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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. |
