Taxes in Costa Rica

You will have many tax advantages in Costa Rica. Investors pay no capital gains taxes on real estate investments. High 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 taxes. There are also many write offs to lessen taxes. 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 some 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, existing 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 2576646 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 in such matters, which is difficult.

If you desire better protection for your assets or business, we suggest you 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 we do not know all of the nuances of setting up one of these corporations, we 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 taxsheltered 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 a couple of property taxes to be paid. Corporations that are inactive pay a small tax.

You must report all income made 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 go 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 in 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. Don't forget to save the receipt if the municipality has a dispute.

U.S. citizens are subject to income tax wherever they are living. You must file your U.S. income tax returns yearly through the U.S. Embassy. You have to declare all income earned abroad but you may claim a tax exemption up to $ 80,000 on overseas-earned gross income. The $80,000 applies to individual, unmarried taxpayers. If you are married, you and your spouse may exclude up to $144,000 of foreign income, but you cannot combine the two exemptions. 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 IRS. Call either the Consular Section of the U.S. Embassy (220-3939) or the nearest IRS office in Mexico City at (525) 211-0042, ext. 3557. You may consult the IRS Web sites at http://www.irs.gov or http://www.irs.gov/ faqs/faq13.html.

There is also book titled The Expats Guide to U.S. Taxes. It may be purchased through http://www.amazon.com. Another good resource is found at http://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 383-7043, E-mail: ustax@lawyer.com and David Houseman at 257-1655 or 239-2005, fax: 223-7997 or 293- 2437, 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 http://www.taxmelesss. 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 un-leased house, Canadian health coverage, automobile registration, spouse or child support in Canada, banking or investment ties.

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: http://www.ccraedrc.gc.ca. Canadian tax returns should be in by April 30. Self-employed people have until June 15.

Canadians will have to contact Revenue Canada concerning their tax obligations while living abroad.