Costa Rica Focus

Expat Briefing Editorial Team, 14 December, 2017

With its pleasant sub-tropical climate, relatively low taxation and an array of residency programs 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.

Introduction to Costa Rica

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 six hours (US Central Time).

The climate is sub-tropical; the average temperature in the Central Valley is 22 degrees C (72 degrees F), 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.

In July 2017, the population was an estimated 4.9m and is overwhelmingly white or mestizo (people of combined European and Amerindian descent). 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 percent of the vote. Solis vowed to tackle corruption and inequality, including through an overhaul of the tax system.

Economy

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, as have high value-added goods and services.

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 roughly 10 percent 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, reducing the country's dependence in agricultural goods.

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 United States-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) has encouraged higher flows of foreign direct investment into Costa Rica, especially in the insurance and telecommunications sectors. Besides Costa Rica and the US, the other members of CAFTA-DR are El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic.

Although the economy faces a number of challenges, in the form of a rising budget deficit, growing public debt, and pressure on public spending, economic growth averaged a creditable 4.2 percent in the three years to the end of 2016.

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. At the time of writing, USD1 was worth just CRC559.

Tax

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 long-delayed fiscal reforms.

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 percent in 2017).

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 percent.

A progressive tax of up to 25 percent is applied to annual taxable profits.

The standard rate of corporate income tax in Costa Rica is 30 percent, although there are lower rates of 10 percent and 20 percent 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 26.33 percent of gross salary, whereas employees pay a contribution of up to 9.34 percent of gross salary. Self-employed persons are also required to contribute to this fund at varying rates. 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.

Sales Tax stands at 13 percent 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.

There is also a "selective consumption tax" which varies from 0 percent to 60 percent 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. However, in September, 2015, legislation was published which would replace the sales tax with a value-added tax (VAT). The tax would be 14 percent in the first year, rising to 15 percent in the second year. There would be reduced rates for tourism services in the first three years. At the time of writing, the legislation remains pending, and the date of its introduction is subject to some uncertainty.

Quality Of Life

In a region so often afflicted by political instability and crime, Costa Rica has gained a reputation as one of the safest countries in Latin America for foreigners. The country has not seen the internal civil strife and wars that have beset neighboring countries for a number of decades. Indeed, that the country no longer has a standing army, and hasn't had one since the end of the Second World War, is a testament to its peaceful intentions.

In fact, Costa Rica was rated as one of the most favorable places for expats to settle according to a survey carried out by expat network InterNations, beaten by only Taiwan, Austria, Japan, and Spain.

Education

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.

Infrastructure

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.

There are some 10,000km of paved roads, and the Government is also attempting to bring the country's railways back to life, after the 278km network fell into disuse and disrepair in at the end of the 20th century.

There is a good domestic telephone service in terms of breadth of coverage, and Costa Rica is well-connected to regional telecommunications infrastructure; there are landing points for the Americas Region Caribbean Ring System (ARCOS-1), MAYA-1, and the Pan American Crossing submarine cables that provide links to South and Central America, parts of the Caribbean, and the US.

It is also possible to access the internet in most parts of the country.

Property

There are no real estate restrictions for foreigners, and Costa Rican law ensures the same rights for foreigners and citizens.

An immovable property tax of 1.5 percent is payable by the purchaser on the value of real estate purchased. There is also a 0.25 percent municipal tax on the value of real property, and a luxury property tax applies to properties exceeding certain values.

Entry And Residence

All travelers must have a valid passport to enter the country for either business or tourism. Generally, citizens of the United States, Canada and the European Union do not require a visa to enter Costa Rica and can remain in the country for up to a maximum of 90 days.

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 neighboring 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:

Pensionado

Rentista

Inversionista

Representante

Permanent

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.

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