production machinery and equipment from the Zones that have entered under this Regimen.
e) 100% exemption for a term of ten years counted from the start of the operations from payment of taxes on capital and net assets, from payment of property taxes and from payment of the tax on transfer of real estate.
f) 100% exemption from sales and excise taxes on purchases of goods and services.
g) 100% exemption from all taxes on remittances abroad.
h) 100% exemption from all taxes on profits, as well as any other which taxable base is determined on the basis of the gross or net profits, the dividends paid to shareholders or income or sales, in accordance with the following differences:
- For companies located in zones of "higher relative development", the exemption shall be one hundred percent (100%) for a term of up to eight years and fifty percent (50%) for the following four years.
- For companies located in zones of "lower relative development", the exemption shall be one hundred percent (100%) for a term of up to twelve years and fifty percent (50%) for the following six years.
i) 100% exemption from all taxes on imports and exports of commercial or industrial samples, upon prior authorization of PROCOMER.
j) For a better development of their operations, the companies operating under the Costa Rica Free Zone Regime can freely perform and enter into all kinds of acts and contracts in foreign currency. In this case, the respective amounts shall be necessarily paid in this currency in their international transactions or those conducted with other companies established under the Free Zone Regime.
The companies operating under the Costa Rica Free Zone Regime shall enjoy the free possession and management of foreign currency acquired as provided in the foregoing paragraph or derived from their regular activity, being exempted from the application of the exchange regulations. The Costa Rica Central Bank shall establish the regulations for this benefit and the activities derived from it. These Regulations shall be an essential requirement for the enjoyment of such benefit.
The needs of national currency of these companies shall be processed only through authorized commercial banks, converting the foreign currency they have available for such purpose into local currency.
k) The export processing companies, beneficiaries of the Free Zone Regime, which after four years of operating under such Regime do reinvest in the country can receive an additional exemption from payment of income taxes, in accordance with the following parameters:
1. If the reinvestment exceeds twenty-five percent (25%) of the original investment, the exemption shall be for one additional year.
2. If the reinvestment exceeds fifty percent (50%) of the original investment, the exemption shall be for two additional years.
3. If the reinvestment exceeds seventy-five percent (75%) of the original investment, the exemption shall be for three additional years.
4. If the reinvestment exceeds one hundred percent (100%) of the original investment, the exemption shall be for four additional years.
The additional tax exemptions shall be seventy-five percent (75%) of the income tax payable. Any additional tax exemptions herein granted shall apply after the eighth year of operations, without prejudice of the exemptions corresponding to the final term of four years originally granted, which shall apply once the additional exemption period hereby regulated expires. In the case of companies installed in zones of "lower relative development", the additional exemption granted shall enter into force after their twelfth year of operations, without prejudice of the tax exemptions corresponding to the final period of six years originally granted, which shall enter into force after expiration of this period of the additional exemption. The reinvestment that results in the additional exemption shall be completed after the fourth year and before the start of the eighth year of operations under the Free Zone Regime.
The additional tax exemption can only be granted to companies which original initial investment in fixed assets has amounted to at least two million U.S. dollars (US$2,000,000).
When any of the companies conducts commercialization activities, they shall suffer a reduction of the income tax exemption in the same proportion of such activities, as established in the Regulations to this Law. The performance of commercialization activities by non-commercialization companies operating under the Regime can only be complementary, not their main activities, and shall require the prior authorization of PROCOMER.
Costa Rica General Sales Tax (GST)
The rate of General Sales Tax (GST) in Costa Rica is 13%.
Costa Rica sales tax is 13% on the amount paid for goods and for some services. The services of Lawyers, Doctors, Dentists and other independent professionals are exempt from sales tax; anything else you buy, from a candy bar to a computer or furniture is taxed. Houses and cars require payment of a 'transfer tax', and that is covered elsewhere. In some cases the sale is subject to the Simplified Regimen, used for very small businesses like your local 'Pulperia' or 'Soda' (corner store).