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Expat Briefing Editorial Team
23 September, 2013
With its pleasant sub-tropical climate, relatively low taxation and an array of residency programmes designed to attract expat retirees and investors from all over the world, the Central American republic of Costa Rica is well worth investigating if you are planning to make a new life for yourself in the sun.
Costa Rica is located in Central America between Nicaragua and Panama and is bordered by the Pacific Ocean and the Caribbean Sea. The country measures just over 51,000 square kilometers. The time zone is GMT minus 6 hours (US Central Time).
The climate is sub-tropical; average temperature in the Central Valley is 22 degrees C, and on the coast it varies between 20 and 30 degrees. December to April is the dry season; May to November is rainy.
Costa Rica became independent from Spain in 1821 and has been relatively stable. Following a short civil war in 1948 the country abolished its army and passed a new, quite liberal constitution, which remains in force.
The population stands at just under 4.7 million (July 2013 est.) and is overwhelmingly white or mestizo. As in all former Spanish colonies the official language is Spanish, the population is largely Roman Catholic and the culture is Hispanic. However, English is widely spoken within the business community.
Costa Rica has a democratic government and is both politically and economically stable. Elections in February 2010 resulted in a landslide victory for Laura Chinchilla, the country's first female president. Chinchilla vowed to continue her predecessor's pro-business policies.
The economy has traditionally been based on tourism and the export of agricultural products such as bananas and coffee, although low prices for these two commodities have caused problems for the country in the past. The country's Pacific and Caribbean coastlands are lined with luxury hotel resorts. National parkland which covers 10.3% of the country includes coral reefs, virgin rainforests and volcanic craters.
The introduction of a free trade zone fiscal regime resulted in a major national economic transformation, with non-traditional goods now accounting for 68% of exports and agriculture representing only 17% of GDP.
The currency is the colon (CRC), divided into 100 cents. Costa Rica is not a member of any monetary union, and in recent times the colon has tended to depreciate against the dollar by about 10% annually. At the time of writing, USD1 was worth just under CRC490.
In 2004 Costa Rica concluded negotiations to participate in the US-Central American Free Trade Agreement (CAFTA), although final implementation was delayed by legal problems until 2008. Nonetheless, since the implementation of CAFTA, foreign direct investment in key sectors such as insurance and telecommunications, recently opened to private investors, has increased.
Although Costa Rica's favorable taxation regime meant that it has for decades had all the characteristics of an offshore tax haven it was not until relatively recently that the Government became aware of the financial services potential and began to actively legislate and promote this sector of the economy.
However, in response to greater demands internationally for tax transparency, Costa Rica is strengthening its engagement with the Organisation for Economic Cooperation and Development (OECD) including in the area of taxation. For instance, in April 2013, Costa Rica notified the OECD that it had ratified the Convention on Mutual Administrative Assistance in Tax Matters, the most comprehensive multilateral agreement available for tax-cooperation and exchange of information.
Costa Rica's Minister of Finance, Edgar Ayales, meeting with OECD Secretary-General Angel Gurria, noted that: "The ratification of this Convention is another milestone in Costa Rica's longstanding commitment towards tax transparency. Through the application of this Convention and recent amendments to our domestic legislation, we look forward to contributing in the cross-border fight against tax evasion."
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.
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. The Government plans to reintroduce the tax reform bill in early 2014.
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.
There are 3 distinct manners of assessing income tax payable by residents and non-residents namely:
Personal Income Taxes:
This group includes two categories:
Any individual employed in Costa Rica pays a monthly withholding tax rate based on salary. From October 1, 2012, employment income (on a monthly basis) of individuals is subject to a progressive tax of 15% as follows:
The following rates are applied to taxable annual profits for the 2012/2013 tax year:
Employers pay a social security contribution of up to 26.17% of gross salary, whereas employees pay a contribution of up to 9.17% of 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 various other contingencies. Depending on the monthly salary and the nature of the risk, premiums can vary from 0.5% to 22% of the employee's salary. Total employer contributions can therefore reach a scary 48% of gross salary.
A capital transfer tax of between 1% and 2% (dependent on value) is payable by the purchaser on the value of real estate purchased, plus about 1% stamp duty.
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.
There is also a "selective consumption tax" which varies from 0% to 60% and is levied either at the point of importation or for domestic production at the point of sale.
The Government raises about half of its revenue from sales tax and selective consumption tax.
Houses with a value greater than USD18,600 are charged a levy of 0.25% annually. From January, 2009, a scale of increased rates between 0.25% and 0.55% applies to houses with a value of USD200,000 or more.
The main taxes affecting a business are business income tax (progressive to a maximum of 30%), employers social insurance, withholding tax, import duty and sales tax. Tax exemptions apply to businesses under various foreign investment incentive schemes. For more information on business taxation in Costa Rica, please visit the Costa Rica Domestic Corporate Taxation page of www.lowtax.net.
Unfortunately, Latin American countries have gained a reputation for not being the safest places on earth, particularly those affected most by the narcotics trade. However, Costa Rica is considered an oasis of clam compared with some of its near neighbours. The country has not seen the internal civil strife and wars that have afflicted other nations in Central America for a number of decades, and it is rated as the safest place to live in Latin America. The capital, San Jose, was ranked 4th in Latin America by the Economist Intelligence Unit for its quality of life.
There are over 10,000 educational institutions in Costa Rica and the country has the best education system in Latin America according to the World Economic Report Global Competitiveness Report. Almost 900 private schools and high schools are registered with the Ministry of Education, most of which offer worldwide recognized programs such as the Advanced Placement and the International Baccalaureate.
While transport and telecommunications infrastructure might not come up to the standard that some are used to in the advanced nations, it is nevertheless among the best in the region.
Furthermore, there are no real estate restrictions for foreigners, and Costa Rican law ensures the same rights for foreigners and citizens.
All travellers must have a valid passport (with at least six months left to expiry) to enter the country for either business or tourism. 90 day entry visas are granted at the airport. To stay beyond the 90-day period, travellers must submit an application for an extension to the Office of Temporary Permits in the Costa Rican Department of Immigration. Tourist visas are usually not extended except under special circumstances, and extension requests are evaluated on a case-by-case basis.
There have been many changes to Costa Rica's immigration law over the past few years as the Government simultaneously sought to crack down on illegal immigration from neighbouring countries in Central American while encouraging wealthy expats, retirees and investors to settle in the country.
A new law, known as the Costa Rica Immigration Law (Ley General de MigraciÃ³n y ExtranjerÃa), was published in the official Costa Rica government newspaper La Gaceta on September 1, 2009 and became effective on March 1, 2010.
The new law creates 5 residency types as follows:
It is important to note that under the new residency law, all residency types must participate in Costa Rica's national social security and healthcare insurance system, known as "Caja". Proof of participation and payments for the entire term of residency are required for renewals.
Any request for residency in Costa Rica should be submitted to the Costa Rican Consulate in the country of origin or residency or directly to the offices of immigration in San JosÃ©.
There is a USD250 tax upon approval of a residency application.
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