Individual Taxation in Costa Rica
In Costa Rica, the taxation system for individuals is based on the concept of territoriality, which means that personal income from foreign sources is exempt from taxation. Only income earned within Costa Rica is subject to assessment by the local tax authorities. This is especially important for those looking at places to retire in Costa Rica because it means that when retiring in Costa Rica, Social Security income, pension, investment income, and other similar earnings are not subject to income tax in Costa Rica. Additionally, if you work remotely for a job outside Costa Rica, have a business or rental property outside Costa Rica, run an online business, or work as a freelancer, you do not need to pay income tax in Costa Rica. However, it's important to note that you may still be liable for taxes to the IRS or your home country's tax authority. For U.S. citizens, it's advisable to consult with a tax professional to determine if you qualify for the Foreign Earned Income Exclusion, which could exempt you from paying taxes on an overseas job or business income.
Although you may not be required to participate in the individual taxation system, there are still other taxes you will need to be mindful of. These include:
- Income Tax
- Property Transfer Tax
- Property Taxes
- Sales Tax
Income Tax
If you are employed or have a business in Costa Rica, you may be liable for Income Tax (Impuesto de Renta), you may be subject to Income Tax (Impuesto de Renta). This includes vacation rentals. This tax applies to both employment source income and non-employment source income. If employed in Costa Rica, you must pay a monthly withholding tax based on your salary, with rates that can go up to 15% for employment income every month.
For self-employed individuals, the tax rates range from 10% to 25%.
Property Transfer Tax
When looking for places to live in Costa Rica, note that there is a Property Transfer Tax. Those purchasing real estate in Costa Rica are required to pay a property transfer tax of 1.5% based on the value of the property. This tax is levied upon the transfer of the property and must be paid by the purchaser.
Property Taxes
In Costa Rica, real estate taxes are charged at closing and then annually as a Property Tax based on the value of the property recorded in Costa Rica's National Registry of Real Estate. These taxes are charged to any person or entity purchasing and owning real estate in Costa Rica, regardless of nationality.
- Annual Property Tax: 0.25% of Registered Value
- Paid in 4 installments due March, June, September, & December
- The property Owner is responsible for reporting & updating the value and changes in the property to the local municipality.
- The local municipality reserves the right to send an appraiser to assess the value
- Luxury Tax: Up to 0.55% of Registered Value
- Homes valued over $225,000 (USD) are assessed an additional annual property tax allocated to subsidize government programs for low-income housing. The tax is commonly referred to as the "Luxury Tax". The tax is scaled with seven rates ranging from 0.25% to 0.55%, depending on the valuation.
- The tax ranges from 0.25% for the portion of the home value between US$225,000 and US$567,000, increasing to 0.55% for the amount above $3.4 million.
Sales Tax
The sales tax in Costa Rica, equivalent to VAT, is set at 13% and is applied both at the point of importation and at the point of sale unless the sale is considered an export. This tax applies to all goods, with some exceptions, such as foodstuffs, medicinal products, and certain other items. It is important to consider this tax when looking into the Costa Rica travel cost, even if you are not planning on residing in Costa Rica. If you are a business owner in Costa Rica, you are responsible for collecting and submitting to the government the sales tax from your customers.
Conclusion
In conclusion, Costa Rica's territorial-based taxation system exempts personal income from foreign sources. It is an attractive destination for remote workers considering international living in Costa Rica and those reviewing the cost to retire in Costa Rica. It's crucial to be aware of local tax laws and consult with a tax professional, especially for U.S. citizens, to ensure compliance and potential eligibility for exemptions. If you have questions about how to pay taxes in Costa Rica or are ready to make your move to Costa Rica, contact us or visit our website at coldwellbankercostarica.com.