Costa Rica’s New Tax Law – What’s There To Worry About? Absolutely nothing, all you have to do is to do your homework, keep accurate records and proper advice.

Costa Rica is trying to get back on track to ensure a better, brighter future for it’s citizens.

Costa Rica understands that that there are many unscrupulous persons who are making a lot of money from a variety of business opportunities in this country and that little of that money is benefitting Costa Rica.

Little of it remains to improve the roads, bridges and other infrastructure that’s needed in this county so that entrepreneurs, corporations and individuals can continue investing profitably in Costa Rica. Therefore, collecting what is rightfully due is, theoretically the main objective of this new law.

After I had read the entire text of the tax bill, and remembering that this the second time during my 12 years experience, that we face significant changes in the Costa Rican Tax Law, I can tell that there is no reason to panic and worrying about “take the money and run” to other countries, remember that the “bigger the rat, the better the rat trapper”.

What’s new? – World Wide Income

For the first time, Costa Rica plans to tax revenues from foreign sources; this means that any commercial activity that takes place from Costa Rica by an individual or corporation will have to pay taxes on that income. However, please note that you still having the right to:

• Deduct expenses occurred abroad Costa Rica
• Apply for a Foreign Income Exemption if you are a US Citizen living in Costa Rica for more than 330 days continuously and within the same 12 months, IRS form 2555EZ.
• Apply for Foreign Tax Credit if you are a US Citizen living both in Costa Rica and United States and doing business in both countries. Some especial requirements must be fulfilled.
• Bring money to Costa Rica for investment, retirement or dividends or profits gained outside of Costa Rica and pay no taxes.
• Apply for all the exemptions to this tax included in the Chapter VI of this bill and that protects the tax payer from tax double-payment from one country to another.

Capital Gains Tax

As well as World Wide Income this would be the first time that we have this principle in our Tax Law. Basically, it will tax all the Capital Gains obtained from the sale of a property. It is important to point out that this principle has also exemptions, such as:

• No tax should be paid if this gain is obtained from your unique house.
• Even if you buy a cheaper house with the money of the sale, you can keep the profit for 2 years without paying taxes, especial requirements applies.
• Properties owned by Costa Rican Corporations will play an important role on this chapter thanks to the assets re-value and transferable stocks tools, which used wisely, may help to save on taxes.

My first recommendation for this tax is not to try to save on transfer taxes when you buy by artificially lowering the price of the property in the contract, this will ring the Tax Inspectors’ bell.

Value Added Tax (VAT):

It’s the same as our old Sales Tax but with a brand new name and some new features. Some of the new changes include:

• 6% tax over professional services like accountants, attorneys, translations, architects, etc.
• 6% tax over rents above $400 (this amount is up dated every year), but remember that the tax will apply only over the excess not the base.
• 6% tax over private medical attention and 13% tax over private hospitalization services. Even if the patient is non-resident or came to Costa Rica for treatment must add the tax to the doctor’s bill.

Some people may think that this will make Costa Rica less attractive but the truth is that there are a lot of exemptions to this VAT tax like:

• Internet Residential Service
• Power and Water Residential Services (minimum consumption)
• Sales of products and services to individuals or companies outside Costa Rica.
• Medicines and Personal Care Products
• Sale of Properties (Real Estate)
• Some products used on Farming Industry.
• And more that other 30 exemptions for services and products.

Also keep in mind Value Added Tax can be used as credit if you are charging the same tax to your clients, and it was paid over those services or products that your business needs to perform

Vehicle Taxes:

The owners of well valued vehicles will have to pay an additional percentage on their yearly ownership tax (Marchamo) based on the value of the vehicle, remember that this is the value given by the Costa Rican Government, not the market value, and using the following table:

From To Additional Tax

$0,00 $34.999,00 0%
$35.000,00 $49.999,00 15%
$50.000,00 $69.999,00 30%
$70.000,00 More 50%

Presumptive Revenues

The government will apply presumptive revenues to those corporations that own properties and do not prove that are not used for commercial purposes. To prevent the situation the tax bill also include a special classification for this kind of corporations so you can register yours as a entirely title holding corporation and you do not have to worry about taxes in the future.

Some Good Points

The Tax bill also includes good news for new investors or new endeavors, like:

• Benefits for companies that will be located in rural areas and that will help to improve the social and economical status of the population.
• Benefits for companies that come out with new technologies and produce non-traditional items.

These companies will have to go through some red tape to get the license, but the paperwork and the benefits can be compared with the ones given by the Duty Free Zone.

If the government reaches its Tax Collections projections, a reduction of the Income Tax Rate will take place in 2010 from 30% to 25%. This can considered as an incentive from the government so all the tax payers wisely fulfill our duties and once that the Costa Rica Treasury get backs to normality all the tax payers will have a relief.

As you can see and even with the changes Costa Rica stills a country where you can enjoy of a unique social and economical stability, which are the most important elements for safe investments; and lower rates than other countries, including United States.

Randall Zamora, President and CEO of Costa Rica ABC, a former CFO of multinational companies like Health Care Merger Inc and Four Seasons Resort Costa Rica, with twelve years of experience in accounting, management and tax advisory. Randall is fluent in English and is our Preferred Professional for Costa Rican tax matters.

Written by Randall Zamora who is the President and CEO of CostaRicaABC.com, former CFO and Head of Accounting Department of multinational companies like Four Seasons Resort Costa Rica, active member of the Interamerican Accounting Association, Pro Bono Local Partner of The World Bank and contributor to their yearly publication “Doing Business Report.”

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.