Jack of all Taxes, Master of None.
The CR Government put a bill in the Congress this last Friday, with the intention to modify the current income tax system and create a dual system of collection on the global earnings of taxpayers,
The CR Government put a bill in the Congress this last Friday, with the intention to modify the current income tax system and create a dual system of collection on the global earnings of taxpayers, whether individuals or legal entities.
This tax would be paid on the global earnings of taxpayers who earned above ¢ 8.2 million ($13,666 USD in 2021 dollars) per year and according to the income level per each individual or company. Basically, it creates a marginal tax rate applicable to gross income.
In addition, the plan establishes a single rate of 15% on capital gains, to which will add an additional 1.5% for the following two years.
The proposal repeals the current legislation to establish a global collection system, which would imply that a person pays the rent annually on his salary along with what would be due to him for all kinds of personal earnings, such as those from financial investments or rentals, for example.
The Executive Branch explains that it is a progressive system based on the individual, in which the treatment of income from wages and the income of individuals with lucrative activities is standardized. The current system, called cedular, charges separately the tax on wages and other productive activities that the person has, with a variety of progressive rates for each activity.
With the cedular system, the tax payer ends up paying a certain tax rate for salary, another one for a certificate of deposit, a different one for rental income, a different one doing contractual work, so on and so forth. The intention is to pay one rate based on the totality of the income the subject produces.
Definition of Global
Section 2 of the bill, establishes the objective of the law which is to tax:
- All income generated in Costa Rica.
- All income brought to Costa Rica.
For the purposes of the law, income is described as money produced by (and I quote):
- Dividends obtained through investments funds.
- Interests resulting from investments in bonds or certificates of deposit.
- Income generated by real estate rentals.
- Capital gains obtained by activities other than real estate or securities obtained abroad.
- Capital gains obtained by activities related to real estate not originated in Costa Rica.
- Capital gains obtained by investment in securities not originated in Costa Rica.
- Capital gains resulting from rental income generated through real estate in Costa Rica.
Section 2 mentions that the Government will understand that people have generated income when there is an increase of capital (or liquidity) in the tax payers accounts in Costa Rican banks. The tax payer has the burden of proof to demonstrate the funds put in bank accounts in CR is not income as defined by the bill.
It is extremely important to understand the definition of Global Income under this bill. The intention of the CR Government is to tax all income that is nationalized. That means, all income that is generated in Costa Rica and all income that is generated abroad and brought into Costa Rica. The intention of the bill is not to tax all income produced abroad whether you bring it to Costa Rica or not.
Sections 9 and 10 of the bill sets forth the definition of a tax resident for the purposes of the global income tax. There are basically two types of people:
- Natural people (distinct from companies) who habitually reside in Costa Rica. These are:
- People who habitually reside in Costa Rica are those people who spend more than 183 days in a calendar year in Costa Rica. People who have a fiscal residency in another country will not be deemed to be habitual residents of Costa Rica and therefore will not be considered tax residents subject to this taxes. However, they must demonstrate by an official document that they are tax residents in another jurisdiction.
- People who have the main economic activity in Costa Rica.
- People who have a spouse or common law partner in Costa Rica and are not able to establish by official document a tax residency in another country.
- Natural people (distinct from companies) who habitually reside abroad, which fall in one of the following categories:
- Costa Rican diplomats abroad.
- Costa Rican employees of government agencies assigned to projects abroad.
- Costa Rican employees of CR Companies and assigned to projects abroad.
The Devil is in the Details.
While some people will be subject to the tax, and if the bill is approved, the Revenue Service (Ministerio de Hacienda) must issue the regulations and processes to implement and enforce this law. If this bill is approved, it will probably take years for Hacienda to establish the processes, forms and bureaucracy for people to comply. Perhaps many people will file complaints in the Supreme Court for unclear and confusing regulations.
If there is something that Costa Rica is not good at (there are actually many things) is collecting taxes. I am curious, if you bring money from abroad, what forms do you need to complete to report that money? How do you establish that it did not result from income? You are just bringing money from savings, from your retirement, from your divorce settlement, inheritance, you name it. How do you establish that you are not subject to the tax? All those details must be considered. It will be a long time before this is implemented.
In a Nutshell
Many expats inquired about this bill in the CR Congress. Certainly, many are concerned whether they must pay taxes in Costa Rica for income generated abroad. So, this the situation:
- You must be considered a habitual resident to be subject to the tax.
- To be considered a habitual resident you must spend more than 183 days in Costa Rica.
- If you spend more than 183 days in Costa Rica but are a tax resident abroad, then you are not subject to the tax.
- If you are considered a habitual resident, you will be subject to the tax for income that bring to Costa Rica.
For the most part, I think foreign nationals who reside in Costa Rica will not be affected by this law. Most foreign nationals that I know keep their fiscal residency abroad, primarily because Costa Rica does not really provide tax benefits for foreign companies or people. Costa Rica may be natural paradise, but it is not a tax heaven.
Enjoy the beach, but keep your money abroad.