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A Quick Costa Rica Tax Overview for Costa Rica Newbies

Costa Rica News – If you are contemplating moving to Costa Rica or if you have a business or are a resident here, just like it is in the United States or other western country, you are subject to the friendly arms of the taxing authorities here. This article touches on some of the taxes that you may be subject to.

First, before we discuss any Costa Rica taxes, you need to remember that if you are a United States citizen, you are required to file a US tax return and report your worldwide income even if you reside in another country.  I have met many clients who were under the false impression or received poor advice that they do not have to file. This is erroneous advice – do not get caught in the trap.  If you are in that position already, contact a tax professional to assist you on becoming complaint. Not being compliant will create numerous and substantial civil tax penalties. There is no need to go through that process. Not doing anything about it, will not solve it!

Income Taxes – Individuals

With respect to income taxes in Costa Rica, they have their system to impose and collect an assortment of taxes on both individuals and legal entities, like corporations. The good news is that income taxes imposed in Costa Rica are based upon income earned inside Costa Rica. Thus, if you are earning an income outside of the country, it is not subject to Costa Rican income taxes.

If you live in and or are legal resident of Costa Rica and have earned income (much like a W-2 income from the United States), then you are taxed generally based on your gross earned income (there are very few deductions or credits available like there is in the US) at the following graduated monthly income amounts and rates (amounts are approximates as they change from year to year and are legally in colones)

  • $0-$1,300 – 0%
  • $1,301-$1,950 – 10%
  • More than $1,950 – 15%

Dividends received from privately held Costa Rican corporations are also taxed at 15% and are subject to withholding from the payor.

If you have self-employed income from owning a business, the income taxes you are subject to following rates on the annual income (again, these are approximates):

  • $0-$5,715 – 0%
  • $5,716-$8,536 – 10%
  • $8,537-$14,237 – 15%
  • $14,238-$28,531 – 20%
  • More than $28,532 – 25%

Remember, if you are a US citizen or resident, and file individual Costa Rican income taxes, you may use the taxes paid as a foreign tax credit on your US income taxes (as you would be reporting your Costa Rican income). Therefore, you can avoid a double taxation of individual income.

In addition, if you have earned income and you are either a resident or meet other requirements, like having a tax home in Costa Rica and you have not spent more than 35 days in the United States for the past twelve months, you are eligible to exclude a portion of your earned income, about $93,000, from taxation in the United States.

Income Taxes – Corporate

With respect to legal entities, like corporations, their are income taxes as well. Entity taxes do have deductions, similar to those you would find in the US for company taxes (of course there are differences). The net profits are taxed also on a progressive schedule as follows (again, these are approximates in dollars):

  • Up to $91,000 – 10%
  • $91,000 to $183,000 – 20%
  • Over $183,000 – 30%

Tax returns and payments are due by December 15th and are subject to quarterly estimated payments throughout the year based on the prior year tax. Late filings and under-reporting of taxes are subject to varying civil penalties.

Since Costa Rica does not have a concept of a pass-through corporation, like a sub-chapter S in the United States, taxes paid are not eligible to a foreign tax credit on your US individual tax return; they are effectively trapped inside the corporation. Monies withdrawn by shareholders are considered dividends and are subject to a 15% withholding by the corporation and are taxed to the individual.  Hence, incomes from Costa Rican corporations are double taxed – at the entity level and at the shareholder level.

Remember if you own 10% or more of a foreign corporation or partnership, you are required to file various disclosures forms with your US tax return. Also, depending on the type of income earned by the foreign corporation or partnership, it may be taxable in the US regardless of whether the profit is distributed to the shareholders. This requires careful planning and discussions with a tax professional. Failing to make the proper disclosures can subject you to automatic civil penalties.

Other Corporate Taxes

Corporations are subject to a Education and Culture Stamp Tax based on their computed capital. This tax is due in February and March and is based on the following capital:

  • $0 – $500 – $1.50
  • $500 – $2,000 – $6.00
  • $2,000 – $4,000 –$12.00
  • More than $4,000  – $18.00

Corporations are subject to a new Annual Corporate Tax based on the status of the company, much like a company that is required to file an annual report or franchise fee to the state in which it is incorporated in the United States. This tax is based upon if the company is active or inactive according to the Ministerio de Hacienda (Costa Rica’s IRS). Companies that are active are also required to file an income tax return.

In 2012, this tax was pro-rated for nine months and assessed as of April 1 and payable on April 30. In 2013, corporations will be subject to a full year, which is due on January 1st and is approximately $360 and $180, for active and inactive companies, respectively. Penalties are 50 colones or $.10 per day for late fees. If your corporation does not pay this tax for three consecutive years, the company is subject to involuntary dissolution and the obligation may be transferred to the officers of the company.

Real estate taxes for properties held inside a corporation are subject to annual tax graduated rates ranging between 0.25% and 0.55% of the assessed value of the property. As many of you are aware, the assessed value does not necessarily represent the fair market value of the property (similar to the US when you receive your property tax bill). Your assessed value, especially, if you qualify for the higher brackets should be done annually by voluntarily filing the documents and paying the taxes.

There are other taxes in Costa Rica as well, but these are just some of the highlights and more significant ones. The above listed taxes are generally not subject to a foreign income tax credit on your US tax return. Once again they are “trapped” inside the corporation.

I recognize this week’s article is jammed with numbers and rates that would make an accountant’s head spin – oh wait, I am an accountant! Taxes can be a dull and uninviting topic to discuss or know – that is why you need to have a tax professional at your side to navigate you through these areas.

Robert L. Pioso, CPA, with 20 years of experience as a CPA, CFO and owner of a Costa Rican business can help you navigate through the complexities of US taxation for US expats and those who own investments and assets in Costa Rica. You can contact him for a free consultation – CR 6050-3831 or US 312-235-2301 or visit him at or email  [email protected]. Rich Coast Accounting and Financial Services are focused at providing positive and tangible results that will bring real value to you or your business and offers a unique guaranty “You pay only for the value of the services received or the invoice, whichever is less.”

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