Costa Rica Taxes
INCOME TAXES IN COSTA RICA
A lot of foreigners come thinking they don’t have to pay taxes. Unfortunately in some cases they do. Many individuals who work and any Corporations that are involved in commerce in Costa Rica have to pay Income Taxes. However, not everyone has to pay, individuals are exempt for the first $5,700 a year.
Taxable income is based upon net income, thus becoming necessary to establish the corresponding gross income of the tax paying entity. Costa Rican Laws defines gross income as the total income and profits earned in the country during the taxable year. This includes earnings from real property (Capital gains are not taxable if it is a one time deal), investment of capital and other business activities. It also contemplates any increase in net worth during the taxable year, which cannot be justified by declared or registered income. For now Costa Rica only taxes revenue that is generated within Costa Rica and not worldwide as other countries do. However, there is new legislation pending which may try to tax world-wide income.
The country is desperate for revenue because of its deficit and trying to get it through increased taxation. NOTE: The taxes year in Costa Rica begins in October 1 and ends September 30, both for individuals and corporations. The tax law (Ley de Justicia Tributaria) and Tax Adjustment Law (Ley de Ajuste Tributario impose severe fines, penalties and criminal prosecution for failing to comply with the income reporting requirements established by law.
Personal income taxes range from 0% to 25% depending on the amount earned (net income). Corporate taxation ranges from 10% to 30% depending on the amount. Costa Rica applies a sales tax of 13% (may possibly be raised to 14%) and a special consumption tax on selected items which ranges from 8% to 10%.
In order to work in Costa Rica independently, you must register yourself at Ministro de Hacienda (located 4 blocks south of the Pizza Hut on Paseo Colón) in the income tax office. You have to fill out a D-140 form asking what money generating activity you will be involved in and basic contact information. You will be assigned a tax ID number and given a receipt to pick up official facturas (invoices) that must be filled out and given to your employer every time you are paid.
However, an individual who works for an employer does not have to register in Hacienda, and does not give invoices to the employer every time is paid. Registration in Hacienda and invoices are necessary if anindividual works independent, offering services)
You are a “salaried professional”. This means you have a set salary established by your place of employment. By law, your employer must register you with the Costa Rican “Caja” (CCSS) or the government’s Social Security organization. As such, you will not have to register with the Hacienda because your taxes are taken out automatically each month.
To start, you will have to get your Orden Patronal which the Caja will send to the work place. Payment must be made through a state or private bank, so you will probably have to open an account and give your account number to your employer for direct salary deposits every quincena (every 15 days). The tax bracket for salaried professionals is slightly different as the assumption is that all work related expenses are covered by your company.
An employee also has to pay income taxes in Costa Rica if his/her salary is higher than $1,250 a month. The employer has to withhold the tax and pay it to the Caja. Taxes are automatically deducted each month along with your payment to the Caja for health insurance. The other benefit of the Caja system beyond not having to declare taxes is the yearly aguinaldo which totals what a worker earns between December 1st through November 30th divided by 12 (8.33%). So if you complete a full year, a worker should get nearly an extra month’s salary in December, which is tax free.
SMALL BUSINESS OWNERS
If you own a Costa Rican corporation, as long as you are considered a small Costa Rica Business your company may be registered in the Hacienda through the simple regime document.
Unlike individuals, your tax rate will be based on your gross income, but applied to yournet income. (Your profits before deducting expenses determine the rate you pay, whereas the rate is applied to the result of deducting your expenses from that income). This is also filed by using the D-101 income tax form due on December 15th. If your company involves the sale of a certain product on which you charge the 13% Costa Rican sales tax, you must also file the D-104. This is due the 15th of each month.
You must also pay an Education and Culture tax called the timbre educacion y cultura every March 31st based on the total net equity of your company, totaling up to $18 a year, as well as a minimal municipal tax that varies based on each municipality.
