Do You Pay Taxes in Costa Rica? How the System Works

Costa Rica operates a structured tax system applicable to individuals and entities engaged in economic activities within its borders. This framework ensures that both residents and non-residents contribute to the national revenue through various levies. Understanding the fundamental principles and specific tax obligations is essential for anyone considering financial engagement or residency in the nation. The system is managed by the Ministry of Finance and the Directorate General of Taxation (Dirección General de Tributación).

Understanding Tax Residency

Tax residency in Costa Rica is foundational for understanding tax obligations. For individuals, tax residency is established by physical presence within the country. An individual is considered a tax resident if they spend more than 183 days, whether continuous or discontinuous, in Costa Rica during a given tax period. This 183-day count includes short, sporadic absences from the country, provided these do not exceed 30 continuous calendar days.

The tax period for individuals is the calendar year, running from January 1 to December 31. Tax residency is distinct from immigration status, meaning one can be a tax resident without necessarily holding formal immigration residency.

For corporations, tax residency is determined by their place of incorporation or the location of their permanent establishment within Costa Rica. While the 183-day rule primarily applies to individuals, the principle of having a substantial presence and conducting economic activity within the territory guides corporate tax residency.

Costa Rica’s Territorial Taxation Principle

Costa Rica’s tax system operates on a territorial principle, meaning only income sourced within its national borders is subject to taxation. This includes income from services rendered, capital used, or assets located within Costa Rican territory.

For individuals, examples of Costa Rican-sourced income include wages earned from work performed in the country, rental income from properties situated in Costa Rica, and profits from businesses operating locally. Conversely, income earned from foreign sources is not subject to Costa Rican income tax. This includes, for instance, a salary earned while working abroad, interest from bank accounts held outside Costa Rica, or income from foreign rental properties.

In 2023, Costa Rica enacted reforms to address international standards, incorporating taxation of foreign-source passive income under specific conditions. This applies to foreign-source passive income, such as dividends, interest, royalties, capital gains, and real estate income, for entities that do not meet substance requirements in Costa Rica. This adjustment aims to align the country with international transparency and anti-avoidance measures.

Common Tax Types

Beyond the general income tax, Costa Rica levies several other significant taxes. These include the Value Added Tax, property taxes, capital gains tax, and corporate income tax, each with specific applications and responsibilities.

The Value Added Tax (VAT), known as Impuesto al Valor Agregado (IVA), is a consumption tax applied to the sale of goods and services within Costa Rica. The standard VAT rate is 13%, but reduced rates exist for specific items and services. Businesses are responsible for collecting and remitting VAT to the tax authorities.

Property tax, or Impuesto sobre Bienes Inmuebles (IBI), is levied annually on real estate. The standard rate is 0.25% of the registered property value. Property owners are responsible for this tax, which is collected by local municipalities.

Capital gains tax applies to profits realized from the sale of certain assets. A rate of 15% is applied to capital gains. When real estate is sold, the capital gains tax is the responsibility of the seller.

Corporate income tax is imposed on the profits of companies and other legal entities operating in Costa Rica. The standard corporate income tax rate is 30% for companies with gross annual income exceeding certain thresholds. Smaller companies may benefit from lower progressive rates, ranging from 5% to 20%, depending on their gross income.

Tax Compliance and Administration

Fulfilling tax obligations in Costa Rica involves specific procedural steps, beginning with proper registration. Individuals and companies required to pay taxes must register with the “Registro Único Tributario” (RUT). While there isn’t a single universal tax identification number, taxpayers are identified according to their status within this system.

Tax returns are filed electronically through the digital platform provided by the Costa Rican tax administration. The standard tax year aligns with the calendar year, from January 1 to December 31. For most income tax purposes, annual tax returns are due by March 15 of the following year for both individuals and corporations. However, some specific taxes have different deadlines; for instance, the corporate tax is due by January 31 annually. VAT returns are submitted monthly by the 15th day of the month following the period being reported.

Tax payments can be made through various channels, including online banking services offered by local institutions like Banco de Costa Rica, or in person at municipal offices and bank branches. Common payment methods include credit cards, debit cards, and bank transfers. Property taxes, for example, are paid in quarterly installments, with due dates on March 31, June 30, September 30, and December 31.

Maintaining accurate records is an important compliance requirement. For instance, VAT-related documents should be retained for at least five years. Property owners are also expected to update their property valuations with the municipality every three to five years. Additionally, legal entities domiciled in Costa Rica are required to submit an annual declaration of their ultimate beneficial owners through the Registry of Transparency.