Costa Rica. Capital city: San José. Aera: 51,100 km 2. Population: 4,200,000. Language: Spanish. Political system: Presidential republic

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1 Costa Rica Capital city: San José Aera: 51,100 km 2 Population: 4,200,000 Language: Spanish Political system: Presidential republic GDP/capita 2015: USD 10,185 Currency: Costarican Colon (CRC) ISO Code: CRI Telephone code: +506 National day: 15 September Taxes in America 101

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3 Costa Rica According to the political constitution of the Republic of Costa Rica, fiscal laws and municipal laws provide the main taxes that are levied in our country: Only the Legislature, by means of a law, imposes contributions and taxes. 1. National taxes National Taxes currently in force are: 1.1 National Taxes profits Tax; sales Tax. 1.2 Municipal Taxes Costa Rica s territory is divided into Provinces and each province is divided into Municipalities, which enjoy autonomy. Each municipality has the power to set provincial taxes and contributions to cover their expenditures. The main provincial taxes and contributions are: territory Tax; patent Tax. Below is a description of the main features of the taxes: 2. Profit taxes 2.1 Income Tax Base The taxation system in Costa Rica is based on the principle of territoriality. In other words, income in money or in kind, whether received on a continuous or occasional basis, from any Costa Rican source shall be liable to tax. Income is understood to be revenues or economic benefits from a Costa Rican source and revenues or economic benefits from services provided, assets located or capital Taxes in America 103

4 used in Costa Rican territory obtained during the tax period in accordance with the provisions established in law. 2.2 Persons liable to income tax All public or private companies that engage in activities or business of a lucrative nature in the country shall be liable to income tax, regardless of nationality, domicile or their place of incorporation or meeting place of their boards of directors or where they enter into contracts. The Costa Rican State, municipalities, autonomous and semi-autonomous state institutions that enjoy exemption by virtue of a special law, state universities, political parties, religious institutions, companies that come under the Customs Free Zone Regime, labor union organizations, foundations, associations declared to be affected with a public interest by the Executive Branch, cooperatives, employer-sponsored workers associations (asociaciones solidaristas), national teachers organizations, and nonprofit organizations forming unions of small and medium agricultural producers of goods and services whose purpose is the provision of technical assistance. 2.3 Tax Period The tax period shall be one year commencing on October 1 each year. 2.4 Assessing the Taxable Base Gross Income Total revenues or profits received by the taxpayer during the tax period are considered gross income. Also considered part of gross income is any increase in net worth that cannot be justified by duly registered and filed revenues, from the subsequent tax period onwards. Exclusions from Gross Income The following are not considered part of gross income: contributions from equity in money or kind; revaluations of fixed assets; profits, dividends, percentages from partnership interests in companies and any other form of distribution of benefits; income derived as a result of contracts or agreements on or negotiations with regard to goods or capital located abroad; income derived as a result of contracts or agreements on or negotiations with regard to goods or capital located abroad, even though they were entered into and carried out totally or partially in the country; 104 Taxes in America

5 capital gains obtained from the transfer of moveable assets or real property of any kind provided the income thus obtained does not constitute a habitual activity, in which case it shall be taxed in accordance with the general rules established by law; for the purposes of the tax levied on revenues received or put at the disposal of individuals domiciled in the country, inheritances, legacies and community properties will not be considered revenues liable to this tax; prizes from national lotteries; donations. Deductible Expenses The following are deductible from gross income: the cost of goods and services sold, such as the acquisition of goods and services necessary for carrying out the company s business; raw materials, parts, components and services for producing the goods and services sold; salaries, differentials, bonuses, gratuities, perquisites, Christmas bonuses, gifts or any other types of remuneration for personal services actually provided; the taxes and tributes levied on the goods, services and transactions involved in the company s ordinary course of business or the activities engaged in by individuals; insurance premiums for policies that cover fire, theft, robbery, earthquakes or other risks taken out with the National Insurance Institute or other authorized insurance institutions; interest and other financial expenses paid or incurred by the taxpayer during the tax year. These deductions will be subject to the limitations established below: COSTA RICA interest and other financial expenses paid in the name of partners in limited liability companies will not be deductible as they are considered to be similar to dividends or percentages in partnership interests; the part of interest attributable to the fact that a rate over the usual market rates has been agreed will not be deductible; interest will not be deductible when the tax corresponding thereto has not been withheld; when the amount of interest the taxpayer intends to deduct is greater than 50% of net income, the taxpayer must prepare additional information in order for that deduction to be legally justifiable. Taxes in America 105

