Individual Income Tax

General Provisions

Under the Costa Rica tax system, residents and corporations are taxed only income earned in Costa Rica.

The tax year begins in October 1 and ends September 30, both for individuals and corporations. Companies may request filing returns on a different tax year, subject to the approval of the Ministry of Finance.

Unless proof to the contrary exists, for certain professionals as well as corporations, presumptive net income is established by the Ministry of Finance, and constitutes a minimum taxable base.

Tax & Tax Adjustment Laws

On September 1995 a main set of reforms to the prevailing tax structure was issued. These are the tax law (Ley de Justicia Tributaria) and Tax Adjustment Law (Ley de Ajuste Tributario).

Both these Laws impose severe administrative fines, administrative penalties and criminal prosecution for failing to comply with the income reporting requirements established by law.

Income Tax

Applied to individuals as well as legal entities, i.e., corporations for income originated from a Costa Rican source. Costa Rican Laws do not tax income derived from a foreign source.

According to the Law all of the following are subject to income taxation:

• Legal entities, the facto corporation, professional companies, and state enterprises which operate in the country;
• Branch offices, subsidiaries, or agencies of any non-resident which operates in the country;
• Trusts;
• Inheritances (as long as remaining indivisible);
• Individuals residing in Costa Rica regardless of nationality;
• Individuals hired in a professional occupation;
• Physical and legal entities not specifically mentioned and engaged in profit making activities in Costa Rica.

Entities Exempt From Income Taxation

The following are tax exempt:

• Government, local governments and autonomous and semi-autonomous organizations excluded by specific laws;
• Religious institutions regardless of creed;
• Associations, foundations, chambers, unions, political parties and other non-profit organizations;
• Employer -Sponsored Workers Associations (Asociaciones Solidaristas);
• Worker’s Cooperatives;
• Companies under Free Zone status.

Taxable Incomes

Taxable income is based upon net income, thus becoming necessary to establish the corresponding gross income of the tax paying entity.

Costa Rican Laws defines gross income as the total income and profits earned in the country during the taxable year. This includes earnings from real property, investment of capital and other business activities. It also contemplates any increase in net worth during the taxable year, which cannot be justified by declared or registered income.

Excluded from the gross income are the following:

• Donations in cash or kind;
• Revaluation of fixed assets (except depreciable fixed assets, though, depreciation allowances may be considered if approved by the tax administration);
• Profits, dividends, participation and any other form of distribution of benefits credited to the taxpayer;
• Income derived as a result of contracts or agreements made on goods or capital located abroad, even for contracts negotiated in C.R.;
• Capital gains obtained form the transfer of real or personal property so long as this income does not constitute a habitual transaction;
• Inheritances, legacies, community properties;
• Prizes from national lotteries;
• Approved charitable donations.

Deductions

Deductions may be subtracted from the gross income. To be allowable deductions the taxpayer must prove that they were necessary to produce taxable income. The following are deductible from income:

Costs: Any costs incurred, which are necessary to produce the income, may be deducted (i.e. raw materials, parts, components, or services needed to produce the goods or services);

Salaries: Wages, bonuses, gifts, benefits actually paid out are deductible as long as the income tax of the recipient has been withheld and paid to the Treasury;

Taxes: Any taxes levied against the goods or services or transactions carried out in the ordinary course of business;

Insurance Premiums: Insurance Premiums for policies, which cover fire, theft, earthquake, or similar risks;

Interest: No reduction allowed for interest payable to shareholders of limited liability companies;

Bad Debts: If related to the transactions in the ordinary course of business of the taxpayer and all legal efforts have been exhausted to collect the debt;

Depreciation: Apply to the exhaustion, wear and tear, or obsolescence of property, which is used in the trade or business. The Tax Law specifies the maximum depreciation amounts allowed;

Business Losses: Deductions are allowed for business losses. Losses incurred in one taxable year may be carried over for 3 years (5 years for agricultural enterprises);

Social Security Contributions: Contributions established by law and paid to the employees are deductible;

Board of Directors’ Remuneration: Deductions are allowed for remuneration, wages, commissions, honoraria, paid to members of the board of directors located abroad;

Payments to entities not domiciled in C.R..: Payments for technical support, financial, as well as for the use of patents, trademarks, franchise fees, or royalties are deductible. If payments are made to an agent or subsidiary of a firm which is permanently established in C.R. then the deduction cannot exceed 10% of the annual gross sales of that company;

Travel Expenses: These may not exceed 1% of the gross income declared;

Start up Expenses: Deductions are allowed for expenses necessary to initiate production of taxable income;

Advertising: Advertising and sales promotion expenses inside C.R. or abroad are deductible;

Casualty losses: Casualty and theft losses, which are not covered by insurance;

Gifts made to the state.