Professional Services employees must fill out the D-101 and D-151 forms that can be purchased for less than $1 at any branch of the Banco Popular, other banks or can be obtained through a special software provided by the Hacienda, called EDD-7).
D-101 will list your total income, expenses divided by category, net income and total owed. You need three copies of this, two to turn into most any bank (Banco de Costa Rica, Promerica, etc.) where you will pay the taxes and receive an official stamp and keep one copy for yourself. This must be done by Dec. 15. The D-151 form must be turned into the Hacienda by Nov. 30, which they will check to be sure that theexpenses and earnings match up with what companies and individuals you worked with claim in their taxes.
Deductions may be subtracted from the gross income. To be allowable deductions the taxpayer must prove that they were necessary to produce taxable income. Tax deductible receipts encompass a wide variety of topics: transportation (international and domestic flights, bus receipts, car rentals), office supplies (computers, pencils, etc.), work clothing, entertainment expenses (this can be for groceries, eating out, anything that you may have used to entertain clients) as well as your rent (this assumes you work out of your home, even if you do not).
Until the end of the fiscal year (begins Oct. 1 and ends Sept. 30), you should be saving ALL facturas that you write as well as all receipts for work-related expenses. Actually just save all receipts and let your accountant determine what counts, you’d be surprised what is considered work-related! The receipts will then be deducted from your income to determine which tax bracket you fall into.
The following are deductible from income for tax purposes:
Costs: Any costs incurred, which are necessary to produce the income, may be deducted (i.e. raw materials, parts, components, or services needed to produce the goods or services);
Salaries: Wages, bonuses, gifts, benefits actually paid out are deductible as long as the income tax of the recipient has been withheld and paid to the Treasury;
Taxes: Any taxes levied against the goods or services or transactions carried out in the ordinary course of business;
Insurance Premiums: Insurance Premiums for policies, which cover fire, theft, earthquake, or similar risks;
Interest: No reduction allowed for interest payable to shareholders of limited liability companies;
Bad Debts: If related to the transactions in the ordinary course of business of the taxpayer and all legal efforts have been exhausted to collect the debt;
Depreciation: Apply to the exhaustion, wear and tear, or obsolescence of property, which is used in the trade or business. The Tax Law specifies the maximum depreciation amounts allowed;
Business Losses: Deductions are allowed for business losses. Losses incurred in one taxable year may be carried over for 3 years (5 years for agricultural enterprises). However, only a very few activities can carry forward losses like agriculture. Pre-operating expenses can be capitalized for future years, also.
Social Security Contributions: Contributions established by law and paid to the employees are deductible;
Board of Directors’ Remuneration: Deductions are allowed for remuneration, wages, commissions, honoraria, paid to members of the board of directors located abroad;
Payments to entities not domiciled in Costa Rica: Payments for technical support, financial, as well as for the use of patents, trademarks, franchise fees, or royalties are deductible. If a payment is made from Costa Rica to outside Costa Rica, a 15 percent income tax has to be withheld. If payments are made to an agent or subsidiary of a firm which is permanently established in Costa Rica then the deduction cannot exceed 10% of the annual gross sales of that company;
Travel Expenses: These may not exceed 1% of the gross income declared;
Start up Expenses: Deductions are allowed for expenses necessary to initiate production of taxable income;
Advertising: Advertising and sales promotion expenses inside C.R. or abroad are deductible;
Casualty losses: Casualty and theft losses, which are not covered by insurance;
Note: It is best to consult a good accountant who can help you will the process of filing taxes in Costa Rica. The information above is just to give you an idea of how the income tax system works here. Talk to other expats for recommendations. Randall Linder of U.S. Tax & Accounting Service is a U.S. trained accountant who can help you with both U.S. and local taxes questions. He has members of his staff who can also help with local matters. Tel: 011-506-2288-2201 or Cell:
011-506-8839-9970, E-Mail: email@example.com
OTHER TAXES IN COSTA RICA
PROPERTY AND VEHICLE TRANSFER TAXES FROM A SALE
The government also collects a property transfer tax of 1.5% which is triggered whenever a property deed is presented at the Costa Rican National Public Registry to record the transfer of ownership of property from one person to another. The same applies to the transfer of ownership of a motor vehicle which includes a 2.5% transfer tax.