6 manifestly uncollectable debts, provided the debts were incurred as a result of operations in the ordinary course of business and all legal efforts to collect the debts have been exhausted; depreciation to compensate for the wear and tear, deterioration or economic, functional or technological obsolescence of tangible assets used in the production of taxed income the value of an invention patent belonging to the taxpayer may be charged off over the life of the patent. when an industrial company incurs losses in a given tax period, those losses will be deductible over the next three tax periods. In the case of agricultural enterprises, this deduction may be carried over to the next five tax periods. The proportion allowed for the exhaustion of exploitable assets in the case of natural nonrenewable resources, including expenses incurred in obtaining the concession, when applicable. The employer contributions established by law. The remunerations, salaries, commissions, fees or attendance fees paid or credited to members of boards of directors, directorates or other governing bodies operating abroad. Payments made or credits granted to entities not domiciled in Costa Rica for technical, financial or other kinds of consultancy, as well as for the supply of formulas, and the use of patents and trademarks, concessions, franchises, royalties and the like. When these payments or credits are made to parent companies of affiliates, branches, agencies or permanent establishments located in Costa Rica, the total amount of these deductions may not exceed ten% (10%) of gross sales obtained during the tax period in question. In order to apply the deductions, the corresponding withholdings shall have been made. Payments made or credits granted to entities not domiciled in Costa Rica for news services, the production, distribution, intermediation or any other form of negotiation in Costa Rica of motion pictures, movies for television, videotapes, radio serials, gramophone records, comic strips, photonovels, and all other similar media used for the projection, transmission or broadcasting of images or sound. Representation and similar expenses incurred inside Costa Rica and abroad, per diem allowances allocated or paid to owners, partners, members of boards of directors or other governing bodies or to the taxpayer s officers or employees, provided the deductions for these items do not represent more than 1% of declared gross revenues. A company s startup expenses: These expenses may be deducted in the tax period in which they are incurred or credited or, if they are accumulated, they may be carried over to the five consecutive tax periods following the date in which the company commences production until they have been deducted in full. Indemnities, economic benefits and retirement pensions, limited to three 106 Taxes in America

7 times the minimum established in the Labor Code. Advertising and promotion expenses. Transport and communications expenses, salaries, fees and any other remuneration paid to persons not domiciled in Costa Rica. Donations to the State its autonomous and semi-autonomous institutions, municipal corporations, state-owned universities, social welfare organizations (Juntas de Protección Social), educational organizations (Juntas de Educación), state-run educational institutions, the Costa Rican Red Cross, and other institutions such as associations or foundations engaged in performing social welfare, scientific or cultural works, when there is proper proof that they have been made during the respective tax period. Losses incurred as a result of the destruction of property due to fire or crimes against the company that have been duly proven, and only the part not covered by insurance policies. Professionals or technicians who provide their services without there being a relationship of dependence with their clients, sales agents, commission agents, and insurance agents, may deduct the expenses necessarily incurred in order to produce their taxable revenues following the general rules or they may adopt a single deduction, without the need to provide any backup documentation, equivalent to 25% of the gross revenues obtained from their activities or commissions earned, as the case may be. The Tax Authority will accept all deductions considered in this article, except the point on donations, provided that, taken together, they meet the following requirements: That they are expenses that are necessary for obtaining current or potential revenues taxed under this law. That the obligation to withhold and pay the tax established in other provisions of this law has been complied with. That the backup documents are duly authorized by the Tax Authority. It will be up to the Tax Authority to decide to exempt special cases, which will be indicated in the Regulations to this law. Nondeductible expenses The following are not deductible from gross income: COSTA RICA the value of permanent improvements made to assets and constructions and, in general, all outlays liable to capitalization, including investments; costs and expenses not originating from the business, activity or operation that gives rise to taxed income, as well as similar outlays associated with taxed income that are not backed by the corresponding documentation or do not refer to the tax period being assessed; Taxes in America 107

