Thinking beyond borders
A person’s liability to Costa Rican income tax is determined by the territoriality principle, as opposed to the method of taxation based on residence status. However, residents and nonresidents receive different tax treatment. Furthermore, the Costa Rican income tax legislation also differentiates in the tax treatment given to individuals working independently to those working under an employment relationship. Whereas residents working independently are subject to a progressive tax schedule with the highest bracket being 25 percent of net income (which is computed by all useful and necessary business related expenses from total taxable income), resident individuals working under an employment relationship are subject to a progressive tax schedule for which the highest tax rate is 15 percent.
In both situations, deductibility of personal expenses is limited to immaterial fixed amounts for the spouse and for each dependent child. On the other hand, nonresidents providing independent professional services within the country are subject to a 15 percent withholding tax on gross income, and nonresidents providing dependent services within the country are subject to a 10 percent withholding tax on gross income.
Also, formal tax obligations differ between these categories. Resident individuals working independently should file income tax returns annually. Resident individuals working under an employment relationship and nonresidents providing services in the country (whether it is independently or not) are subject to a monthly withholding tax system, where the payer acts as withholding agent and, consequently, is liable to the tax authorities for the correct compliance of the tax obligations of the individual or entity beneficiary of the income. The withholding tax agent is jointly and severally liable, together with the corresponding taxpayer, for taxes due to the tax authorities.
The Costa Rican tax system is based on the territoriality principle whereby all income derived within Costa Rican territory and from Costa Rican sources is subject to income tax. Certain exceptions apply. The amount taxable in Costa Rica does not change based on immigration status. However, the method of taxation does change for expatriates residing in Costa Rica for six months or longer.
Residence for tax purposes is triggered by a continuous physical presence in the country for six months during the tax period. Pursuant to Article 5 of the Regulations to the Income Tax Law, the tax authorities are empowered to treat individuals who have not yet satisfied the six-month period of permanence in the country as residents for tax purposes, provided certain conditions are met: (a) the tax authorities may consider as residents for tax purposes those individuals who, even though they have resided in the country for less than six months, have been in an employment relationship with Costa Rican employers; and (b) the tax authorities have granted the residence condition to individuals who have just arrived in the country but are transferred on assignments that would exceed the six-month period; therefore, these individuals are considered as residents for tax purposes as of their first day of permanence in the country.
The tax rules that would apply to an expatriate on assignment in Costa Rica would differ depending on the length of the assignment. If the assignment would not exceed the six- month period of permanence and the expatriate would not be working under an employment relationship with a Costa Rican employer, then the expatriate would be subject to a 10 percent withholding tax rate on gross income received for services provided within the country. This tax should be withheld by the payer at the moment of paying the income to the expatriate.
Expatriates residing in Costa Rica for more than six months on a continuous basis will be considered residents for tax purposes. Similar treatment would apply to those expatriates who are transferred on assignment for a period exceeding the six-month term, but in this situation, the resident status would apply as of the first day of their assignment. In these cases, the expatriates will be subject to salary tax, which is the income tax applicable to domiciled individuals obtaining income from the provision of personal services rendered under an employment relationship. This tax applies at a progressive tax rate schedule.
Employment income is generally treated as Costa Rican- sourced income when it derives from the provision of services rendered while the individual is physically located in Costa Rica, irrespective of the location where the salary is being paid.Compensation related to services provided outside Costa Rica will receive a different tax treatment depending on the tasks being performed abroad. Herein we include the different possible situations and their corresponding tax treatment.
The above-mentioned criteria do not apply for social security purposes, where the rules differ. Within this scope, individuals are liable to pay social security contributions when working within Costa Rica to the benefit of a local or foreign employer, or when working abroad to the benefit of a local employer. It is important to call attention to this latter situation, to the extent that the employee is on a local payroll, the social security authorities will charge social security contributions regardless of the fact that the employee works in Costa Rica or abroad, or regardless of the fact that their work is performed abroad for the benefit of the local entity or for the benefit of a foreign entity.
Technically, there is no threshold/minimum number of days that exempts the employee from the requirements to file and pay taxes in Costa Rica, including both income tax and social security contributions.
For extended business travelers, the types of income that are generally taxed are employment income and other Costa Rican-sourced income. However, Costa Rica has a statutory 13th month benefit that is not subject to salary tax or social security contributions
Residents’ employment taxable income is taxed at progressive tax rates ranging from 0 percent to 15 percent. For 2016, the tax schedule in force is:
|Up to Costa Rica colon (CRC) 787,000
|From CRC787,001 to CRC1,181,000
Deductibility of personal expenses is limited to an annual expense per child of CRC 17, 760 and for the spouse of CRC26, 520. This tax is reported on an annual basis. Even though the tax liability is determined at the end of the tax year, the law establishes that taxpayers must perform three advance income tax payments prior to the final due date.
These are carried out on a quarterly basis and the amount is determined based on either the amount of income tax liability paid in the previous year or the average of the previous three years – whichever is higher.
Nonresidents working under an employment relationship are subject to a flat tax rate of 10 percent on gross Costa Rican-sourced income.
Self-employed nonresidents working in Costa Rica are subject to a 15 percent tax rate on gross Costa Rican-sourced income received.
|Up to CRC 3.496.000,00
|From CRC 3.496.000,00 to CRC 5.220.000
|From CRC 5.220.000 to CRC 8.708.000
|From CRC 8.708.000 to CRC 17.451.000
|Over CRC 17.451.000
|Up to Costa Rica colon (CRC) 792,000||0% (exempt)|
|From CRC792,000 to CRC1,188,000||10%|
|Up to Costa Rica colon (CRC) 752,000||0% (exempt)|
|From CRC752,000 to CRC1,128,000||10%|
|Up to Costa Rica colon (CRC) 752,000||0% (exempt)|
|From CRC752,000 to CRC1,128,000||10%|
There is a comprehensive social security system in Costa Rica. Employees must contribute to all segments of social security. The segments include a workers’ bank, social security, a national training institute, a social welfare institute, and welfare for the poor. The social security rates are uncapped and are applied to gross compensation.The employee’s contribution rate is 9.34 percent and the employer’s contribution rate is 26.33 percent.