Personal Income Taxes

This group includes two categories:

• persons whose income consist of a fixed salary or other remuneration and
• persons with profit generating activities

Any individual employed in Costa Rica pays a monthly withholding tax rate based on his salary. Employment income (on a monthly basis) of individuals is subject to a progressive tax of 15% as follows:

• Income up to ¢323,000 exempt.
• In excess of ¢323,000 up to ¢485,000 10%.
• In excess of ¢485,000 15%.

There is ¢560 monthly tax credit applicable to each dependent meeting the following criteria:

• A minor (under 18 years)
• Handicapped (physically or mentally), and therefore unable to make his own living.
• A high school or college student, not older than 25 years.

b. - Individuals with profit generating activities

The following rates are applied to taxable annual profits:

• Profits up to ¢1,434,000 Exempt
• In excess of ¢1,434,000 up to ¢2,142,000 10%
• In excess of ¢2,142,000 up to ¢3,573,000 15%
• In excess of ¢3,573,000 up to ¢7,160,000 20%
• In excess of ¢7,160,000 25%

A ¢1,800 annual tax credit for each dependent. Conditions to apply to this tax credit are the same as stated previously. In case that both spouses are tax payers, the tax credit can only be deducted by one of them.

Imputed Income

An individual taxpayer who does not file a tax return will be presumed to have earned income pursuant to the income schedule established by law. The imputed income is based on a base salary of a mid-level government employee as published in the annual budget.

The following professions: Doctors, Dentists, Architects, Engineers, Lawyers, Accountants, Economists and Realtors, are presumed to have earned 335 times the base salary if they do not file an income tax returns. For Appraisers, Private Accountants, Technicians, and in general all other professionals and technicians the imputed salary is 250 times the base salary.

Corporate Income Tax

For Corporate entities the following tax table prevails:

• Gross income up to ¢21,468,000 10%
• Gross income up to ¢43,183,000 20%
• Gross income over ¢43,183,000 30%

Any industrial corporation is allowed to make deductions from their annual gross income according to the list of deductible items listed on page 2 of this document.

The tax administration can deem a deduction invalid under the following criteria: belonging to another taxes period; non-income generating; excessive or unreasonable.

Depreciation and Other Allowances

Depreciation rates can not be higher than those prescribed by law, unless so authorized by the tax administration. Companies can choose either the straight-line or the sum-of-digits methods of depreciation, though, once chosen, the method must be used consistently. Accelerated depreciation is allowed in certain cases.

Other allowances are: organizational and pre-operational expenses that can be paid from one to five years; operational losses can be carried forward up to three years for industry and five years for agricultural operations.

Tax on Corporate Assets

The Tax Adjustment Law introduced a 10% tax on the assets of corporations whose assets exceed ¢30,000,000.00. The law has several exemptions. An accountant should be consulted as to the application of this law on your particular situation.

Tax on Capital

This tax is also known as the "Education and Culture Tax". Every legal entity (corporation) as well as its subsidiaries, or agencies of a foreign company, which are duly recorded in the Costa Rican Mercantile Registry, must pay an annual tax based on its net capital or equity (assets less liabilities), according to the following table:

• For net capital up to ¢250,000: ¢750 per year (also applicable to negative capitals, i.e., liabilities higher than assets).
• For net capital of ¢250,001 and up to ¢1,000,000: ¢3,000 per year.
• For net capital over ¢1,000,001 and up to ¢6,000 per year.
• For net capital over ¢2,000,001: ¢9,000 per year.

Annual Property Taxes

Starting November 30, 1995, the law states that the administration and collection functions for property taxes to the Local Governments (Municipalidades) where the property is located.

Under the new law, it will be these entities’ responsibility to conduct property appraisals and collect the corresponding property tax.

The property tax is established on an annual basis and may be paid annually, by semester or by quarter depending on the procedures established by each Local Government. For the next five years, the property tax payment will be 60% of the appraised value of the property. Starting on year six, the municipality may set its own rate not to exceed 1%.

Transfer Taxes

There is a 3% property transfer tax. This tax is based upon the registered value placed on the property transfer deed at the time of sale.

Tax on Distributed Profits / Dividends

Whenever a corporation distributes its profits as dividends, the following tax is applied:

• When the profits are distributed to corporation partners, the corporation, for payment to fiscal authorities must withhold a 15% tax.
• When dividends are distributed by a corporation whose shares are registered in an officially recognized stock exchange, a 5% tax must be withheld only if the shares were acquired through a stock exchange.
• If the partner is another corporation also subject to this withholding tax and with its capital duly registered in Costa Rica, the tax is not applicable.

Sales Tax

The tax Adjustment Law increased the sales tax from 10% to 15%. Starting on November 18, 1995 this new sales tax will be in effect for the next 18 months. After this period of time, the rate drops to 13%.