8 income tax, sales tax, selective consumption tax and specific consumption taxes, and the special rates established for those taxes when individuals or companies are liable to such taxes, as well as surtaxes, fines and interest paid on any tribute or on account of facilities granted for payment of tax debts; profits, percentages from equity investments in companies or dividends paid or credited to partners, shareholders, owners of companies or individuals who pay taxes under this law; expenses and taxes incurred abroad, except those expressly authorized by this law; expenses incurred in luxury investments or investments in personal leisure. When these investments are mixed up with lucrative activities, separate accounts shall be kept in order to assess the results of each class of operations so that the operations involved in lucrative activities can be deducted; amounts paid for the purchase of goodwill, trademarks or brands, manufacturing procedures, intellectual property rights, and formulas of other similar tangible assets, as well as amounts paid in indemnities; withholdings, payments on account and partial payments made in accordance with this law; the following are not deductible from gross income: -- remunerations not subject to the contribution regime of the Caja Costarricense de Seguro Social (social security fund); -- gifts and perquisites or donations made to partners or relatives by blood or by marriage; -- living expenses of the taxpayer and his family; -- interest on capital and liabilities or loans that individual limited liability companies and individual businessmen grant themselves, their spouses, their children and their relatives to the third degree by blood; losses of capital incurred as a result of transfers of any kind of moveable or real property. 2.5 Presumed net income of companies not domiciled in Costa Rica It is presumed, unless proven otherwise, that the minimum annual net income of branches, agencies and other permanent establishments operating in Cost Rica and of individuals not domiciled in the country who engage in the activities mentioned below is the amount indicated in each case: Transport and communications 15.00% Reinsurance 10.50% Motion pictures and the like 30.00% International news services 30.00% 108 Taxes in America

9 2.6 Rate applied to Income Tax COSTA RICA The rates established below shall be applied to taxable income: Companies: 30% Per the following table: GROSS REVENUES* (Tax Year 2014) Rate (October 2013 to September 2014) Up to 49,969,000 10% Up to 100,513,000 20% More than 100,513,000 30% 2014 Amount of Net Income* RATE (October 2013 to September 2014) Up to Not liable to tax On the excess between and % On the excess between and % On the excess between and % On the excess over % In the case of individuals engaged in lucrative activities, the following scale of rates shall be applied to taxable income: 2.7 Classification of taxed entities For the purposes of income tax, companies are classified as corporate enterprises (sociedades de capital) and partnerships. Corporate enterprises are corporations, joint stock companies, and limited liability companies; partnerships are limited partnerships, general partnerships, and professional associations and all partnerships whose capital is not represented by shares, except those mentioned as corporate enterprises. 2.8 Withholding tax at source Every public or private company, whether liable or not to payment of this tax, including the State, banks in the National Banking System, the National Insurance Institute and other autonomous or semi-autonomous institutions, municipalities, and the associations and institutions referred to in Article 3 of this law, is Taxes in America 109

10 under the obligation to act as a withholding or receiving agent of the tax when it pays or credits income liable to the tax established in this law. To those ends, said taxpayers shall withhold and pay the Treasury on behalf of the beneficiaries of the income mentioned below the amounts indicated in each case: Source Wages and any other remuneration paid for work by individuals performed in a relationship of dependence Per diem allowances, whether or not from a dependent work relationship, gratuities and other benefits paid for personal services, in a situation of a dependent work relationship, if such income was for persons domiciled in the country. Issuers, paying agents, corporations and other public or private entities that, performing the function of obtaining resources from the financial market, pay or credit interest or grant discounts on promissory notes and all kinds of securities to persons domiciled in Costa Rica. Securities registered with a Stock Exchange or issued by entities registered with the General Superintendency of Financial Entities. Surpluses paid by cooperatives, employer-sponsored workers associations and similar organizations. Remittances or credits for the account of beneficiaries domiciled abroad. Transport, communications, reinsurance, motion pictures, international news services and others; this rate applies only in cases where the company has a representative in Costa Rica. Otherwise other withholding taxes will be applied. The State or its autonomous or semi-autonomous institutions, municipalities, state-owned companies and other public entities that pay or credit income to individuals or companies domiciled in Costa Rica in cases of public or private tenders, issuing of contracts, business or other operations conducted by them. Persons not domiciled in the country that obtain Costa Rica-source income from the provision of personal services of any kind. Withholding Tax As indicated by the brackets established for this type of income 15% 15% 8% 5% 3% for companies that have a representative in Costa Rica. For companies that do not have a representative in Costa Rica, withholding tax goes from 5.5% to 20%. 2% 15% 2.9 Tax rates for remittances sent abroad Individuals or companies domiciled abroad who receive Costa Rica-source income or benefits are liable to this tax, as detailed below: 110 Taxes in America

