Costa Rican Taxes

Taxes in Costa Rica for Residents and Foreigners

You will have many tax advantages in Costa Rica.
Investors pay no capital gains tax on real estate investments.
Interest-bearing bank accounts are also tax -free.

The maximum Costa Rican tax rate is around 30 percent with no city or state
taxes and low property taxes. There is no personal income tax on a salary of less
than $750 monthly. Self-employed people can earn up to $3000 a year without
paying taxes. The most a corporation has to pay in taxes is 30 percent on an
income of more than $100,000 (tax percentage is applied to net income after all
expenses). However, it is easy to form a Costa Rican “offshore” corporation, or
Sociedad Anónima, to shelter earnings and pay significantly fewer tax. There
are also many write offs to lessen the tax burden. Tax information is available
in Spanish from a government website: www.hacienda.go.cr.

Briefly, a Sociedad Anónima is an anonymous corporation anyone, even
tourists, can set up without their names appearing on any records. The
initials S.A. will appear after a corporation’s name instead of Inc.. A Costa
Rican corporation is similar to its U.S. counterpart in having a board of
directors, shareholders and shares that can be bought and sold freely. You
control all the stock in the corporation but your identity remains unknown.
This practice is illegal in the United States but not in Costa Rica. Thus you
are able to maintain some degree of secrecy in financial matters and protect
yourself from minor tax problems.

Each corporation has a set of six legal books in which changes may be
made. Many corporations never even use their books because they never
engage in any commercial activity, they exist only to hold vehicles or real
estate and other investments.

These offshore corporations are used in most business transactions
in Costa Rica and abroad. Because they are foreign corporations they are
not subject to U.S. taxes. Furthermore, Costa Rican corporations pay only
minimal taxes in Costa Rica, or none at all.

There are additional benefits to establishing an “offshore” corporation.
If you put your property in your corporation’s name, it is easier to transfer
title. All one has to do is exchange the company’s stocks. This way your
assets can be transferred or sold by simply giving your shares to the new
owner or vice versa. Owning one of these corporations entitles you to start a
business and open a checking account in the company’s name, even though
you are not a legal resident or citizen. If you have relatives on the board
of directors of your company, there will be no probate taxes in the event
of your death. It is almost impossible to find out whose name appears in
the public records since ownership is confidential. Furthermore, if you get
involved in any serious litigation, it will be difficult to sue you directly. You
will be protected against most judgments and liens. This affords your assets
greater protection. If you are a non-resident foreigner, you must have one
of these corporations to own a business.

Contact your attorney if you are seriously thinking about forming one of
these anonymous corporations. Your lawyer can explain how they work and their
advantages and disadvantages. The fee for starting one of these corporations is
usually between $300 and $1,000. It will usually take a few months to finish
all of the paperwork, depending on how fast your lawyer works.

In order to form a corporation, your attorney will have to make sure there
are no other corporations with the same name as your company. The name
of your company will have to be in Spanish, not English. Your corporation
must have a minimum number of shareholders. It also must have a board
of directors, consisting of a president, secretary and treasurer—all of whom
have the option of being shareholders. The final steps are preparing a set of
books, registering your company, establishing a charter and advertising the
charter in the local newspaper.

Be forewarned: Many individuals have lost large amounts of money
and property by not understanding fully how the corporate structure
works, and therefore have been defrauded by their lawyer or other persons
(often foreigners). Please contact Ryan Piercy at 2221-2053 to obtain an
appointment if you wish to better understand this structure.
Costa Rica’s bank secrecy is not “foolproof.” This is especially true
since the September 11, 2001 terrorist incident in the United States. If you
attempt to use your corporation for fraudulent purposes, you are asking for
big trouble. Fortunately the IRS usually will not go after you unless you
are a “big fish” who has done something obvious to attract their attention.
This rarely happens, since the country’s banks are not very cooperative with
U.S. authorities in such matters. Furthermore, the U.S. also has to obtain
the authorization of a Costa Rican judge, which is difficult.

If you desire better protection for your assets or business, form a
Panamanian corporation. Many savvy investors put their Costa Rica corporation
in a Panamanian corporation. This way they are guaranteed maximum
protection of their assets. Since I do not know all of the nuances of setting
up one of these corporations, I suggest you contact one of the companies
listed at the end of the next section.

Foreign income is exempt from taxation in Costa Rica. You will have to
pay taxes on income earned in Costa Rica. La Tributación Directa, the local
equivalent of the IRS, is in charge of collecting taxes, but is far less efficient.
However, if you go into business in Costa Rica and form a tax-sheltered
corporation, many of your expenses can be written off. You will pay an income
tax on your company’s earnings during the prior fiscal year, or año económico
which runs from October through September 30. Corporations are taxed
only on the income earned within Costa Rica. Every company needs to file
form D110 in March. If your corporation owns property, there are property
taxes to be paid. Corporations that are inactive pay a small tax.
You must report all income earned in Costa Rica. All net income is
subject to taxation. Current taxes for salaried employees run from about
zero to 15 percent on a monthly income above $900. Taxes for the self employed
range from zero to $3,000 annually to 25 percent above $15,000
annually. Small companies pay from 10 percent to 30 percent depending
on their profits. Though it must be declared, bank interest is tax free to the
depositor (therefore deducted as non-taxable income), as the rate offered
at the bank is net interest.