In addition, the employer must make contributions to a professional risk insurance scheme. The risk insurance rates can vary widely depending upon the nature of the risk.
Residents receiving employment income are subject to withholding tax. The employer should do the corresponding withholdings at the moment it pays the corresponding salary to the employee.
Nonresidents receiving Costa Rican-sourced income are also subject to withholding tax. The withholding tax agent is the payer of such income and should withhold the corresponding remittances abroad tax at the moment of paying or crediting Costa Rican-sourced income to the benefit of the nonresident beneficiary.
The tax liability should be paid to the Tax Administration within the first 15 days of the following month to that of the date of payment, and should be paid together with the filing of Form D-103 (withholding tax return) for both residents and nonresidents.
A visa must be applied for before the individual enters Costa Rica. The type of visa required will depend on the purpose of the individual’s entry into Costa Rica. For example, an individual may be considered a business visitor provided their activities are limited to attending business meetings, making sales calls to potential clients on behalf of a non-Costa Rican entity, and attending seminars.
A consular visa used by a tourist visitor is generally valid for 90 days and may be extended for up to an additional 90 days. Certain nationalities may be granted shorter visas, as the length of time may vary depending on the nationality of the foreigner. The different treatments can be reviewed at the official web site.
A business visitor, someone who is visiting Costa Rica for a period equal to twice the consular visa used as a tourist, may obtain a business visa. All business visitors have to comply with the Costa Rican laws and the payment of the corresponding taxes.
Costa Rica has signed income tax treaties Germany (1993), and Spain (2004), and currently is negotiating one with Mexico. The treaty with Spain is in effect from 1 January 2011. However, the income tax treaty with Germany has been signed by Costa Rica, but not yet ratified and is awaiting signature in and ratification in Germany. There has been an exchange-of-information agreement in effect with the US since 1990, with Argentina, Canada, France and Netherlands in force since 12 December, 2011, with Mexico since 25 May, 2012 and with the Central American countries since 14 August, 2012. Also, Costa Rica has signed 13 exchange-of-information agreements with Australia, South Korea, Denmark, Finland, Greenland, India, Indonesia, England, Iceland, Faroe Islands, Norway, South Africa and Sweden.
Regarding the Organization for Economic Co-operation and Development (OECD), since 18 May, 2012 Costa Rica is considered as a jurisdiction that have substantially implemented the internationally agreed tax standard.
There is the potential that a permanent establishment could be created as a result of extended business travel, but this would depend on the type of services performed and the level of authority the employee has.
The standard value-added tax (VAT) rate is 13 percent.
In accordance with the Sales Tax Law (the VAT Law), VAT is levied on the sale of all merchandise within the country and/ or the import of merchandise into the country.
According to Article 1 of the Executive Regulation to the VAT Law, the term ‘merchandise’ must be understood as any material, product, article, manufacture, and, in general, all movable goods produced or acquired for their processing or trade. According to this article, the term ‘merchandise’ does not include intangible property such as stocks or securities. Immovable property is also excluded from the term ‘merchandise’.
Only those goods specifically listed in the VAT Law as exempt are exempted from VAT.
Unlike goods and merchandise, services are not subject to VAT except when expressly taxed by law. Article 1 of the VAT Law includes a list of services that are subject to the general sales tax.
Taxable services include:
Article 1 of the VAT Law also includes:
All other services are not subject to VAT since the Law does not expressly mention them.
The export of goods and the sale of exempt goods allow the taxpayer a credit for the input of VAT paid. The legislation in force establishes restrictions to the input of VAT that can be credited.
Costa Rican entities
Under the VAT system established by the VAT Law, taxpayers are:
In such cases, the final tax liability is calculated by subtracting total VAT paid on imports or local purchases that are incorporated to the taxable goods or services provided, from total VAT collected from taxable sales during a given period. Pursuant to Article 5 of the VAT Law, these individuals or entities are known as ‘VAT taxpayers’ and have an obligation to register as such before the tax authorities. Registration is a simple process and is accomplished by filing a registration form before the Unique Taxpayers Registry of the Tax Authorities.
It can usually be accomplished in a single day, if filed together with the requirements requested for such purposes.
Non-Costa Rican entities
The Costa Rican VAT Law does not distinguish between Costa Rican and non-Costa Rican entities. Non-Costa Rican entities that fall under the descriptions indicated above are required to register as VAT taxpayers.
In the Gazette No. 176 of 13 September 2013, was published the Executive Decree No. 37898-H: Transfer Pricing Provisions. The tax administration has become more aggressive in applying transfer pricing rules to intercompany transactions of taxpayers and in requesting due compliance of market price conditions in intercompany transactions.
A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of another entity in another jurisdiction, in other words, when a cross-border benefit is being provided. This may apply depending on the nature and complexity of the services performed.
Costa Rica does not provide for the statutory protection of privacy. Some protections are available under Article 24 of the Constitutional Act.
Costa Rica does not restrict the flow of Costa Rican or foreign currency into or out of the country. Only some anti-money laundering rules are in place to keep track of capitals and prove their legal source.
Nondeductible costs for assignees may include a portion or all of the contributions by an employer to non-Costa Rican pension funds.
As businesses become increasingly global, we have witnessed a dramatic rise in the number of business travelers now working in foreign jurisdictions.