11 COSTA RICA Item Tax Rate Transport and communications. 8.5% Retirement and other pensions, wages and any other remuneration paid for work performed by an individual in a relationship of dependence. 10.0% Fees, commissions, attendance fees and amounts paid for the provision of services performed by an individual when there is no relationship of 15.0% dependence. Reinsurance, counter-insurance, and insurance premiums of any kind. 5.5% Use of motion pictures, movies for television, recordings, gramophone records, comic strips and, in general, all other similar media used for the dissemination of images or sound; also, the use of international news services. 20.0% Radio serials and television serials. 50.0% Profits, dividends or percentages paid on equity interests in companies. 5.0% Legal participations. 15.0% Leasing for commercial activities. 15.0% Technical-financial or other types of consultancy and payments for the supply of formulas and the use of patents, trademarks, concessions, franchises, 25.0% and royalties. Any remittance of Costa Rica-source income not covered in the previous items. 30.0% 3. SALES TAX Unlike its neighboring countries, Costa Rica does not levy Value Added Tax but a Sales Tax, which is currently 13% (June 2008) and is not applied to the professional services sector. For the purposes of this law, a sale is understood to be: The transfer of ownership of merchandise. The importing of merchandise into the country or its clearance through customs: -- sale on consignment, the setting aside of merchandise, and the leasing of merchandise with option to purchase; -- the withdrawal of merchandise for the taxpayer s personal use or consumption; -- the provision of the services referred to in the previous article; -- any act involving or whose ultimate purpose is the transfer of ownership of merchandise, regardless of the legal nature or description of said act or the terms agreed to by the parties; Taxes in America 111

12 An event giving rise to the tax occurs: Upon the sale of merchandise at the time of billing or delivery, whichever occurs first; upon merchandise being imported or cleared through customs, at the time the policy or customs form is accepted, whichever the case may be; upon the provision of services at the time of billing or provision of the service (with the exception of professional services); upon the use or consumption of merchandise by the taxpayer on the date on which the merchandise is withdrawn from the company; in the case of sales on consignment and the setting aside of merchandise, the moment that the merchandise is received on consignment or set aside, as the case may be. 4. REAL ESTATE TAX 4.1 Territory Tax Costa Rica s tax on the transfer of real estate is 0.25% of the registered value of the property. This means that you must pay US 625 a year in taxes on your luxury home valued at US 250,000. It should be noted that Costa Rica s Property Tax Law requires the owner of a home to file a return indicating the value of the home (Real Estate Return) with the municipal government every five years. The property transfer tax (Transfer Tax) is 1.5% of the value indicated in the transfer document or the registered property tax value, whichever is higher, and is levied when the title deed of a property is transferred from the seller to the buyer. 4.2 Patent Tax The patent tax is 0.5% on sales conducted in each municipality. 112 Taxes in America

