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Expat Briefing Editorial Team, 03 October, 2014
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 4.8 million (July 2014 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 2014 resulted in a landslide victory for Luis Guillermo Solis Rivera, who won almost 78% of the vote. Solis vowed to tackle corruption and inequality, including through an overhaul of the tax system.
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.
While the traditional agricultural exports of bananas, coffee, sugar, and beef are still the backbone of commodity export trade, a variety of industrial and specialized agricultural products have broadened export trade in recent years. High value-added goods and services, including microchips, have further bolstered exports.
Tourism is a significant foreign exchange earner, and 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.
Foreign investors remain attracted by the Costa Rica’s political stability and relatively high education levels, as well as the incentives offered in the free-trade zones; Costa Rica has attracted one of the highest levels of foreign direct investment per capita in Latin America.
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. In October 2013, USD1 was worth just under CRC530.
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 May 2014, Costa Rica was among several non-OECD members to endorse the Organisation’s Declaration on Automatic Exchange of Information in Tax Matters, a commitment to implement a new single global standard on automatic exchange of information.
Traditionally, 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. Under the existing system, only that proportion of revenue earned by an individual within Costa Rica is subject to an assessment by the tax authorities. This may soon change under plans outlined by President Solis in 2014, however (see below).
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.
Capital gains are exempt from tax in Costa Rica unless derived from the sale of a tangible, depreciable asset, or from the habitual trade of a seller. Where capital gains tax is charged, the rate is generally the same as the corporate tax rate (30% in 2014).
No credits are granted in Costa Rica for taxes paid in a foreign country.
There are three 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 with a top rate of 15%.
A progressive tax of up to 25% is applied to annual taxable profits.
The standard rate of corporate income tax in Costa Rica is 30%, although there are lower rates of 10% and 20% on income under certain thresholds. Tax exemptions apply to businesses under various foreign investment incentive schemes, principally the free zones.
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 at a rate of 9.5%. 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 1.5% is payable by the purchaser on the value of real estate purchased. There is also a 0.25% municipal tax on the value of real property, and a luxury property tax applies to properties exceeding certain values.
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 of 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.
Tax Changes Ahead?
There is a potential spanner in the works for Costa Rica’s favourable tax system, however.
While Costa Rican Vice President and Finance Minister Helio Fallas presented a budget free of new taxes to the Legislative Assembly on September 1, 2014, the Government says that the tax gap – the amount lost through tax avoidance, evasion, and exemptions – amounted to 13.37 percent of gross domestic product in 2012, and must be reduced.
President Solis, who represents the left-leaning Citizens' Action Party, said during his campaign that he would not raise taxes for two years, despite promising to increase spending on social projects.
Solis aims to reduce Costa Rica's budget deficit, which reached around 5.4 percent of GDP in 2013, by cutting government spending and cracking down on tax evasion. These measures would pave the way for eventual tax hikes.
In June, Minister of Finance Helio Fallas announced a number of new tax measures to be implemented this year and in 2015 to tackle the country's deficit, including a draft law on combatting tax evasion which will mean that all expenditures for professional services will only be tax deductible if the service provider is registered with the Directorate General of Taxation. The finance minister also said that the government will review tax exemptions and eliminate those it deems are unjustified.
On September 21, 2014, Solis announced that by the end of the year his Government will present a bill to introduce a value-added tax (VAT). The VAT will replace the 13 percent sales tax.
Crucially however, the President also revealed plans to introduce a global income tax, which would require Costa Rican tax resident persons to pay tax on their worldwide income. The proposal will be submitted to the Legislative Assembly in 2015.
The proposed tax changes are intended to generate USD555m a year in additional revenue.
Not that any such changes are expected to be implemented swiftly. We have seen in the past how a fiscal reform plan first proposed in 2002 got bogged down in the Legislative Assembly, and the newly proposed reforms are unlikely to get an easy ride in the legislature. Nevertheless, residents of Costa Rica and those considering expatriating to the country will want to keep a close eye on this situation.
Quality Of Life
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 calm 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.
Entry And Residence
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 Migracion y Extranjeria), 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 Jose.
There is a USD250 tax upon approval of a residency application.