Tax guide for Americans in Costa Rica
Whether you're considering a move to this beautiful country, already living there, or just curious about the tax implications, this guide is designed to give you a clear understanding of the Costa Rican tax system, especially for Americans living in Costa Rica.
Costa Rica offers a unique blend of natural beauty and economic opportunity, making it an attractive destination for expatriates.
Table of contents
- Resident vs. non-resident of Costa Rica
- Who can be considered a resident of Costa Rica?
- Types of taxes in Costa Rica
- Costa Rica income tax filing
- Types of income in Costa Rica
- Social Security in Costa Rica
- Pension system in Costa Rica
- Tax deductions for expats in Costa Rica
- The tax treaty between the USA and Costa Rica
- Most popular tax forms for US expats
- Costa Rica tax forms for US expats
Resident vs. non-resident of Costa Rica
Understanding the distinction between resident and non-resident status in Costa Rica is fundamental for tax purposes, especially when navigating Costa Rican taxes. This classification significantly affects your tax liability and the nature of your tax obligations.
Generally, residents are taxed on their worldwide income. This means that as a resident, your income from both Costa Rican and international sources is taxable in Costa Rica.
In contrast, non-residents are taxed only on their Costa Rican source income. This includes income earned in the country, such as income from employment or business activities conducted in Costa Rica.
The Costa Rican tax system is independent of immigration status. Therefore, even if you haven't obtained permanent residency in the immigration sense, you may still be considered a tax resident based on your presence in the country.
Who can be considered a resident of Costa Rica?
The criteria for being considered a tax resident in Costa Rica are quite specific:
- You are considered a tax resident if you spend more than 183 days, continuous or discontinuous, in Costa Rica during a single fiscal year (one year, but not necessarily beginning at the beginning of the calendar year.). This period includes all arrivals and departures, meaning that short trips outside of Costa Rica do not reset the count.
- If you are sporadically absent from Costa Rica, you are still considered a resident unless you can prove tax residency in another country. This proof usually requires a residency tax certificate from the other country.
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Types of taxes in Costa Rica
Costa Rica's tax system includes various forms of taxation, each with its own set of rules and Costa Rica tax rates. Understanding these is crucial for anyone earning income in the country, especially for Americans who are either considering relocating or already living there.
The primary focus here is on personal income tax, which applies to both self-employed and employed individuals.
Personal income tax rates
In Costa Rica, personal income tax is levied based on the source and amount of income. The system is progressive, meaning higher income brackets are subject to higher tax rates.
Self-employed
For those who are self-employed, including professionals who offer their services independently, the tax rates are as follows (2024):
| Taxable income (CRC*) | Tax rate (%) |
|---|---|
| 0-4,181,000 | 0 |
| 4,181,000-6,244,000 | 10 |
| 6,244,000-10,414,000 | 15 |
| 10,414,000-20,872,000 | 20 |
| 20,872,000 and above | 25 |
* Costa Rican colones
These rates apply to net income, which is gross income less allowable deductions.
Employed individuals
For individuals employed by others, the tax rates are applied differently, focusing on monthly taxable income (2024):
| Taxable income (CRC*) | Tax rate (%) |
|---|---|
| 0-941,000 | 0 |
| 941,000-1,381,000 | 10 |
| 1,381,000-2,423,000 | 15 |
| 2,423,000-4,845,000 | 20 |
| 4,845,000 and above | 25 |
For employees, the employer is usually responsible for withholding the correct amount of tax from the monthly paycheck and remitting it to the tax authorities.
This system simplifies the process for employees by eliminating the need for them to make these calculations or payments.
Rate of withholding tax
In Costa Rica, the WHT is a critical component of the tax system, especially for non-residents and in certain transactions involving residents.
This tax is generally withheld at source from various types of income, such as interest, dividends, royalties, and service fees.
The payer of the income is responsible for withholding and remitting the tax to the tax authorities.
