Costa Rican Income Tax

[DavidCMurray]

We’ve been looking for a safe place to stash a little extra cash each month. The readily apparent alternatives are Certificates of Deposit in either a U.S. financial institution or a Costa Rican one. Since our income originates in the U.S., we could just leave the money up there, but the Costa Rican banks offer much higher interest rates and somewhat more flexible and convenient terms, and we’re confident that the funds would be available to us when we want them. And Costa Rica is where the money will likely be spent.

[b]Question[/b]: If we deposit money in a CD here in Costa Rica, will we be liable for Costa Rican income tax on the interest? I understand that we’ll be liable for U.S. income tax, but we file those returns anyway, so the interest here would just be a little more detail. What we hope to avoid is having to also file an income tax return here in Costa Rica.

Anybody have a definitive answer?

[b]Second question[/b]: Woefully ignorant of things financial as I am, am I overlooking another likely option? For instance, I know nothing about money market accounts. Is there an argument in favor of putting our modest savings there? Or someplace else?

Thanks!

[maravilla]

what higher interest are they offering? last time i looked at the interest board at BN, the net yields were no higher than those in the States, esp if you put your money into colones. which bank did you go to and what rates are they offering? i’ve got some extra cash too, and it’s either put it in gold or. . . .

[jerrym]

David,

From what I have been seeing, investing in Costa Rica real estate might be an option if you don’t need immediate liquidity.

Of course, you’ve probably already considered this and I’m sure you know much more about the market there than I do.

Just a thought,

Jerry Minchey

[johnr]

David – I think Sealy has a mattress with a zipper pocket!

Interest is horrible but you’ll sleep better at night. 😆

[DavidCMurray]

Jerry, liquidity is an issue for us, so real estate is out of the question.

maravilla, the CDs I’ve been admiring are offered by Banco HSBC. Off the top of my head, I can’t quote the interest rates for investments in colones, but they’re much higher than their offerings for investments in U.S. dollars, which are similarly negligible to those offered by U.S. financial institutions. In view of the stability of the dollar:colon exchange rate in recent months, the higher rates on colon-expressed CDs seem to be attractive.

johnr, my mattress pays no interest at all. What’s Sealy’s current rate?

But what about paying Costa Rican income tax on the interest? Does anybody know??

[DavidCMurray]

[quote=”maravilla”]what higher interest are they offering? [/quote]

The placard in the Banco HSBC ATM lobby shows the following rates for CDs [u]expressed in colones[/u]:

1 month — 4.5%
3 months — 5.27%
6 months — 6.59%
9 months — 6.9%
12 months — 7.23%

Banco HSBC also offers CDs expressed in dollars but at much lower rates of interest. I didn’t write those down.

Just for comparison, the Michigan State University Federal Credit Union offers the following rates (expressed in U.S. dollars, of course):

3 months — 0.25%
6 months — 0.35%
12 months — 0.75%

In view of the stability of the colon versus the dollar over the past year or so, I think I think that the deals offered by Banco HSBC are more attractive, but financial wizard that I’m not, I’d be happy to be corrected.

[b]Question remains:[/b] If one invests in a Costa Rican CD, is there a Costa Rican income tax liability? Anybody??

[maravilla]

but you didn’t allow for the 10% fluctuation. the chart at BN has the gross rates and then the net rates. on first look, it seems as though investing in colones would give you a higher yield, but when everything else is taken into account, the net yields were the same as on $ accounts. hubby and i sat there for a whole hour studying that board while we were waiting for a gerente. just the day before a friend of ours was bragging about how he was dumping all his money into colones because he could make 10%. he obviously hadn’t really investigated what the 10% was really going to yield. the coloon is still fluctuating — the other day it was 500; last week it was 507; and it has dipped to 497. there is no way they are going to pay you 7%. even the Swiss banks are not paying 7%, or the Italian banks. i have to go to BN on monday so i will write down all the numbers. it was very interesting to say the least.

[clewis]

I would be shocked if your earned interest would be tax free. But I don’t know CR tax law.

Lew

[DavidCMurray]

Well, maravilla, I guess my ignorance of things financial is shining through. To my simple mind, a swing of 5 colones one side or the other of 502 represents a fluctuation of about +/-one percent, doesn’t it? Or am I wrong?

If that’s right, and if HSBC is offering 7 percent for one year, then if the exchange rate fell to c465:$1, I think I’d be pretty close to money even. Such a return would hardly constitute a good investment, but as compared to virtually no return on other currency investments, I think I think it looks all right. Or am I wrong?

Please bear in mind that I’m talking about stashing a rather small amount of money which I want to keep liquid for emergency needs. I’m not trying to get rich –too late for that.

[maravilla]

i would go talk to them if i were you to get the full picture. but the net rates that BN posted were only a tiny bit different that the interest paid on dollars in the end, somewhere in the neighborhood of less than 1%. the exchange rate has been all over the place in the last 18 months going from a high of 580 down to 485 at one point. you go talk to HSBC and i’ll get the figures from BN and we will compare.

[DavidCMurray]

Here is the web address where Banco HSBC advertises its CD rates:

http://www.hsbc.fi.cr/a/bp/depositos_a_plazo.asp

Please have a look for yourself.

