Expatriate tax - Costa Rica

The tax year ordinarily runs from January 1st to December 31st.

If an individual is considered a taxpayer for income tax purposes in Costa Rica due to the provision of services independently within the country's territory, the individual is required to comply with filing the annual income tax return (D-101 Form). 

Additionally, the rendering of services habitually is also ordinarily taxed by Value Added Tax (VAT) which should be reported monthly by Form D-104.2. Services exported outside Costa Rica consumed and received by entities and individuals are exempt of VAT; however, reporting obligations may remain. 

Furthermore, all individuals engaged in economic activities in Costa Rica are obligated to, issue authorized electronic invoices, maintain accounting records in accordance with International Financial Reporting Standards (NIFF and NIC), as well as the supporting documentation for these transactions. This supporting documentation may include contracts, electronic invoices, credit notes, and other documents accepted and/or required by the Costa Rican Tax Administration.

On the other hand, if an expatriate is classified as an employee for Costa Rican regulations, the employer would be required to fulfill obligations such as social security contributions, mandatory insurance payments, and, if applicable, salary tax. The salary tax only applies if the individual meets the annual thresholds established by the Tax Administration and the employer is responsible for withholding, reporting, and remitting this tax to the Tax Administration using tax form D-103.

Other types of incomes such as capital gains, passive income, income paid to an entity or individual abroad are taxed differently and require the submission of additional tax returns. 

Income Tax follows an annual fiscal period, which ordinarily begins on January 1st and ends in December 31st.  Taxpayers are obliged to file the D101 Form within the two months and fifteen days following the end of the fiscal year. Therefore, commonly, taxpayers should submit their Income Tax Return as latest as March 15th of the following year.

The tax periods for Salary Tax and Value Added Tax (VAT) are monthly. Individuals and entities are required to submit tax returns (Forms D-103 and D-102) no later than the 15th of the following month.

Typically, time extensions are not granted under the Costa Rican Tax System for filing tax returns. Failure to file and pay Costa Rican taxes in a timely manner may result in interests and penalties. 

For individuals considered income tax taxpayers under Costa Rican tax regulations, the following tax brackets and progressive tax rates apply:

These thresholds are updated annually by the Tax Administration through decree. The figures presented in this table correspond to the 2023 fiscal year.

To calculate the payable tax in the scenario of an independent worker in Costa Rica, single and no child, providing services to a local company with a gross an annual income of ₡10,614,000 and annual deductible expenses of ₡200,000, you can follow these steps:

Calculate Net Income: Subtract deductible expenses from gross income.
Net Income = Gross Income - Deductible Expenses
Net Income = ₡10,614,000 - ₡200,000
Net Income = ₡10,414,000

Determine Income Tax based on the applicable tax rate table:

Calculate the payable tax based on net income:

For the first ₡4,181,000, there is no tax.
For the next ₡2,063,000 (₡6,244,000 - ₡4,181,000), a 10% tax rate applies.
For the next ₡4,170,000 (₡10,414,000 - ₡6,244,000), a 15% tax rate applies.

Now, calculate the tax:

Tax = (₡2,063,000 * 0.10) + (₡4,170,000 * 0.15)
Tax = ₡206,300 + ₡625,500
Tax = ₡831,800

Hence, the payable tax under this scenario would be ₡831,800. Please note that this is a simplified calculation, and other deductions or considerations may apply depending on the individual's specific tax situation.

Under the Costa Rican Tax System only income from Costa Rican source is subject to taxation, regardless of the taxpayer's nationality. The assessment of applicable taxes in each case hinges upon factors such as the nature of the relationship and the fiscal domicile of the parties involved.

An individual is considered to have a Costa Rican domicile for tax purposes if it stays within the national territory more than one hundred eighty-three days during a fiscal year carrying economic activity. 

In general terms, an entity is considered to have a Costa Rican domicile for tax purposes, if it is an entity constituted in Costa Rica or meets the criteria for permanent established in the Costa Rican law and regulations in force. 

Income from employment is subject to social security contributions and may be subject to salary tax if it exceeds the de minimis. 
Salary tax in Costa Rica is calculated according to the following tax brackets and progressive tax rates:

The above thresholds are updated annually by the Tax Administration through decree. The figures presented in this table corresponds to the 2023 fiscal year.  Salary tax should be withhold, reported and paid by the employer. 

Social security contributions are estimated on the employee’s gross monthly salary, and they are composed by a contribution percentage that is assumed by the employer and a contribution percentage that should be assumed by the employee. However, the employee’s contribution percentage should be withheld, reported and paid by the employer. 
Any form of compensation provided by an employer to an employee, including in-kind benefits, is categorized as salary when calculating salary tax and the CCSS.

Individuals who carry economic activity that are not within an employment relationship, but instead work as independent service providers, should comply with social security contributions as well as independent workers. 

The tax treatment of stock options in Costa Rica will primarily depend on whether they have a commercial or salary nature, which will be determined by the specific context of their application. To determine the tax obligations related to these, it is crucial to conduct an analysis of the specific scenario.

It's important to note that this analysis should consider the interpretations from jurisprudence, both administrative and judicial, for a comprehensive and accurate assessment.

Income received due to an employment relationship with a company with permanent establishment or fiscal domicile in Costa Rica and not merely a commercial relationship is considered income of a salary nature for tax purposes in Costa Rica.

In Costa Rica, in-kind salary is generally understood by the Costa Rican regulations in force as the benefits received by the employee and/or its family such as food, accommodation, clothing, and other items intended for their immediate personal consumption.

Currently, Costa Rica has four Double Taxation Treaties in place, with the following nations: Germany, Spain, Mexico, and the United Arab Emirates.

