Taxes in Costa Rica

Income tax in Costa Rica is territorial. This means that income tax applies to individuals as well as legal entities, i.e. corporations, for income originated from a Costa Rican source only. Costa Rican Laws do not tax income derived from a foreign source.

Taxable income is based upon net income. This is calculated as the gross income after deductions. Costa Rican Laws define gross income as the total income and profits earned in the Country during the taxable year (begins on October 1 and ends September 30). These include earnings from real property, 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.

Corporate Taxation

Territoriality Principle

The Costa Rican income tax system is based on the territoriality principle, whereby only income derived from activities within Costa Rican territory and from Costa Rican sources is subject to income tax. According to article 1 of the Income Tax Law, “a tax is imposed on occasional or ongoing revenues received by legal entities and individuals and obtained within national territory, regardless of the recipient’s nationality or domicile”. This law also imposes a tax on occasional or ongoing Costa Rican revenues that are accrued or received by domiciled individuals and on any other type of income that is not legally ex­empt. Foreign source income is not taxable in Costa Rica.

Tax Year

The statutory tax year for companies runs from October 1st to September 30th.  However, Tax Authorities may authorize local subsidiaries and foreign branches to adopt the tax year of the parent company.  Banks use the calendar year as their tax year, and similar authorization may be granted to certain companies engaged in agricultural activi­ties. Taxpayers with close commercial or administrative relationships with foreign entities may adopt the tax year of the foreign company if authorized by Tax Authorities.

Income Tax

General

Under the territoriality principle, all income earned in Costa Rica or derived from a Costa Rican source is taxed, regardless of citizenship, domicile, residence, place of incorpora­tion, or location of board meetings. Such income includes the following:

• Real estate transactions (as a trade or business);
• Assets, goods, and rights invested or used in Costa Rica;
• Commercial, industrial, agricultural, or any other trade or business activities carried out within the country;
• Services rendered within the country.

All costs and expenses necessary to generate taxable income and to protect investments are deductible from gross income. Expenses incurred to obtain non-taxable income are not deductible. If expenses give rise to both taxable and non-taxable income, only those expenses incurred to generate taxable income are deductible.

Tax Authorities are empowered to reject any expenses treated as deductible if they con­sider:

• The expenses to be unnecessary for purposes of generating taxable income;
• The expenses to be excessive or unreasonable;
• The expenses to be applicable to a different tax year;
• There to be inadequate supporting documentation for the expenses;
• That the expenses have not been properly booked in the accounting records; or
• That proper income tax has not been withheld at source (if applicable).

Losses

Tax loss carryforwards may only be applied by industrial and agricultural companies. Operating losses incurred by commercial enterprises may not be carried forward.  For agricultural and industrial companies, the carry forward periods are ?ve and three years, respectively. Industrial companies that began operations after 1988 are allowed to ap­ply net operating loss carryforwards for ?ve years for losses incurred within the ?rst ?ve years of operations. However, losses incurred after the initial ?ve-year period may only be carried forward for three tax years.

Rates

Corporate income tax is levied based on the size of the taxpayer. Accordingly, “small companies” are taxed at lower rates. The Costa Rican Income Tax Law de?nes small companies as entities with gross incomes of less than ¢49,043,000.

For the 2005 tax year, the following corporate tax rates are in effect:

The above rates are ?at rates. Gross income is the parameter for determining the ap­plicable tax rate. However, the rate determined is then assessed on the company’s net income.

Tax Returns

Taxpayers must ?le their tax returns within two months and ?fteen days from the tax year end (i.e. December 31st for companies that use the statutory tax year).

Tax Payment

Income tax due must be paid when the tax return is ?led.

A system is also in place to permit advance payment of quarterly taxes.  Quarterly taxes are estimated at 75% of either the average tax paid in the previous three years or the tax liability for the previous tax year (whichever is greater).  Taxpayers are entitled to apply any excess paid to the following year’s income tax liability or to other tax liabilities (ex­cept import duties and stamp taxes or other taxes not collected by Tax Authorities), or to request a cash refund. However, requesting a cash refund is a lengthy process and may take from six months to one year.

Withholding Taxes on Foreign Remittances

Remittances of Costa Rican source income to individuals or corporations domiciled abroad are subject to the following withholding taxes:

Dividends

Dividends paid (or accrued) by corporations to individuals (both local and foreign) or to for­eign entities are subject to a 15% withholding tax.  When the shares of the payor corpo­ration are registered with a local stock exchange and were bought on the same exchange, the withholding tax is reduced to 5%.  Dividends paid (or accrued) to another Costa Rican corporation subject to income tax are exempt from withholding taxes.  Additionally, the withholding tax is not applied if retained earnings are distributed to shareholders in the form of registered shares or quotas of the payor entity.