And here’s what I’m able to copy from that page:

Tasas Actuales para Certificados de Depósito a Plazo

COLONES
(De ¢100.000 en adelante)

Plazo en
meses
Intereses Mensuales *Intereses al Vencimiento *

1 4.50% 4.50%
2 4.50% 4.51%
3 5.25% 5.27%
4 5.25% 5.28%
5 5.25% 5.30%
6 6.50% 6.59%
7 6.50% 6.61%
8 6.50% 6.62%
9 6.75% 6.90%
10 6.75% 6.92%
11 6.75% 6.94%
12 7.00% 7.23%

————————————————-
DÓLARES
(Para montos de $500 a $10.000**)

Plazo en
meses
Intereses Mensuales * Intereses al Vencimiento *

1 0.50% 0.50%
2 0.50% 0.50%
3 0.75% 0.75%
4 0.75% 0.75%
5 0.75% 0.75%
6 1.50% 1.50%
7 1.50% 1.51%
8 1.50% 1.51%
9 1.85% 1.86%
10 1.85% 1.86%
11 1.85% 1.86%
12 2.10% 2.12%
* Las tasas que se indican anteriormente son tasas netas anuales.
** Para montos superiores a los indicados, contacte a alguno de nuestros ejecutivos al 2287-1111 o en cualquiera de nuestras Sucursales.

Now your Spanish is surely better than mine, maravilla, but my reading of the Arabic numerals, with which I do have some fluency, indicates that Banco HSBC is paying 4.5% annual interest on one-month CDs and 7.23% on twelve-month CDs, both expressed in colones.

And they’re paying 0.50% to 2.12% on CDs expressed in dollars. Those are much better rates than the ones I quoted from the Michigan State Federal Credit Union above, no? Those I’m very confident of, since they’re written in my native tongue.

I promise I’m not making this stuff up. What is it I’m misinterpreting?

Or maybe they’re lying?

[maravilla]

it certainly looks attractive, i will admit. what is not factored in is the fluctuation though, and if the 7% were the net interest at maturity, WITH the fluctuation factored in, then this is the best deal in the world because i have not heard of any other bank paying that high an interest rate.

[maravilla]

now you have really peaked my interest in all of this so i will be off to the bank tomorrow and have a sit-down with the gerente. there is this to consider, however — if you change dollars to colones you pay one price, the lower exchange rate, but when you transfer those colones back into dollars you pay a higher rate. right now it’s 500/512. i did find this little blurb on an investment site but it is not very in-depth:

Exchange rates directly affect [b]the realized return[/b] on an investment portfolio with overseas holdings. If you own stock in a foreign company and [b]the local currency goes up 10%, the value of your investment goes up 10% [/b]even if the stock price doesn’t change at all.

But what happens if the currency goes DOWN??

[DavidCMurray]

Hmmm . . .

Assuming you’re not seeing CDs as a vehicle by which to become wealthy but merely as a receptacle for some cash you can do without for a while, it seems to me that earning 4.5% or 7% would have the effect of offsetting some of the possible devaluation of the currency in question. Or am I wrong?

If I invest (say) c100,000 for a year, at the end of the year I’ll have c107,000, I think. If during that year the exchange rate goes down by 7% (from (say) c500:$1 to c465:$1) then my c107,000 will be worth more, in purchasing power, won’t it? Of course, I’m ignoring the matter of domestic (Costa Rican) inflation.

And if the exchange rate goes to c535:$1, won’t I be pretty much money even?

If, on the other hand, I put my c100,000 into a demand account (or into the zipper pocket in my mattress, as has been suggested) that earns virtually no interest, at the end of that year won’t I have virtually the same c100,000? And won’t the purchasing power of that c100,000 be equally affected by the domestic inflation rate?

I guess what I don’t understand is how can I be hurt by earning more interest rather than less? And every indication is that Banco HSBC is paying more interest on its colon-denominated CDs.

That is, unless earning that interest gets me into a Costa Rican income tax snarl which I fervently hope to avoid and which is the primary theme of this discussion thread.

[maravilla]

this is a good analogy on fluctuating exchange rates. i hadn’t planned on spending so much time trying to understand this issue, but if i can make more than the .80% i’m getting now on a $ account. . . .

For example, assume that the current exchange rate of the U.S. dollar to British pound is $1=0.53 British pounds. If you invest $1,000 in a mutual fund that invests in the stock of British companies, this will equal 530 pounds ($1,000 x 0.53 pounds = 530 pounds). Six months later, assume the dollar strengthens and the exchange rate becomes $1=0.65 pounds. If the value of the fund does not change, converting the original investment of 530 pounds into dollars will return only $815 (530 pounds/0.65 pounds = $815). Consequently, while the value of the mutual fund has not changed in the local currency, a change in the exchange rate has devalued the original investment of $1,000 into $815. On the other hand, if the dollar were to weaken, the value of the investment would go up. So if the exchange rate changes to $1=0.43 pounds, the original investment of $1,000 would increase to $1,233 (530 pounds/0.43 pounds = $1,233).

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