Tax Guide for US Expats Living and Working in Costa Rica
Who Is Liable For Income Taxes in the Republic of Costa Rica
Resident and nonresident individuals, regardless of their nationality, are taxed on their income earned in Costa Rica. Foreign-source income is not taxed.
Individuals are considered resident if they have lived in Costa Rica for more than six consecutive months during a taxable year. However, the tax authorities may apply a shorter term for employed individuals.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Monthly income in excess of ¢651,000 is taxable, including salary, pensions, bonuses, premiums, commissions and allowances (for example, housing and educational allowances). Payments made to board members, other executives and counselors not included in the payroll are subject to a 15% withholding tax.
Self-employment and business income. Income derived from self-employment or from a trade or business is subject to taxation.
Investment income. Dividends paid or credited by local companies to resident and non-domiciled individuals and to non-domiciled business entities are subject to a 15% withholding tax. Dividend distributions between local corporations and limited liability companies are not subject to withholding. If dividends are paid by publicly traded companies registered on the Costa Rican stock exchange, the withholding tax rate is reduced to 5% if the shares were acquired through the stock market. Interest paid abroad is generally taxed at a rate of 15%. However, interest paid to a non-domiciled entity recognized by the Banco Central de Costa Rica (central bank) and tax authorities as a first-order financial institution are exempt from the 15% withholding tax. In addition, interest derived from commercial invoices paid abroad is not subject to taxation in Costa Rica. Royalties from franchises, technical advice and similar payments are not subject to a 25% withholding tax.
Directors’ fees. Directors’ fees paid to resident and nonresident individuals are subject to a 15% withholding tax.
Capital gains. Capital gains are taxable and capital losses deductible only if derived from the sale of depreciable assets or from the sale of non-depreciable assets in the ordinary course of business. Occasional (non-habitual) sales of non-depreciable assets are not subject to tax.
Deductions
Personal deductions and allowances. Annual tax credits are allowed in the amounts of ¢14,760 for each dependent child and ¢21,840 for a spouse. The spouse tax credit may be taken by either the husband or the wife, but not by both.
Business deductions. All costs and expenses that are necessary to generate taxable income and protect investments are deductible.
Relief for losses. Self-employed individuals may not carry their losses forward or back.
B. Estate and gift taxes
Costa Rica does not impose estate or gift taxes. However, estates may be taxed as ordinary taxpayers if they derive income before the distribution of assets to beneficiaries.
C. Social security
Social security contributions are levied on salaries, at a rate of 26.17% for the employer and 9.17% for the employee. Contributions are computed based on an employee’s gross compensation, with no deductions allowed.
E. Double tax relief and tax treaties
Costa Rica has entered into an income tax treaty with Spain (Law Number 8888), which took effect on 1 January 2010. Costa Rica has entered into a tax information exchange agreement with the United States. It has also entered into a tax information exchange agreement with Argentina, which took effect on 12 February 2010 (Executive Decree Number 35706-RE). In addition, Costa Rica is negotiating information agreements with Australia, Canada, Denmark, Faroe Islands, Finland, Greenland, Iceland, India, Indonesia, Italy, Japan, Korea (South), Norway, South Africa and Sweden. In certain circumstances, the tax authorities may exempt specific types of income, such as earnings, dividends, interest, commissions, royalties and patents, from tax in Costa Rica if the non-domiciled beneficiaries of the Costa Rican income demonstrate that they will not be granted a total or partial credit in their countries for taxes paid in Costa Rica. This relief does not apply if the Costa Rican income is not taxed in the foreign jurisdiction.
To learn more about the history, culture, economy and other information about Costa Rica
We have been preparing US income tax returns for US Citizens and permanent residents living in Costa Rica for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Costa Rica and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US 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 Costa Rica tax fiscal year for US tax purposes). You must 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 forms 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.
There are certain times you may wish to make elections with respect to your Costa Rica Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Costa Rica, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Costa Rica.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email