Tax Authorities are authorized to waive withholding taxes on dividends, interest, commis­sions, royalties, and insurance premiums remitted abroad, provided the bene?ciary can prove that it is not entitled to a foreign tax credit for the tax assessed in Costa Rica and that the income will be taxed in the foreign country.

Other Withholdings

Employers are required to withhold income taxes from employees on a monthly basis. Both employers and employees are subject to monthly payroll taxes, payable through the Costa Rican Social Security Administration (see section on “Social Security System” for further details).

Income Taxes

Individuals engaged in business activities

The Income Tax Law assumes a given net income for certain individuals, limited liability companies, and individual companies, unless evidence to the contrary is provided.

Financing

In the absence of a formal loan agreement or other document specifying the interest rate, Tax Authorities will charge presumptive interest on lending or financing transactions. The applicable rate is the highest lending rate charged by the Central Bank of Costa Rica, or, if no such rate is available, the average lending rate charged by banks of the National Banking System.

Non-domiciled companies

Unless evidence is provided to the contrary, minimum taxable income is imputed to subsidiaries, agencies, and other permanent establishments of non-domiciled entities in Costa Rica as follows:

Transportation and Communications

Tax Authorities impute a minimum taxable income of ?fteen percent (15%) of gross in-come derived from freight, passenger, and cargo operations, as well as from radiograms, telephone, telex, and similar services provided in Costa Rica.

Companies engaged in transportation and communication services may execute a spe­cial agreement with Tax Authorities whereby taxable income is computed by applying the company’s overall pro?t margin to Costa Rican source income derived from services or sales within the country.

Reinsurance

Tax Authorities assign a minimum taxable income of ten and one-half percent (10.5%) of the net value of reinsurance, re?nancing, and insurance premiums of any kind, except life insurance that is either assigned to or contracted by the National Insurance Institute with foreign companies.

Media

Tax Authorities apply a presumptive income tax rate of thirty percent (30%) on gross in-come derived from cinematography ?lms, series, and any similar form of public broadcast or exhibition of images or sound, as well as international news.

Capital Gains Tax

Capital gains are taxable and capital losses are deductible when derived from the sale of depreciable assets or from the sale of assets in the ordinary course of a trade or busi­ness. Sporadic capital gains derived from the sale of non-depreciable assets are exempt.

Taxable capital gains must be included as part of taxable income and are subject to the corresponding tax tables.

Transfer Taxes

A transfer tax of one and one-half percent (1.5%) is levied on the transfer of real property. This tax is computed based on the declared value of real property transferred or on the value reported to Tax Authorities, whichever is higher.  Typically, both the buyer and the seller of real property are jointly liable for the tax, except where the contracting parties have agreed otherwise. The tax is assessed on the date the transaction is executed.  In the case of vehicles, a two and one-half percent (2.5%) transfer tax is levied.

Sales (Value-Added) and Excise Taxes

The general sales tax is an imperfect value-added tax levied on the sale of merchandise and the import of merchandise into Costa Rican territory.  With certain exceptions, most services are not subject to sales tax. This tax is assessed on value added and the ?nal liability is calculated by subtracting total sales taxes paid on imports or purchases (of inputs used to manufacture goods sold) from total sales taxes derived from taxable sales during the same period. The sales tax is levied by the manufacturer, wholesaler, retailer, or customs authorities.

All individuals, legal entities, and “de facto” companies, both public and private, that habitually sell merchandise or render speci?c services in Costa Rica, or that import goods into Costa Rica, are treated as taxpayers and must be registered as such in the Taxpayer Registry.

In addition to sales taxes, excise taxes are levied on selected goods. However, taxpayers with sales of under ¢2,000,000 (two million Costa Rican colones) during a three-month period are exempt.

Rates

The current general sales tax is thirteen percent (13%). A 5% tax is applied to energy consumed for residential purposes in excess of 250 kW/h.  All other energy consumption is tax exempt.  Currently, the sales tax on timber is 10% (ordinary sales tax less the 3% Forestry Tax).  A table is used to determine excise tax rates.

Tax payment

Sales tax is payable monthly and is calculated on sales in Costa Rica during the preceding month, less taxes paid to suppliers during the same month. Taxes on imports are paid as part of import duties before the goods are released from customs.