Costa Rica does not provide tax incentives in the Income Tax Law for expatriates, as its tax system is primarily territorial. Nevertheless, there are some active Double Taxation Treaties (DTTs) in place aimed at mitigating double taxation.

Only useful, necessary, and relevant expenses for generating taxable income, duly documented y registered in the accounting, are deductible for income tax purposes. Additional requirements may apply to certain expenses according to the regulation in force. It is advisable to analyze each expense to determine its nature and if it meets the requirement for deduction. 

In Costa Rica, capital gains from assets not affected by income tax, are subject to capital gains tax at a general tax rate of 15% on the taxable base that is determined as follows:

• Capital Gains and Losses: are considered any change in the value of taxpayers' patrimony due to an alteration in its composition. In the case of capital gains, they occur, among other situations, when there is a net profit from the sale or transfer of a capital asset, and the selling price exceeds its acquisition value.
  • The taxable income base for capital gains or losses will generally be as follows:
    • In the case of an onerous transfer, the difference between the acquisition and transfer values of the assets or rights.
    • In other cases, the market value of the assets or rights that are incorporated into the taxpayer's patrimony.

It's important to note that there are various factors that could affect these income categories in the income tax, which could result in the income generated from these types of assets being subject to other taxes.

In the case of capital assets or rights acquired prior to July 1st, 2019, taxpayers may choose for one-time the special rate of 2.25% on the sale price.

If a real restate property is sold by a non-domiciled individual or entity in Costa Rica, the purchaser will be required to withhold and remit 2.5% of the total consideration agreed upon as an advance payment of the capital gains tax. Additionally, real estate transfer tax must be paid at a 1.5% tax rate on the highest value between the tax value and the transaction value, which should be in line with the fair market value and never less than the higher of the recorded values.

If the real estate property subject to sale corresponds to the habitual home residence of an individual domiciled in Costa Rica, the sale could be exempt of paying capital gains tax. However, real estate transfer tax should still be paid at 1.5% tax rate on the highest value between the tax value and the transaction value, which should be in line with the fair market value and never less than the higher of the recorded values.

In Costa Rica, inheritances, legacies, and donations received by their recipients and donors are exempt of capital gains and losses tax.

However, if the recipient or donor is an income tax taxpayer certain special rules apply for expense deduction for income tax purposes.

Income from dividends, surpluses, interests, or the rental of movable property like vehicles or intellectual property rights, is taxed at a 15% tax rate on the gross income without deductions. There are additional situations where taxpayers are required to pay a 15% tax on such capital gains derived from the variation on their patrimony, for example the capital gain obtained from the sale of shares.

Taxpayers subject to the income tax who engage in transactions with entities or individuals domiciled abroad may be required to act as withholding agents of the withholding tax, if they pay or place in disposition of entities or individuals domicile abroad income considered of Costa Rican source according to the laws and regulations in force. The withholding rate varies depending on the type of income, ranging from 8.5% to 50%. For instance, in the case of interest and other financial expense a 15% tax rate applies on the gross income.  

Both taxes should be reported by Form D-103 if the taxable event of the tax has occurred, within the fifteen days of the following month to which the taxable event occurred. 

The habitual sale of goods and services used in Costa Rica, as well as the import of goods and services is taxed in Costa Rica by the Value Added Tax (VAT). The general Value Added Tax rate for rendering services consists of 13% on the net price.

Value Added Tax taxpayers should issue authorized electronic invoices for each sale and maintain authorized electronic invoices for each purchase. Generally, the tax to pay and report for VAT will consist of the difference between the tax credits generated by VAT-taxed purchases made and the tax debits generated the for sales made taxed with VAT.

In the case of the exportation of services that are not used in Costa Rica, to individuals or entities not domiciled in Costa Rica, these are exempt. However, the obligation to report remains.

Owners of real estate located within the Costa Rican territory are required to pay the annual real estate tax at a 0.25% tax rate on the fiscal value of their properties to the corresponding local government. Additionally, they are obligated to file a real estate declaration every five years reporting their property’s value. Failure to comply with this obligation may result in ex officio appraisal, penalties, and interest charges.

The real estate declaration involves voluntarily determining the property's value, considering the land's characteristics and the structures on the property. This value serves as the taxable base for calculating the real estate tax.

Costa Rica's social security system, managed by the "Social Security Costa Rican Fund" (CCSS for its initials in Spanish) is a contributions system that provides healthcare, disability, and pension benefits to the country's residents. It is funded through contributions from both employees and employers. The CCSS covers a wide range of medical services, including hospital care, doctor visits, medicine prescription, and it aims to ensure that all citizens have access to healthcare. Additionally, the system offers disability and retirement benefits to eligible participants. As of the year 2023, according to the current CCSS contribution rates, the employer is required to pay an additional 26.67% on the employee's salary each month. Additionally, they must withhold 10.67% from the employee's salary. These percentages are updated annually.

Residential real estate used regularly, occasionally or for recreational purposes, whose edifications exceed a certain value threshold (updated yearly), will be taxed with the solidarity tax based on its assessed value.  Condominium owners need to include their proportional share of common area values. The solidarity tax rate is progressive, and ranges from 0.25% to 0.55% depending on the property's value.

Additionally, vehicle owners in Costa Rica, whether residents or not, must pay an annual tax based on factors like the vehicle's assessed value and year of manufacture.

Furthermore, individuals who obtain real estate rental income, are required to pay a 15% real estate capital income tax on the income generated from this source. This tax regime allows taxpayers to deduct 15% of expenses capped, without the need for any proof. Taxpayers may also choose to migrate from the real estate capital income tax regime to the ordinary income tax regime if certain requirements are met.