ANNUAL PROPERTY TAXES
The law states that the administration and collection functions for property taxes to the local governments or Municipalidades in Costa Rica where the property is located. It is the responsibility of the Municipality to conduct property appraisals and collect the corresponding property tax.
The property values on the books of Municipalities is far below the actual market value of the property and each Municipality is implementing its own property tax program to update its property tax data base. The property tax is established on an annual basis and may be paid annually, by semester or by quarter depending on the procedures established by each local government. Property taxes are about .25 percent of the value of a home. So, on a home that is valued at $100,000 you will pay around $250.00.
LUXURY HOME TAX
Costa Rican lawmakers recently passed legislation that will levy a new property tax on houses with the construction costs valued at more than 100 million colons, or approximately $200,000 U.S. at today’s exchange rate. If the construction value of your house is below $this amount (give or take – this amount will vary depending on the exchange rate), you are exempt. Dubbed “the luxury home tax,” the proceeds are to be used specifically toward the fight to eliminate shanty towns in Costa Rica.
This is a new tax and it is only for houses, not for raw land. Houses built on both titled and maritime zoneproperty are affected. House owners must declare the value of their house, and then pay the tax between January 1 and January 15th of each year.
Sales tax is 13% on the amount paid for goods and for some services. It may be raised to 14%. The services of Lawyers, For now doctors, dentists and other independent professionals are exempt from sales tax but this may also change with the new tax law. Anything else you buy, from a candy bar to a computer or furniture is taxed.
VALUE ADDED TAX
A value added tax or value-added tax (VAT) – Impuesto al Valor Agregado (IVA) in Spanish – is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the “value added” to a product, material or service. Value added tax (VAT) in theory avoids the cascade effect of sales tax by taxing only the value added at each stage of production.
For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government.
If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
TAX ON CORPORATIONS
In December 2011, President Laura Chinchilla Miranda signed a law to tax Costa Rican corporations annually. That doesn’t mean that it will happen because the Costarican citizens have the option of what’scalled Sala IV, a court where impending legislation may be overturned.
But for now, congress as well as Costarican government have approved the new tax, and it is scheduled to go into effect on April 1st, 2012. Active corporations (those that are used to run a business or own assets) will pay $357. This tax is based on the basic salary of a government employee, which is now 180,330 Colones (US$ 357).
However, for the year 2012, the due date will be April 1st, so it will be an incomplete year and you will pay less. Inactive corporations (those that are not being used or for holding homes or cars) will pay around $200 a year.
If you don’t want to pay the tax and decide to dissolve a corporation, you will end up paying around $300 in legal expenses and other fees to do it. A notary will charge around $40 for recording the change in his protocolo book and $120 to notarize the act.
To change the constitution of any company requires publication in La Gaceta, the official newspaper, which around $15. To file the paperwork costs about $130.
NOTE: If you have any unused corporations, ask your attorney to dissolve them. If all the shareholders agree, the law allows you to dissolve a corporation. You can move all your assets into one corporation, but make sure you understand the liability issues because that was probably the original reason you put each car in a different corporation and your Costa Rica Real Estate in another.
The law also says that businesses cannot list the tax as a deduction when paying income tax.
Which corporations should pay taxes in Costa Rica?
1. Sociedad Anónima (S.A.)
2. Sociedad Limitada (Limited)
3. Branches of International companies or its representative
When do you have to pay the tax?
1. New corporations have to pay when constituted
2. Existing corporations every year from 1st of January until the 31st of January
Where do you have to pay the tax?