WHT rates vary depending on the type of income (2024):
| Type of income | WHT (%) |
|---|---|
| Interest | 15 |
| Dividends | 15 |
| Directors’ fees, etc. | 15 |
| Salaries to non-residents | 10 |
| Professional fees | 25 |
| Other | 5,5-30 |
Value Added Tax
VAT is a consumption tax levied on selling goods and services in Costa Rica. As of the latest updates, the standard VAT rate is 13%.
This tax applies to most transactions, including the importation of goods, the provision of services, and the transfer of tangible and intangible goods within the country.
However, there are certain exemptions and reduced rates for certain categories:
- Some essential goods and services, such as certain food items, health services, and educational materials, are subject to lower VAT rates, ranging from 1% to 4%.
- Certain transactions are exempt from VAT. These include exports, some types of insurance, and certain financial services.
- Businesses registered for VAT in Costa Rica are responsible for charging, collecting, and remitting this tax to the government. They can also claim credits for the VAT paid on their business-related purchases, which effectively makes the tax neutral for registered businesses.
Property tax
Property tax in Costa Rica is a local tax levied on the ownership of real estate. This tax is administered by the municipal governments where the property is located.
The rate of property tax is relatively low compared to many other countries, making property ownership in Costa Rica attractive to many expatriates, including Americans.
The standard property tax rate is set at 0.25% of the assessed value of the property. This value is determined by the local municipality and may be reassessed periodically.
Property taxes are usually paid annually, although some municipalities allow for semi-annual or quarterly payments.
Certain types of property, such as those used for agricultural purposes, may qualify for tax exemptions or reductions.
Transfer tax on real estate
The real estate transfer tax is levied on the transfer of ownership of real estate in Costa Rica. This tax is an important consideration in the purchase and sale of real estate and affects both the buyer and the seller.
The real estate transfer tax is levied at a rate of 1.5% of the sale price of the property or its registered value, whichever is higher.
The responsibility for paying this tax usually falls on the buyer, but it may be subject to negotiation between the buyer and seller.
Payment of the transfer tax is required to legally record the change of ownership in the Public Registry.
Pro Tip. Participants in real estate transactions in Costa Rica need to consider this tax in their financial planning and ensure timely payment to facilitate a smooth transfer process.
Corporate tax
Corporate income tax in Costa Rica is levied on the profits of corporations and other legal entities. This tax is an important part of the country's tax system and is relevant for companies operating within its jurisdiction, particularly in terms of corporate tax rates.
The standard corporate income tax rate is 30%. However, there are lower rates for smaller companies and certain types of income.
Corporate income tax is applied to a corporation's net income, which is defined as gross income less allowable deductions such as operating expenses, depreciation, and interest.
Corporations are required to file annual corporate income tax returns detailing their income, expenses, and resulting taxable profit.
Costa Rica offers special tax regimes for certain sectors, such as free trade zones, where companies can benefit from reduced tax rates or exemptions.
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Costa Rica income tax filing
When to file tax returns
In Costa Rica, the tax year is based on the calendar year and runs from January 1 to December 31.
Tax returns must be filed by March 15 of the following year. This deadline applies to both individuals and corporations.
For certain taxpayers, such as the self-employed, provisional payments may be required throughout the year based on the previous year's income.
How to file a tax return
Costa Rica has adopted digital solutions for tax filing. Taxpayers are required to file their returns electronically using the digital platform provided by the Costa Rican tax administration.
When filing your tax return, you will be required to submit various documents, including proof of income, deductible expenses, and any applicable tax credits.
Due to the complexity of the tax laws, many expatriates and businesses choose to hire professional tax services or accountants to ensure accurate filing.
Penalties for late or incorrect filing
Failure to file your tax return by the due date may result in penalties. The penalty is usually calculated as a percentage of the unpaid tax, with interest accruing over time.
Filing an incorrect or incomplete tax return can also result in penalties. These can include fines and additional interest.
In serious cases, especially where tax evasion is suspected, there may be more serious legal consequences, including criminal charges.
Types of income in Costa Rica
Understanding the different types of income and their tax implications is crucial for anyone working or investing in Costa Rica. The Costa Rican tax system categorizes income differently, each with its own set of rules.
