At Osa Property Management, we understand the importance of navigating Costa Rica’s tax system for property owners and investors. Understanding what taxes are in Costa Rica is crucial for financial planning and compliance.
This guide will provide an overview of the country’s tax structure, including income tax, VAT, and property-related taxes. We’ll also cover recent reforms and key considerations for both residents and businesses operating in Costa Rica.
What Taxes Do You Pay in Costa Rica?
Costa Rica’s tax system supports the country’s social and economic development while maintaining a competitive edge for businesses and investors. This chapter outlines the main taxes you’ll encounter in Costa Rica.
Income Tax: Progressive Rates for Individuals and Corporations
Income tax forms the backbone of Costa Rica’s tax system. For residents, the rates progress up to 35%. Non-residents face varying rates depending on the type of income, with salaries subject to progressive rates up to 30%. This structure distributes the tax burden across different income levels.
Corporations pay a standard rate of 30% on Costa Rican-sourced income. Small businesses with annual gross income below ₡112,170,000 benefit from lower rates, which promotes entrepreneurship and small business growth.
Value Added Tax: A Recent Addition
Costa Rica introduced a Value Added Tax (VAT) of 13% in 2019, replacing the previous sales tax. This change expanded the tax base to include services, which were previously exempt. Essential items (like basic foodstuffs, healthcare, and education) remain exempt or subject to reduced rates, balancing revenue generation with social considerations.
Property and Transfer Taxes: Key for Real Estate Transactions
Property owners in Costa Rica face an annual property tax of 0.25% on the registered value of their property. When buying or selling real estate, a transfer tax of 1.5% applies. These taxes are particularly relevant for those who invest in Costa Rican real estate.
Recent Reforms: Addressing International Standards
Costa Rica enacted significant tax reforms in 2023 to align with international standards and remove itself from the EU’s “grey list” of non-cooperative tax jurisdictions. These reforms introduced taxes on certain foreign passive incomes (like dividends and royalties) for multinational groups, demonstrating Costa Rica’s commitment to global tax cooperation.
Social Security Contributions: A Significant Portion of Tax Load
Employers and employees in Costa Rica must make social security contributions. The total contribution rate is approximately 37% of an employee’s wages, with employers bearing the majority at 26.5%. These contributions fund the country’s healthcare and pension systems, known for their quality and accessibility.
Understanding Costa Rica’s tax system is essential for anyone living, working, or investing in the country. The next chapter will explore the specific income tax regulations in more detail, including personal income tax brackets, corporate rates, and available deductions and exemptions.
How Does Income Tax Work in Costa Rica?
Personal Income Tax Rates
Costa Rica uses a progressive tax system for individuals. As of 2024, residents pay taxes on their worldwide income, while non-residents pay taxes only on Costa Rican-sourced income. The tax rates vary depending on the type of income, with withholding tax rates of 15% for dividends and directors’ fees, 10% for salaries to non-residents, and 25% for professional fees.
Corporate Income Tax
The corporate income tax rate in Costa Rica varies depending on the company’s net taxable income. For fiscal year 2024, companies with a net taxable income higher than MAD 100 million are subject to a 33% tax rate. Credit institutions and similar organizations may have different rates.
Available Deductions and Exemptions
Costa Rica offers various deductions and exemptions to reduce tax liability. For individuals, these include mortgage interest, educational expenses, and medical costs. Businesses can deduct expenses directly related to income generation (such as salaries, rent, and utilities). It’s important to maintain proper documentation for all claimed deductions.
The country also provides tax incentives for certain industries, particularly in free trade zones. Companies operating in these zones may enjoy significant tax breaks, including exemptions from import duties and reduced income tax rates.
Filing Requirements and Key Dates
The Costa Rican tax year runs from October 1 to September 30. Individual tax returns are due by December 15 following the end of the tax year. For corporations, the deadline is December 15 or March 15, depending on the company’s fiscal year-end.
Employers must withhold income tax from employee salaries and remit it to the tax authorities monthly. Self-employed individuals and businesses must make quarterly advance tax payments based on the previous year’s income.
Professional Assistance for Tax Compliance
The Costa Rican income tax system can be complex, especially for foreign residents and investors. Professional assistance often proves valuable to ensure compliance and optimize tax positions. Local tax experts can help clients understand and meet their tax obligations efficiently.
As we move forward, let’s explore other important taxes in Costa Rica that affect both individuals and businesses operating in the country.
Beyond Income Tax: Key Levies in Costa Rica
Value Added Tax: A Broad-Based Consumption Tax
Costa Rica introduced a new value-added tax regime on July 1, 2019, replacing the previous general sales tax system. The Value Added Tax (VAT), known locally as Impuesto al Valor Agregado (IVA), stands at 13% for most goods and services. This tax expanded the tax base to include services. Essential items like basic foodstuffs, healthcare services, and educational materials are either exempt or subject to reduced rates (typically 2% or 4%).
Companies must register for VAT if their annual sales exceed ₡111 million (approximately $185,000). Smaller businesses can opt for a simplified tax regime, which may offer advantages depending on specific circumstances.
Property and Transfer Taxes: Real Estate Considerations
Property owners in Costa Rica pay an annual property tax of 0.25% on the registered value of their property. This tax rate is notably lower than many popular expat destinations, such as the United States (0.5% to 1.5%) and Canada (0.25% to 1.3%). The tax goes to the local municipality where the property is located. Property values are often underreported, which leads to lower tax bills but can cause complications when selling the property.
Real estate transactions in Costa Rica incur a transfer tax of 1.5%. Buyers and sellers typically split this tax, though the exact arrangement can be negotiated. Additional fees (such as legal and notary costs) should also factor into real estate transactions.
Social Security: A Major Payroll Expense
Costa Rica’s social security system, managed by the Caja Costarricense del Seguro Social (CCSS), requires substantial contributions from both employers and employees. The total contribution rate is approximately 37% of an employee’s wages, with employers paying 26.5% and employees 10.5%.
These contributions fund Costa Rica’s healthcare and pension systems, which are known for their quality and accessibility. Businesses operating in Costa Rica must factor these costs into labor budgets and ensure compliance with contribution requirements.
Luxury Taxes: Additional Levies on High-End Goods
Costa Rica imposes luxury taxes on certain high-end goods and services. These taxes apply to items such as luxury vehicles, boats, and private aircraft. The rates vary depending on the specific item and its value. For example, luxury vehicles face a tax rate that can reach up to 50% of the vehicle’s value.
Import Duties: Considerations for International Trade
Businesses and individuals importing goods into Costa Rica should be aware of import duties. These taxes vary depending on the type of product and its origin. Costa Rica has free trade agreements with several countries, which may reduce or eliminate certain import duties. However, products from countries without such agreements may face higher tariffs.
Final Thoughts
Costa Rica’s tax system supports the country’s development while maintaining competitiveness for investors. Understanding what taxes are in Costa Rica is essential for residents and businesses. The progressive income tax rates, VAT, and property taxes contribute to a balanced approach that distributes the tax burden fairly.
Recent reforms align Costa Rica with international standards, demonstrating commitment to global tax cooperation. These changes highlight the evolving nature of the country’s tax landscape. Individuals and businesses must stay informed about these developments to ensure compliance and optimize their tax positions.
At Osa Property Management, we recognize the challenges property owners face in managing their tax obligations. Our team can assist with various aspects of property management, including tax compliance. For more detailed information or professional assistance with Costa Rican taxes, consult local tax experts or legal professionals.