1. It will be the same as the income tax and the Costa Rica luxury tax: by downloading the form from the internet and paying it at any governmental bank or by SINPE transfer.
If you own a corporation in Costa Rica, you have 6 month grace period to:
1. Pay the tax
2. Transfer any assets that you have in the S.A. into your personal name.
3. Dissolve the SA. If you do so before June 2012, you will be exempt from paying.
4. If you are only an corporate officer or director, you have 1 year to resign
DISSOLVING A CORPORATION
WHAT HAPPENS IF YOU DON’T PAY THE TAX?
1. The law allows for the corporations to dissolve automatically when the payment of the tax hasn’t been made in three years.
2. If the corporation has any assets at that time, the government will put a mortgage these assets for the tax debt.
3. If there is any payment pending, you will not be able to get a certification on that corporation from the National Register.
4. You will not be able to do any business with any governmental institution.
5. If the taxes are not paid the corporation cannot legally do any business in Costa Rica.
SOCIAL SECURITY TAX
The employer pays a contribution of up to 22% of gross salary and the employee pays a contribution of up to 9 % of his/her gross salary. Self employed persons 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. The new 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 employees’ salary.
CAPITAL GAINS TAX
Capital gains are not taxed in Costa Rica unless they are derived from habitual transactions. Capital gains derived from habitual transactions are taxed at the standard income tax rate.
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 0.05% and a documentary stamps fee of 0.035%.
MUNICIPAL PROPERTY TAX OR IMPUESTO SOBRE BIENES INMUEBLES
The municipal government where the property is located will levy a property tax on the cadastral value of the property as assessed by the tax authorities. These taxes are levied by the municipalities at the flat rate of 0.25%.
The real estate tax is calculated on a calendar year basis and must be paid annually, semi-annually, or quarterly, depending on the municipality.
COOPERATION WITH U.S. TAX AUTHORITIES – U.S. LAW REQUIRES COSTA RICA BANKS TO REPORT BALANCES TO THE IRS
Banks, investment funds and stock exchanges in Costa Rica and around the world must report, starting July 2013, the balances and movements on investments of U.S. citizens to the Internal Revenue Service (IRS). The obligation is based on the Fair and Accurate Credit Transactions Act or (FACTA), a United States federal law, passed by the United States Congress that asks agencies to document all those customers and transfer this information to U.S. tax collector.
The IRS will in 2014 begin to order banks in the United States to withhold assets for foreign financial institutions that fail to sign the agreement. Financial institutions, like Costa Rican banks that violate the provision are exposed to the IRS withholding 30% of all interest, dividends or profits sent from the United States.
Factat applies to all entities around the world as the U.S. wants to better regulate their capital and above all raise more the taxpayer escapees. Slipping through the cracks in Costa Rica with a corporate bank account is not likely to succeed. Local banking regulations have for years required corporate account holders to identify beneficial owners and the IRS rules would ensnare any company with 10 percent ownership or more held by a United States person.
Since the requirements are being applied worldwide, expats who leave Costa Rica or shift their assets elsewhere could expect to encounter the same requirements.
Dual citizenship in Costa Rica may be of little value in escaping FATCA. The law requires the banks to turn over information for any “United States person,” The legal definition includes those with dual nationality, as well as citizens of Costa Rica who hold legal residency in the United States.
Too meet the requirements, all financial institutions must sign an agreement with the IRS, and to inform customers about the extent to which they, in turn, authorize a disclaimer. If the customer does not want to sign the release, the entity must close the account, because otherwise, violates the Fatca.
LOCAL BANKS ARE NOW PREPARING TO IMPLEMENT THE REQUIREMENTS.
Fatca integrates highly sensitive issues such as the closure of accounts and bank secrecy. Costa Rican banks are work to conform to the requirements for documentation of existing accounts. Talk to a good U.S. tax attorney if you have questions about this new IRS regulation.