Costa Rica: interesting for asset protection and tax purposes?
Costa Rica is an attractive investment destination in Latin America for many reasons, including successful economic performance, social achievements, and a stable fiscal environment. The most significant feature of the current Costa Rican taxation system is that it operates on the basis of the territoriality principle. Therefore, companies and individuals based in Costa Rica are taxed only on their income derived from Costa Rican sources. The territorial taxation and the relaxed attitude of the Costa Rican government towards online gambling transformed the small Central American country in a global online gambling center. Below, we will examine Costa Rica’s main asset protection and tax features.
Costa Rican corporate law not only allows the use of nominee directors but also provides foreign investors with the opportunity to set up anonymous offshore corporations, locally known as Sociedad Anónima (S.A.). Their owners do not have to disclose their identity and identify their relationship with the corporations. Usually, Sociedad Anónima (S.A.) serves as an asset protection tool and does not carry out effective business operations. However, from 2019, all companies registered in Costa Rica will be obliged do disclose their ownership in a special register that aims to combat tax fraud.
Corporate income taxation
Resident companies are subject to a progressive profit tax on net income derived from Costa Rican sources. The rates of the progressive tax are 10%, 20%, and 30%. In 2017, the highest rate of 30% applies to corporate net income equal to or exceeding USD 190,000.
Non-resident companies are subject to withholding tax on their Costa Rica-source income. The rate of the withholding tax varies depending on the type of taxable income (e.g., 15% on lease payments and professional fees, 8.5% on transportation, 5.5% on insurance income).
Capital gains are taxed in the following two cases only: (1) when the activity that generates capital gains is habitual (i.e., from the operation of a normal trade or business); and (2) when the capital gain is generated through transfers of depreciable assets. In these two cases, capital gains are taxed at 30%.
Costa Rica has concluded a Free Commerce Treaty with the USA and the Central American Countries. Double taxation treaties are in force with Germany and Spain.
In order to attract foreign investment, Costa Rica has established several free trade zones. Companies registered in those zones are entitled to tax holidays (100% exemption from corporate tax for 8 years, and 50% exemption for next 4 years).
Personal income taxation
Resident individuals are subject to numerous taxes, such as personal employment income tax (progressive rate of 0%-15%), social insurance contributions (9,34%), capital transfer tax (1,5% and 2,5%), selective consumption tax (equivalent to VAT 13%), luxury vehicles tax (50%), and municipal taxes.
Non-resident individuals are required to pay withholding tax on their Costa Rican-source income. Costa Rican-source income is defined as any income derived from services rendered, assets used, or goods located within the territory of Costa Rica. The rate of the withholding tax depends on the type of income (e.g., 15% on interest, 15% on dividends, 15% on director’s fees, and 10% on salaries).