Is Costa Rica a Tax Haven? A Factual Review of Its Laws

A “tax haven” is a jurisdiction offering minimal or no tax liability for foreign individuals and businesses. They are often characterized by financial secrecy, a reluctance to share information, and simplified corporate formation processes.

While there’s no universally agreed-upon definition, a tax haven broadly encompasses places where tax burdens are notably low for non-domiciled entities or individuals. This review examines Costa Rica’s tax system, laws, and international engagements in relation to these characteristics.

Understanding the Characteristics of a Tax Haven

Jurisdictions identified as tax havens share several characteristics. They feature low or zero tax rates on income, corporate profits, or capital gains for non-residents. This allows individuals and corporations to reduce their tax obligations compared to their home countries.

Tax havens also lack financial transparency. This manifests as strict bank secrecy laws or opaque corporate registration, making it difficult to ascertain true owners of assets or businesses. They may also be reluctant to exchange taxpayer information with foreign tax authorities.

Ease of corporate formation is another characteristic. Tax havens feature minimal disclosure requirements for rapid establishment of legal entities with limited public scrutiny. These attributes create an environment favorable for tax minimization and wealth concealment.

Costa Rica’s Territorial Tax Framework

Costa Rica operates under a territorial tax system. Only income generated from economic activities within its borders is subject to taxation. Foreign-sourced income is generally not taxed for residents.

Individuals considered tax residents have tax obligations primarily for Costa Rican-sourced income. This includes wages, business profits, or rental income from local properties. Tax residency is based on physical presence, irrespective of immigration status.

Historically, foreign-sourced income was largely exempt from Costa Rican taxation. However, recent legislative reforms, including Law No. 10.381, have introduced changes. While active foreign-sourced income may still remain outside local taxation, a new framework for foreign-sourced passive income has been established to align with international standards.

Principal Taxes Within Costa Rica

Costa Rica maintains a comprehensive domestic tax structure for income and economic activities originating within its borders. Individual income tax is levied progressively on Costa Rican-sourced earnings, with rates up to 25%. Corporate income tax rates can be as high as 30%.

The Value Added Tax (VAT) is a significant consumption tax with a standard rate of 13% applied to most goods and services. Certain essential goods and services, such as medicines, private education, and healthcare, benefit from reduced VAT rates, ranging from 1% to 4%.

Property owners are subject to an annual municipal property tax at 0.25% of the property’s declared value. A “luxury property tax” or Solidarity Tax is also imposed on residential properties exceeding a certain construction value, with rates ranging from 0.25% to 0.55%. Property values must be reassessed and declared to the municipality every five years.

Social security contributions are mandatory for both employees and employers. Employees contribute 10.67% of their gross salary, while employers contribute 26.67%. A capital gains tax of 15% applies to profits from real estate sales, though primary residences are exempt.

Costa Rica’s Engagement with International Tax Transparency

Costa Rica has committed to international tax transparency standards. It engages with organizations like the Organization for Economic Co-operation and Development (OECD) to align its tax framework with global best practices. This is evidenced by its participation in initiatives combating tax evasion and promoting information exchange.

Costa Rica adheres to the Common Reporting Standard (CRS), facilitating automatic exchange of financial account information. It also has an Intergovernmental Agreement (IGA) with the United States concerning the Foreign Account Tax Compliance Act (FATCA), ensuring exchange of information on U.S. taxpayers’ financial accounts.

Costa Rica has strengthened its anti-money laundering (AML) and counter-terrorist financing (CTF) efforts, guided by Law No. 8204. It follows standards set by the Financial Action Task Force (FATF) and has a legal framework to combat illicit financial flows. Financial institutions must conduct customer due diligence and report suspicious activities.

Costa Rica was delisted from the European Union’s Annex I (“blacklist”) of non-cooperative jurisdictions for tax purposes in October 2023. Costa Rica is currently on Annex II (“grey list”), indicating ongoing progress towards implementing Global Forum recommendations on automatic information exchange.