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As a US citizen developing a small hotel with a 1.4M investment in my Costa Rican Corporation S.A. of which I am assuming would qualify me for residency how are my profits, or income treated here, and by the US, and can I keep them offshore?
I am not a tax attorney in any country and don’t play one on TV and you do need expert US and Costa Rica tax advice. But from what I understand:
As a US citizen you are supposed to file tax returns every year and you are supposed to pay income tax on all income no matter where in the world it was earned.
However for 2008, the maximum foreign earned income exclusion is up to $87,600 per qualifying person. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $175,200 for the 2008 tax year.
But your first priority would be to pay taxes to Costa Rica…
If you own the Costa Rica hotel in the name of a Costa Rica corporation, then the corporation would be responsible for all the expenses, accepting revenue, paying employees and paying taxes in Costa Rica before paying you so the likelihood is that with a small hotel like yours, there may not be a lot left over to pay you and your wife the $175,200 per annum…
You could ask Randall Zamora – He would probably know… [ https://www.welovecostarica.com/members/department63.cfm ]
Scott Oliver – Founder
WeLoveCostaRica.comScott is right about the US tax exclusion, but don’t be so fast on paying taxes here. Get a good accountant and let him show you all the loopholes. They usually charge about $100 per month and it is well worth it
Hmmm… Doubling your exclusion if married filing jointly? That was a new one on me, but worth checking into. Turns out that your spouse must be a US citizen or resident alien and meet the tests as you describe Scott. The resident alien part is pretty much Catch-22 because it would be very difficult to satisfy both the resident alien status AND either the physical presence test or bona-fide resident test. I should have married a gringa… No, just kidding. So, being married to a Tica and living in Costa Rica, I’m only able to exclude the $87,600, not the $175,200.
Thanks for bringing it up though.
Jon
Clayton:
A few thoughts more related to protecting your asset – sadly this often needs more attention in Costa Rica than in most industrialized countries.
One suggestion which may be worth checking out with a reputable lawyer and accountant – why not have two corporations? One for holding the asset value of your hotel development and another to actually trade in the business as a hotelier.
The latter would be the responsible corporation in terms of income, due taxation and any daily liabilities in relation to running a business.
The asset-holding corporation would never trade and would exist solely to protect your asset value.
Two other points which may appears basic, but are relevant in Costa Rica. With Sociedad Anonima entities, the powers of both the President and Secretary are such that these positions normally empower full Powers of Attorney over the corporation. It is important that you are one of these officers and the other should be a person you have total confidence in. Having any lawyer and his/her staff as officers is not advisable – unless any of these parties are actually partners or involved in the business.
Second point is that the statutory books of an S.A. should be in the possession of the principals – possession can become meaningful. Of course, the books will have to be made available to lawyers/accountants for maintenance and meetings, but these documents are better in your hands.
Costa Rica is not an ‘offshore’ in the true sense and there is little confidentiality in a Sociedad Anonima, despite the name.
Good luck on your project!
Another point worth mentioning is that, while a $1.4 million investment MAY help one to qualify for legal residency, it’s not guaranteed and it’s not automatic. You still need to consult a Costa Rican attorney who is knowledgeable in residency matters to determine if or how this investment will satisfy the legal requirements. Failing to qualify leaves one in the legal status of a tourist with a large investment in a country they may not be allowed to stay in.
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