Employment income
Earned income in Costa Rica includes all income received as a result of an employer-employee relationship. This includes salaries, wages, bonuses, and any other form of compensation for services rendered.
Earned income is subject to income tax, which is withheld by the employer. The tax rate depends on the amount of income and follows a progressive structure.
In Costa Rica, employees are entitled to a mandatory annual bonus known as the "Aguinaldo", which is equal to one month's salary. This bonus is also subject to income tax.
Non-monetary benefits provided by the employer, such as housing, transportation, or meals, are generally considered part of taxable employment income.
Expatriates working in Costa Rica are taxed on their Costa Rican earned income. It's important to understand the tax treaty, if any, between your home country and Costa Rica to avoid double taxation.
Interest income
Interest income is the income an individual receives from various forms of investments, such as savings accounts, time deposits, bonds, or other interest-bearing instruments.
Interest received from Costa Rican financial institutions is subject to income tax. The tax rate may vary depending on the type of investment and the residency status of the individual.
For tax residents, interest income from foreign sources may also be subject to taxation in Costa Rica, by the country's position on worldwide income.
A withholding tax is often levied at the source on interest payments. The rate may vary depending on specific conditions and agreements.
Capital gains
Capital gains in Costa Rica refer to the profit made from the sale of assets or investments such as real estate, stocks, or bonds. Understanding how these gains are taxed is crucial for anyone involved in investment activities in the country.
Capital gains are generally taxed at a rate of 15%. This rate applies to the difference between the sale price and the purchase price of the asset, after taking into account any applicable adjustments and deductions.
There are certain conditions under which capital gains may be taxed differently. For example, the sale of a primary residence may be exempt from capital gains tax under certain circumstances.
Recent changes in Costa Rican tax law have introduced more comprehensive rules for the taxation of capital gains, making it important for investors to stay abreast of the latest regulations.
In some cases, tax may be withheld at the source, especially in real estate transactions. It's important to take this into account when calculating the net gain on a sale.
Rental income
Rental income is another important category of taxable income in Costa Rica, especially for expatriates who own property in the country.
Rental income is taxed as part of an individual's regular income. This includes any money received as rent from property owned in Costa Rica.
Taxpayers are allowed to deduct certain expenses related to the rental property, such as maintenance, repairs, and property management fees, which can reduce the taxable amount.
Landlords have the option to pay a flat rate of 15% on their gross rental income, which simplifies the tax calculation process but disallows the deduction of expenses.
Social Security in Costa Rica
Social Security in Costa Rica plays a vital role in providing financial security and health benefits to its residents. The system is comprehensive, covering a range of services from healthcare to retirement benefits, and is mandatory for all employees and self-employed individuals.
Both employers and employees contribute to the social security system. The contribution is a percentage of the employee's salary, with the employer paying a higher percentage than the employee.
Costa Rica's social security system, administered by the Caja Costarricense de Seguro Social (CCSS), provides extensive health care benefits. This includes access to hospitals, clinics, and prescription drugs.
In addition to health care, the system provides disability and maternity benefits.
The self-employed are also required to contribute to the Social Security system, which ensures that they have access to the same benefits as employees.
Pension system in Costa Rica
The pension system in Costa Rica is a key component of the broader social security framework designed to provide income security for individuals in their retirement years, making it an important consideration for Costa Rica retirement planning.
Costa Rica's pension system includes both a mandatory public pension system and voluntary private pension plans. The public pension is administered by the CCSS and is funded by contributions from employees, employers, and the government.
The standard retirement age in Costa Rica is 65 for both men and women. However, early retirement is possible under certain conditions.
To qualify for a full pension, individuals must contribute to the system for a minimum number of years. The amount of the pension depends on the individual's average salary and the total number of years contributed.
In addition to the mandatory state pension, individuals may choose to contribute to voluntary private pension plans, which offer the potential for higher returns and additional savings for retirement.
Tax deductions for expats in Costa Rica
Expatriates living in Costa Rica have access to several tax deductions that can significantly reduce their taxable income.
