In Costa Rica, there are a number of tax benefits that go hand-in-hand when investing and/or living there while earning an income. For one thing, tax rates in Costa Rica are comparatively low, and there are no capital gains taxes. In addition, property taxes are just 0.25 percent of the appraised value of property. As far as the country’s revenue, a significant portion comes from sales tax.
The income tax rate in Costa Rica is actually progressive. For instance, corporations start at a rate of 10 percent and have a maximum rate of 30 percent. For individuals, the highest income tax rate is 25 percent, which applies to net income once all expenses incurred in generating this income have been are deducted. In the event that dividends are paid by a domestic company to another domestic company, there is no taxation. However, when dividends are paid to an individual resident or non-resident, a 15 percent withholding tax applies for shareholders.
No taxes are imposed on companies that are registered in Costa Rica or individual residents of the country that generate no revenue there. When compared to how taxes are in the United States, whereby worldwide income of any U.S. corporation or individual is taxed, you can see a distinct difference.
Something else to consider is the corporate anonymity in Costa Rica. The country does not require a disclosure of names of beneficial owners connected to registered companies. As mentioned, the U.S. has a worldwide taxation regime. In other words, your income will be taxed regardless of where it is generated. That means if you were to move to Costa Rica and establish a business, the income you make must be reported on an income tax return in the U.S.
There is a chance that you might qualify for the Foreign Earned Income Exclusion, which allows foreign earned income of roughly $100,000 for each taxpayer, or $200,000 if you are married and file jointly, to be excluded as U.S. income. Based on annual inflation, the exact amount of the exclusion is adjusted.
For you to qualify for this exclusion, you have to live in Costa Rica for a minimum of 330 days out of any period consisting of 12 consecutive months or you live in the country throughout the full tax year. Because there are complexities associated with exclusion and its application varies more than discussed here, you can always contact a tax expert to gain additional insight.
The bottom line is that as an expat in Costa Rica, you can own and operate a business. Just remember that you will probably be required to file a tax return in that country. Your net income will be taxed at a much lower rate than seen in the United States, and there is no capital gains tax. In addition, this income could be subject to tax laws in the U.S., unless you qualify for the Foreign Earned Income Exclusion.
As an expat, you are permitted to maintain bank accounts in either Costa Rica or United States currency, or both. However, for foreign-owned bank accounts, certain reporting requirements exist. One is the Foreign Bank Account Report (FBAR), which mandates that you keep a minimum of $10,000 in a foreign bank account during the tax year for the U.S. Another is the Foreign Account Tax Compliance Act (FATCA), mandating that foreign financial institutions provide a report on any accounts for American clients in an effort to uncover cheaters.
If you have foreign financial assets that go beyond specific thresholds, Form 8938 must be filed. With this, your regular tax return is sent to the Internal Revenue Service (IRS). As you can see, taxation is complex, even in Costa Rica. Therefore, it is in your best interest to speak to a professional tax advisor regarding any questions.