The excise tax is payable when the invoice is issued or when the merchandise is deliv­ered to the purchaser, whichever occurs ?rst.  The excise tax is due on imports when import documents or forms are of?cially approved by the customs agency.

Real Estate Taxes

Real estate taxes are assessed on land, buildings, and other permanent structures. This tax is managed, assessed, and supervised by the municipalities having jurisdiction over the administrative locality (“canton”) where the property is located. Local governments are the bene?ciaries of property taxes.

Rates

The real estate tax is 0.25%.

Computation and payment

The real estate tax is computed on a calendar year basis and must be paid annually, semi­annually, or quarterly, depending on the requirements of the local government.  The local government determines the tax base either by general or individual appraisal.

Stamp Taxes

Stamp taxes are levied on most legal documents and are determined based on either the monetary value stated in the document or on a speci?ed amount per page.

Education and Culture Stamp Tax

A statutory education and culture stamp tax is assessed on the capital stock of all busi­ness entities. A ¢750 stamp tax is assessed at the time of incorporation, in addition to annual fees ranging from ¢750 to ¢9,000, depending on the amount of capital stock of the company.

Local Taxes

In general, local taxes vary depending on regulations for particular activities and regula­tions established among the different local governments or municipalities.  Minor mu­nicipal taxes are similar between localities (i.e. garbage collection, street lighting, street cleaning, and others) and are generally paid quarterly.

Import Duties

Imports are subject to regional (Central America) and local taxes.  The Central American system for determining import duties is based on the nomenclature from the International Convention on the harmonized merchandise designation and codi?cation system (Harmonized System Convention).  In Costa Rica, Custom Authorities determine the taxable base for goods according to the value of the transaction or sale, or the cus­toms value de?ned by the World Customs Organization.

The existence of customs regimes in Costa Rica is based on the International Convention on Simpli?cation and Harmonization of Customs Procedures (Kyoto Agreement, 1973) and the amendments thereto.

Rates for import duties (regional levies) normally range from 0% to 15%. However, once local levies are imposed (excise tax, 1% under Law No. 6946, and sales tax) the total tax liability for the import duty may exceed 100% of the item’s value for certain “luxury items” (such as tobacco and goods subject to special regimes, such as milk, poultry, etc.).

Customs regimes in Costa Rica include systems that suspend, defer, or eliminate import duties, such as the Temporary Admission System, the Drawback System, the Free Trade Zone System, Repacking for Distribution, and others.  The purpose of these systems is to promote investment in the manufacture and trade of goods for export or use in certain activities (cultural, scienti?c, sportive, development, etc.).

Furthermore, Tax Authorities are empowered to authorize special sales tax treatment for purchases of goods by exporters when it is not feasible to apply the tax credit or the credit is dif?cult to recover.

Tourism

Speci?c taxes assessed on tourism activities include the following:

• Three percent (3%) tax on lodging:  This tax is applied to daily room revenue only.
• Eight percent (8%) tax on international transportation:  This tax includes air, maritime, and bus travel. International transportation companies and travel agencies are respon­sible for collecting this tax.
• Departure tax:  This tax is levied on each national or foreigner who leaves national terri­tory from any international airport.  The current rate is US$26.

Forestry

A Forestry Tax, equivalent to 3% of the value of timber, must be paid for imports or processing. However, sales tax on the import or processing of wood is reduced by the amount of the Forestry Tax (i.e. 10%).

Mining

Individuals or entities that are granted exploration permits and exploitation concessions are subject to the following taxes:

Surface taxes

• Non-commercial mining operations: One third of one base salary for each square kilo-meter or fraction thereof
• Commercial mining operations:
• Exploration permit: One base salary for each square kilometer
• Mining concession:
• Riverbed:  three base salaries for each kilometer
• Quarry and mines: three base salaries for each square kilometer

Taxes

• A 2% tax is assessed on gross sales of minerals obtained from mining concessions.

Additionally, mining activities are subject to the taxes established in the Income Tax Law.

Finally, a 10% tax is due on the total amount of exemptions granted. In essence, this is a tax based on the value of tax incentives.

Tax Evasion: Felonies and Misdemeanors

Applicable legislation is intended to achieve the following:

• Impose economic sanctions for violation of administrative tax rules.
• De?ne minor tax-related crimes that are penalized with economic sanctions.
• De?ne tax-related crimes. Under new legislation, tax evasion and other crimes are subject to a strict Penal Code, which provides for incarceration for up to ten years. Although companies are speci?cally excluded from criminal charges, individuals rep­resenting or working for companies that are involved in illegal activities may be pros­ecuted and held personally liable.
• Increase the powers of Tax Authorities to investigate companies suspected of tax eva­sion, including searches of premises and seizure and con?scation of equipment, docu­ments, books, and records.