Employment expenses
Expatriates working in Costa Rica can deduct certain work-related expenses from their taxable income. However, it's important to note the specific conditions under which these deductions apply:
- Generally, individuals whose only income is from salaried employment cannot deduct general business expenses.
- Those who are self-employed, including freelancers and independent contractors, have more leeway in deducting business-related expenses. These can include expenses directly related to generating income, such as office supplies, travel, and professional development.
Personal allowances
Personal exemptions in Costa Rica act as tax credits, reducing the amount of tax owed. These allowances can be especially beneficial for expatriates with families:
- Taxpayers can claim allowances for their spouse and dependent children. The amount of the allowance is determined annually by the Costa Rican tax authorities.
- To qualify for child allowances, the child must be a minor, disabled, or a student under a certain age (usually 25).
- When filing tax returns, expatriates should ensure that they claim these allowances to reduce their taxable income. It's important to understand the specific criteria and amounts for these allowances, as they can change from year to year.
Business deductions
For expatriates in Costa Rica who own a business or are self-employed, understanding and taking advantage of business deductions is crucial to minimizing tax liabilities. These deductions can significantly reduce taxable income, thereby lowering the overall tax burden.
Business deductions typically include a range of expenses incurred in running a business. These may include office rent, utilities, equipment purchases, advertising, and expenses related to business travel.
Self-employed individuals may elect to deduct a standard percentage of their gross income (up to 25%) as a business expense, simplifying the deduction process. This option eliminates the need to itemize individual expenses.
Alternatively, self-employed expats can choose to itemize their business expenses. This requires keeping detailed records and receipts for all business-related expenses.
Personal tax credits
Personal tax credits in Costa Rica are another way for expatriates to reduce their tax liability. These credits directly reduce the amount of tax owed, rather than reducing taxable income.
Common personal tax credits include those for dependents, such as children or a non-working spouse. The specific amounts and eligibility criteria for these credits are determined by the Costa Rican tax authorities and may vary from year to year.
Child tax credit. This credit is available for each dependent child who meets certain criteria, such as being under a certain age or being a full-time student.
Spousal credit. A tax credit may also be available for a taxpayer supporting a non-working spouse.
To claim these credits, expatriates must provide the necessary documentation and ensure they meet all eligibility requirements. It's important to claim these credits accurately on tax returns to avoid discrepancies or problems with the tax authorities.
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The tax treaty between the USA and Costa Rica
There is currently no comprehensive tax treaty between the United States and Costa Rica.
Most popular tax forms for US expats
For American expatriates living in Costa Rica, compliance with US tax laws is crucial. This includes understanding and correctly filling out various tax forms. Here are some of the most common tax forms for US expats:
- Form 1040: This is the standard form used by US citizens and residents to file their annual income tax returns.
- Form 2555: Expats use this form to claim the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a certain amount of their foreign-earned income from their US taxable income.
- Form 1116: If expats choose not to use the FEIE or have foreign taxes paid on income that exceeds the FEIE limit, they can use this form to claim a credit for taxes paid to a foreign government.
- FBAR (FinCEN Form 114): US expats with foreign bank accounts that exceed certain thresholds must file this form to report their accounts to the US Treasury.
- Form 8938: This form is used to report specified foreign financial assets when the total value exceeds the applicable reporting threshold.
Costa Rica tax forms for US expats
In Costa Rica, US expatriates must also comply with local tax laws, which involve filing specific Costa Rican tax forms. Some of the most important forms include:
- D-101 (Income tax return for Individuals): Expats with sources of income in Costa Rica, such as rental income or business income, must file this form annually.
- D-104 (General sales tax return): For expats running a business in Costa Rica, this form is used to report and pay the sales tax collected from customers.
- D-151 (Summary of payments and withholdings): This form is used to report certain transactions, including payments for services and rent, and the tax withheld on these payments.
- D-140 (Registration or update of taxpayer information): Expats starting a business or becoming tax residents in Costa Rica must file this form to register or update their information with the tax authorities.