13 COSTA RICA 5. Social security and companies obligations Given the social security scheme, any company that conducts business in Costa Rica must contribute to the social security system in addition to paying the corresponding taxes. These contributions are a percentage of the wages paid to the company s workers, as indicated in the following table: Item Percentage Basis for Calculation Contribution to the Costa Rican Social Security 22.17% Wages paid Fund National Insurance Institute 1.5% Wages paid 3% for the Fondo de Capitalización Laboral (Workers The Costa Rican Social Security Fund s Centralized Collection System Capital Accumulation Fund) 0.5% Complementary Pensions Fund (CCS-Sicere) Wages paid Christmas bonus 8.33% Wages earned during the year or fraction thereof. One month per year worked or fraction of a year. Vacations 4.33% On average, each worker is given 15 days for every year worked. The worker makes a contribution to social security of 9% of his monthly wage. 6. Foreign Investment By means of Law 6990, the Tourism Incentive Act, Costa Rica established the regulations applicable to promoting investment in tourism and also the incentives to which investors taking part in this economic sector have access. Companies that qualify for the benefits under this law may be granted all or some of the following incentives based on the activities for which they are qualified: Taxes in America 113

14 Hotel Services Exemption from all taxes and surcharges applicable to the importing or local purchase of articles essential for the functioning or setting up of new companies or of already established companies that offer new services, as well as for the construction, expansion or remodeling of the building in question, with the exception of motor vehicles and fuels. Fast depreciation of assets that, owing to their nature and the use they are given, wear out more rapidly, in accordance with the Income Tax Act. Granting of municipal licenses that companies require in order to conduct their business. The municipalities shall grant these licenses within a maximum of thirty calendar days from the filing of the application and levy the corresponding tax. Licenses may not be granted for rooms given over to games forbidden by other laws. Authorization of the Central Bank of Costa Rica for Costa Rican hotel companies catering to international tourism to be contracted as the Central Bank s ancillary teller facilities for the purchase of foreign currency from foreign tourists. These operations will be conducted on behalf of the Central Bank of Costa Rica and for its account. The Central Bank will establish the conditions and the periods of time for the transfer by the hotels of the foreign currency they receive under this arrangement. Exoneration from the territory tax for a period of up to six years from the signing of the contract for establishments that set up outside the metropolitan region established by the Ministry of Planning. International and domestic air transport for tourists Only companies that transport tourists on international routes and on scheduled flights inside Costa Rican territory qualify for these incentives: fast depreciation of assets in accordance with the Income Tax Act; supply of fuel at a competitive price no higher than the average international market price; exemption from all taxes and surcharges on the importing or local purchasing of the spare parts needed for the correct functioning of the aircraft. Aquatic transport of tourists Exemption from all taxes and surcharges applicable to the importing or local purchase of goods essential for the construction, expansion or remodeling of wharves and other places intended for the embarking or disembarking of tourists and also for the construction and maintenance of marinas, seaside resorts, and aquariums intended for tourism, provided the goods that are going to be imported are not manufactured in the territory of signatory 114 Taxes in America

15 countries to the Convention on the Central American Customs and Tariff Regime on competitive terms of price, quantity, quality and timeliness, in the opinion of the Ministry for the Economy, Industry and Commerce. Fast depreciation of assets in accordance with the Income Tax Act. Exoneration from all taxes and surcharges, except customs duty on imports, whose rate is set at 20%, for the importing or local purchase of water-going craft intended exclusively for transporting passengers for purposes of tourism, to which end they shall have adequate facilities for mooring and the embarking and disembarking of passengers. All forms of tourism cabotage activities from Costa Rican port to Costa Rican port will be reserved solely and exclusively to yachts, tourist cruise ships and similar vessels sailing under the Costa Rican flag. The classification of vessels, their characteristics and verification requirements regarding the use and destination of exonerated goods shall be established by means of Executive Decree. Receptive tourism of travel agencies that engage exclusively in this activity Exoneration of all taxes and surcharges, except for customs duty on the importing of collective transport vehicles with a minimum capacity of fifteen passengers; if the ad valorem tax rate is more than 5%, the tax liability corresponding to the excess taxable amount will be exonerated. Leasing of vehicles to foreign and national tourists COSTA RICA 50% of the total amount obtained by applying current taxes levied on the importing of motor vehicles intended exclusively for renting to tourist is exonerated; the vehicles exonerated under this law shall be renewed at least every three years; the rates and the service will be regulated by the Costa Rican Tourism Institute. Taxes in America 115

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