Due to the need for more revenue, the government has cracked down on
individuals and businesses that attempt to evade their fiscal responsibilities.
With the help of the U.S. Internal Revenue Service, Costa Rica is getting
better at collecting taxes. Under the new tax law, evaders are now subject
to big fines, interest, penalties and possible prison terms. Don’t panic! A
good accountant or tax lawyer can help you minimize your taxes and avoid
problems later on.

Also, unlike some other places, a foreign retiree is not required to pay
Costa Rican taxes on his external income (income generated abroad), so you
can see why Costa Rica is considered a tax-haven by many people.
There is a yearly municipal property tax of 0.25% on your land or
home and a sales tax of 13 percent paid for goods and service. In addition
to paying your property taxes at the municipality, you may also pay them
at the Banco Nacional. If you have an account at the Banco Nacional
and use Internet banking, you can see what you owe in property taxes by
typing in the cédula number of the owner of the property or corporation.
Then go pay in person and be sure to get a receipt and save it, in case the
municipality has a dispute.

U.S. Citizen’s Tax Responsibility
U.S. citizens are subject to income tax wherever they live. You must file
your U.S. income tax return yearly through the U.S. Embassy. If you have
your full time residence abroad for a full calendar year, or live abroad for
330 days out of any consecutive 12 month period, you can exclude up to
$91,500 of earned income from U.S. Income Taxation for 2009 and lesser
amounts in earlier years. If you are married, and both of you earn income
and reside and work abroad, you can also exclude up to another $91,500
of your spouses income from taxation.

This exclusion does not apply to passive income such as interest, dividends,
capital gains or overseas pensions. It only applies to a foreign earned income.
You must reside outside of the United States for at least 330 days a year or
be a legal resident of a foreign country to qualify for this exemption. Your
primary business must also be located abroad to qualify for the foreign earned
income exemption.

Fortunately, if you live outside the United States you qualify for a two month
extension and may wait to file your taxes until June 15. However, if
you mail your return from outside the United States, it is best to mail your
return at least two weeks before the due date. You can speed this up by using
DHL, FedEx or UPS. You need to use a U.S. tax form 2555 to apply for
this extension. Even if you earn no income in Costa Rica, it is imperative to
file a standard 1040 tax form to avoid problems. The biggest mistake made
by individuals is assuming that since their income is under the exclusionary
amount, they do not have to file a return. Payment of taxes, interest and
penalties can now be done by credit card by dialing 1-888-2PAY-TAX.

If you have any tax questions, contact the U.S. Embassy or the IRS.
Call either the Consular Section of the U.S. Embassy (2220-3939) or the
nearest IRS office in Mexico City at (525) 211-0042, ext. 3557. You may
consult the IRS Web sites at www.irs.gov or www.irs.gov/faqs/faq13.html.
There is also a book titled The Expats Guide to U.S. Taxes. It may be
purchased through www.amazon.com. Another good resource is found at
www.filetax.com/expat.html.

If you need help with your tax forms and returns while living in Costa
Rica, contact U.S. Tax and Accounting, 288-2201, E-mail: ustax@lawyer.com
for income tax assistance or for help with IRS problems.
Don D. Nelson, Attorney at Law and CPA, specializes in expatriate tax
services. You may call him toll-free (866) 712-0320 or E-mail him at: don@
taxmeless.com. You may view his website at www.taxmeless.com.

If Canadians want to be exempt from income taxes in Canada they need
to have severed major residency ties for at least two years. These “residency
ties” can include an unleased house, Canadian health coverage, automobile
registration, spouse or child support in Canada, banking or investment
ties. Canadians will have to contact Revenue Canada concerning their tax
obligations while living abroad.

A foreign tax credit is often available for taxpayers who pay tax in another
country, i.e. Costa Rica. To find out your tax status, consult form IT221R3
on the Canadian Customs and Revenue Agency Web site: www.ccraedrc.
gc.ca. Canadian tax returns should be in by April 30. Self-employed people
have until June 15.

A word of caution
Proposed U.S. legislation to restrict the use of so-called tax shelters
would invoke the Patriot Act to punish firms that are deemed to be impeding
U.S. tax enforcement.

The legislation would also would uncooperative foreign banks the authority
to issue credit cards that would be valid in the United States. The use of the
Patriot Act now is reserved for institutions that are active money launderers.
In addition, U.S. citizens who deposit money or receive a benefit from a
private foreign corporation would be considered to have control of that firm
for U.S. tax purposes. Under current law U.S. citizens who hold a foreign
bank account that accumulates more than $10,000 at any time in the year
have to file paperwork with the U.S. Internal Revenue Service. The legislation
would expand that requirement to all foreign bank accounts located in one
of 34 countries identified as a tax haven.

