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COSTA RICA: PERSONAL TAXATION

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Costa Rica Residence and Liability for Taxation

In Costa Rica the taxation of individuals is based on the principle of territoriality, meaning that all personal income which has a foreign source is tax exempt. Only that proportion of revenue earned by an individual within Costa Rica is subject to an assessment by the tax authorities. However, this may change if the Costa Rican legislature manages to pass the long awaited fiscal reform package.

The principle of territoriality is perhaps the most significant aspect of the country's fiscal regime. Costa Rica does not discriminate between the taxes payable by residents and non residents The main taxes affecting an individual are income tax, employee social insurance, withholding taxes, capital transfer tax and selective consumption tax. There are relatively minor municipal taxes, and there is a tax on vehicles.

Income tax is levied on both employment source income and non-employment source income. While residents and non-residents pay the same income tax on employment source income there is a slight distinction between how a resident and a non-resident are assessed on their non-employment source income but the distinction is driven by pragmatic considerations and is not discriminatory.

The selective consumption tax, equivalent to a VAT, and levied at 13% has a major impact on the standard of living.

One of the key components of the Fiscal Reform Bill would be a switch from the sales tax to a Value Added Tax system; taxes payable by Free Zone companies would also be increased over a period of time, and it's possible that the territorial basis of personal taxation would be abandoned in favour of world-wide income taxation.

There is no capital gains tax in Costa Rica. Whilst gains made by businesses on the sale of capital assets may be subject to business income tax, capital gains made by a resident or non-resident individual on the sale of a capital asset are exempt from any form of income tax.

No credits are granted in Costa Rica for taxes paid in a foreign country.

Costa Rica Income Tax

Income tax payable by individuals is set out in the Income Tax Law; the rates are in article 15. The fiscal year runs from 1st October to the following 30th September. Employment income includes the gross value of a salary, wage, pension, commissions, bonuses, expense allowances and any benefits in kind. No expenses can be deducted in assessing employment income. However in respect of non-employment source income (e.g. dividends on shareholdings, rental from a property letting, etc) there is a difference in how residents and non-residents are taxed. Thus there are 3 distinct manners of assessing income tax payable by residents and non residents namely:

Personal Income Taxes:

This group includes two categories:

persons whose income consist of a fixed salary or other remuneration and
persons with profit generating activities

a. - Persons whose income consists of a fixed salary
Any individual employed in Costa Rica pays a monthly withholding tax rate based on his salary. Employment income (on a monthly basis) of individuals is subject to a progressive tax of 15% as follows:

Income up to 419,000 colons exempt.
In excess of 419,000 up to 629,000 colons 10%.
In excess of 629,000 colons 15%.

The following tax credits can be applied by taxpayers, once income tax has been calculated:

There is a monthly tax credit applicable to each dependent meeting the following criteria:

A minor (under 18 years)
Handicapped (physically or mentally), and therefore unable to make his own living.
A high school or college student, not older than 25 years.
A monthly tax credit applicable to the spouse only if there is no legal separation between them. In case that both spouses are tax payers, the tax credit can only be deducted by one of them.

b. - Individuals with profit generating activities

The following rates are applied to taxable annual profits:

Profits up to 1,858,000 colons exempt
In excess of 1,858,000 up to 2,775,000 colons 10%
In excess of 2,775,000 up to 4,629,000 colons 15%
In excess of 4,629,000 up to 9,276,000 colons 20%
In excess of 9,276,000 colons 25%

An annual tax credit per dependent can be applied by taxpayers, once income tax has been calculated. Conditions to apply to this tax credit are the same as stated previously. In case that both spouses are tax payers, the tax credit can only be deducted by one of them.

Income tax payable by residents on non-employment source income:

Non-employment source income includes payments related to bonuses, profit share schemes, dividends on shares, interest on loan deposits, and rental income.
A number of non-employment sources of income are exempt from tax. They include Christmas bonuses (mandatory after 12 months service with the same employer), gains achieved on the sale of capital assets (e.g. the sale of a house at a profit), gifts, inheritances and income from securities designated either as tax exempt or subject to a withholding tax in place of income tax.
There are a number of allowances which can be deducted from non-employment source income by residents so as to reduce the taxable charge namely: an annual tax credit in respect of a spouse; an annual tax credit in respect of a dependant under 25 years of age;
Under law 7293 of 1992 (the Incentives to Tourist Development Law) any individual who purchases shares in a corporation involved in hotel services, air transportation, water transportation or car rental can annually deduct up to 50% of the value of his shareholding from his income for the purposes of income tax so long as the deduction does not exceed 25% of his annual tax payment.
A husband and wife are treated separately for the purposes of assessing income tax on the non employment source income of residents.

Income received by non-residents from a non-employment source is usually taxed at source (e.g. withholding tax on dividends) and if not taxed at source is not taxed at all.

Costa Rica Social Security Taxes

The employer pays a contribution of up to 22% of gross salary and the employee pays a contribution of up to 9% of his gross salary. Self employed persons are also required to contribute to this fund.

Foreigners temporarily working in Costa Rica are not exempted from the requirement to pay this tax even though it is evident they can never benefit from it .

Employers are required to insure their employees against accidents at work and depending on the monthly salary and the nature of the risk, premiums can vary from 0.5% to 22% of the employees salary.

Costa Rica Capital Transfer Tax

A capital transfer tax of 3.01% (at the time of writing) is payable by the purchaser on the value of real estate purchased. For the purposes of capital transfer tax "value" means the higher of either the purchase price recorded by the parties or the value ascribed to the transaction by the relevant Government department using a prescribed formula. The law on capital transfer taxes payable is set out in the Income Tax Law.

Costa Rica Sales Tax

Sales Tax stands at 13% and is levied both at the point of importation and at the point of sale (unless the sale is by way of export). It is levied on all goods with the exception of foodstuffs, real estate, medicinal products and certain other items. A 10% rate applies to the sale of wood and a 5% rate to the consumption electric energy for residential purposes.

Sales tax is not generally levied on services.

Sales tax is charged after the imposition of selective consumption tax.

The selective consumption tax varies from 0% to 60% and is levied either at the point of importation or for domestic production at the point of sale.

In assessing the value of the goods for the purposes of selective consumption tax domestic goods are valued at the price that the manufacturer sells the same to the distributor whereas imported goods are assessed on CIF.

The Government raises about half of its revenue from these two taxes.