Tax Treaties

A Tax Information Exchange Agreement (TIEA) has been subscribed by Costa Rica and the U.S.

Individual Taxation

Income Tax

Individuals with Business Activities

As a general rule, corporate regulations also apply to individuals.  However, individuals are subject to the following progressive tax table:

Individuals are eligible for annual tax credits of ¢12,360.00 (twelve thousand three hun­dred and sixty Costa Rican colones) for a spouse and ¢8,280.00 (eight thousand two hundred and eighty Costa Rican colones) for each child. Income tax returns must be ?led annually.

Employees

Employees are subject to a progressive withholding tax, as follows:

Employees are eligible for monthly tax credits of ¢1,030 (one thousand and thirty Costa Rican colones) for a spouse and ¢690 (six hundred and ninety colones) for each child. No other deductions or credits are allowed.

Monthly withholdings from employee salaries eliminate the need for these individuals to ?le annual income tax returns.

• Non-residents in Costa Rica are subject to a ?at tax on income derived from personal services rendered in the country in an employer-employee relationship.  According to our interpretation of articles 23, 26, and 59 of the Income Tax Law, the applicable rate is 10% . However, in some cases Tax Authorities have interpreted article 26 of the Income Tax Law to imply a 15% tax.
• Self-employed non-residents are subject to a 15% withholding tax on all income de­rived from personal services rendered in Costa Rica.  These individuals are not re­quired to ?le income tax returns in Costa Rica.
• Self-employed non-residents who receive rental or business income through a perma­nent establishment must ?le an annual tax return and are subject to the self-employ­ment progressive tax established in the above table.

Employers may treat mandatory contributions under the Employee Protection Law as de­ductible expenses for income tax purposes.  In addition, those contributions are exempt from social security and income taxes.

De?nition of Resident

For income tax purposes, a resident is de?ned as any person who has maintained a continuous physical presence in Costa Rica for more than six (6) months during the same tax year. A work permit granted by Immigration Authorities could lead Tax Authorities to conclude that the taxpayer should be classi?ed as a resident.  Tax residence usually be­gins after six months have passed.  Until that time, the person is considered to be a non­resident.

Furthermore, Tax Authorities may treat individuals as residents if their sole source of in-come is salary, even if they have resided in Costa Rica for less than six months.

Taxation of Bene?ts

In general, cost of living and other cash allowances paid directly to the employee (except the statutory Christmas bonus) are treated as salary and subject to the progressive rates that apply to employees.  Bonuses (except the statutory Christmas bonus) and bene?ts in kind (i.e. housing, company car, education, etc.) are subject to a ?at 15% withhold­ing tax (no deductions or credits are allowed) and to social security taxes.  However, for lower-level employees who fall in a lower tax bracket or pay no taxes, bonuses are gener­ally treated as salary and are therefore subject to the progressive withholding tax table.

Partnerships

This type of business organization is seldom used, mainly due to the direct personal liabil­ity it implies.  Parties are subject to payment of income tax.

Tax Amendment

The Costa Rican Legislative Assembly is currently analyzing a proposed amendment to tax legislation.  This amendment would reform the entire Costa Rican tax system and re­form includes changes to Income Tax and the General Sales Tax, as well as broadens the authority of the Tax Administration to audit taxpayers.  The amendment related to income tax considers the following:

• Change in the concept of income (from “income produced” to “income received”).  Capital gains will be taxed.
• A global income tax system would replace the current system, where different schedules are applicable depending on the origin and nature of income obtained by individuals. Under the new system,  income will form part of a general tax base and taxpayers will be individually responsible for declaring and reporting that income to Tax Authorities.  Withholdings will also be made by employers.  The schedule applicable to individuals would have rates ranging from 5% to 30%.  The corporate income tax would continue at a 30% rate but may be lowered in future years under certain condi­tions.
• Worldwide income: Costa Rican resident individuals and entities will be taxed on in-come earned abroad, which is contrary to the present territoriality system. In the case of passive income, capital must be registered with the Tax Administration in order to be taxed at the 10% rate.  Active income is taxed at ordinary rates applicable to indi­viduals and corporations.
• In addition, foreign tax credits would be available to avoid double taxation, and rules on transfer pricing, controlled foreign corporations, and tax havens would be sanc­tioned.

In addition, the current sales tax would be replaced with a classic value-added tax (VAT) that would be assessed on all services rendered and goods transferred within the nation­al territory.