The legislation would have wide impact in Costa Rica because many expats
here own corporations. Some are involved in businesses but others are used
to hold the ownership of real estate or automobiles. Even a U.S. citizen with
a minor interest in a corporation could become involved in reporting and tax
requirements under the proposal because the bill presumes that the person
owned and exercised control over such entity, regardless of the paper ownership.
In other words, the U.S. citizen would have to provide clear and convincing
evidence to the contrary if he or she really did not operate the corporation.
Costa Rica is one of those countries.

Living in Costa Rica and U.S. Taxation
By Randall J. Linder E.A.

For U.S. citizens living in a foreign country, there is little or no relief in
income tax filing requirements. Often we are faced with new requirements,
new situations, and given wrong advice from fellow citizens.
As a professional U.S. Income Tax preparer specializing in U.S.
citizens living in a foreign country, I have personally provided answers
to some of the most frequently asked questions.

Now that I am living in Costa Rica, do I need to file a U.S.income tax?
Most U.S. citizens must file an annual income tax return
on their worldwide income. As a general rule, if you were living in the
U.S., and thought you needed to file a return there, you should probably
file one here. It is better to file than not.

My only income is from a Costa Rica company and I pay taxes in
Costa Rica. Do I have to include this income on my U.S. tax return?

U.S. citizens must include worldwide income on their tax returns. This
income could qualify for the foreign earned income exclusion, but the
exclusion in not automatic. You must include the income on your tax
return and then exclude it by using the IRS form 2555. If you do not
meet the requirements for the exclusion, then the tax you paid in Costa
Rica could be taken as foreign tax credit.

I live in Costa Rica and work for a U.S. Company Does this
income qualify for the foreign earned income tax exclusion?
If you
meet the other requirements for the foreign earned income exclusion,
the wages you receive from your U.S. employer can also be excluded.
Your employer is still required to withhold Social Security and Medicare
from your wages.

I have my own business in Costa Rica and work as a self employed
person. My business is not incorporated. Does this
income qualify for the foreign earned income exclusion?
Yes. This
income can qualify for the exclusion just as if you were working for a
U.S. employer. Caution: The exclusion is for federal income tax only.
You will still be required to pay self-employment tax (Social Security and
Medicare taxes) on your profits.

I have dividends from a Costa Rican company. Are the dividends
“foreign earned income” and do they qualify for exclusion?
No
The foreign earned income exclusion does not apply to income such as
interest, dividends, capital gains, pensions, annuities or gambling.
The exclusion applies strictly to earned income. Note: If you own
10% or more of a foreign corporation, you are required to file with your
individual income tax return IRS form 5471.

I receive interest from my Costa Rican bank account, Do I have
to report this interest on my U.S. income tax return?
Yes, U.S.
citizens must include in their income monies received worldwide. This
includes interest and dividend income. In addition, if the aggregate value
of your foreign accounts is greater than $10,000 at any time during the
year, A Report of Foreign Bank and Financial Accounts must be reported
to the U.S. Treasury Department.

I transferred money from the U.S. to Costa Rica, Is there
anything special that I need to do?
If a U.S. citizen has a financial
interest in, or signature authority over any financial accounts, including
bank, securities or other types of financial accounts in a foreign country,
and if the aggregate value of these accounts exceeds $10,000 at ant time
during the year, the accounts must be reported the the U.S. Department
of the Treasury.

Last year I got married to a Costa Rican citizen. Can I file a
joint return with my spouse who is not a U.S. citizen?
Yes, but
in doing so, you make the choice of reporting your income and your
spouse’s income worldwide.

My Costa Rican wife has a child from a previous marriage.
The child is living with us. Can I claim the child as a dependent
on my tax return?
To be claimed as a dependent, the dependent must
be a U.S. citizen or a resident of the U.S., or in certain cases a legally
adopted child of a U.S. citizen.

I have been living in Costa Rica for years and have not filed a tax
return. What Should I do?
It is to your advantage to seek professional
help to determine whether or not you need to file.

My business is incorporated as a Costa Rican S.A. (sociedad
anónima). Currently it is not making a profit, and I am not receiving
a paycheck. Does this have to be included in my tax return?
Yes.
if you own 10% or more of a foreign corporation, you are required to
file with your individual income tax return IRS form 5471 (Information
Return of U.S. Persons With Respect to Certain Foreign Corporations).
This includes inactive S.A.’s and corporations not making a profit.

* Courtesy of Randall Linder, U.S. Tax & Accounting Service,
Tel: 011-506-2288-2201, Cell: 011-506-8839-9970, Fax:
011-506-2288-0120, e-mail: ustax@lawyer.com. http://www.
ustaxinternational.com

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