Costa Rica has become a popular destination for North Americans seeking a change of pace, a warm climate, and a relaxed lifestyle. The country has much to offer, from its beautiful beaches and tropical forests to its friendly people and stable government. But one of the most attractive aspects of living in Costa Rica is its tax benefits for expatriates.
In this article, we will explore the various tax benefits of living in Costa Rica for North Americans who become residents there. We will compare the different tax advantages in Costa Rica to those in Canada or the USA and explain how the benefit works in detail.
One of the most significant tax benefits of living in Costa Rica for North Americans is its territorial tax system. This means that Costa Rican residents are only taxed on income earned within the country. So, if you are a retiree or freelancer who earns income from outside of Costa Rica, you may be able to reduce your tax bill significantly.
For example, let’s say you are a retiree who receives a pension from the United States. You would not have to pay income tax on that pension in Costa Rica because it is considered foreign income. Similarly, if you are a freelancer who provides services to clients in Canada, you would only pay income tax on the portion of your income earned from clients within Costa Rica.
Furthermore, Costa Rica has a low income tax rate compared to other North American countries. The maximum tax rate is 25%, and the tax brackets are as follows:
- 0% up to CRC 840,000 (approximately USD 1,400) per month
- 10% for income between CRC 840,001 and CRC 1,218,000 (approximately USD 2,000) per month
- 15% for income between CRC 1,218,001 and CRC 2,748,000 (approximately USD 4,500) per month
- 20% for income between CRC 2,748,001 and CRC 4,338,000 (approximately USD 7,000) per month
- 25% for income above CRC 4,338,000 per month
However, it’s worth noting that Costa Rica’s income tax system is progressive, which means that the more you earn, the higher your tax rate will be.
Another tax benefit of living in Costa Rica is its low property tax rates. In Costa Rica, property taxes are based on the assessed value of the property. The tax rate is 0.25% of the assessed value, which is considerably lower than property tax rates in North America.
For example, in the United States, property tax rates vary by state, but the average is around 1.1% of the property’s value. In Canada, property tax rates are also based on the property’s value and can range from 0.2% to 2.5% depending on the location.
Moreover, Costa Rica offers exemptions to property tax for the first five years of ownership. This is a great benefit for those who are looking to invest in real estate in Costa Rica.
In Costa Rica, there is a value-added tax (VAT) known as the General Sales Tax (GST) or Impuesto General Sobre las Ventas (IGV). The standard rate for the GST is 13%, which is relatively low compared to the average sales tax rate in North America.
In the United States, the average sales tax rate is 7.25%, but it can vary by state and municipality. In Canada, the average sales tax rate is around 13%, but again, it can vary by province.
It’s worth noting that certain products and services in Costa Rica are exempt from the GST, such as basic food items, medical services, and education.
What other taxes do expats need to know about in Costa Rica, other than income, property and sales tax?
In addition to income tax, property tax, and sales tax, there are other taxes that expats need to know about in Costa Rica. These include:
- Luxury home tax: Costa Rica imposes a luxury home tax (Impuesto Solidario para el Fortalecimiento de Programas de Vivienda) on homes valued at more than CRC 133,322,000 (approximately USD 220,000) as of 2022. The tax rate ranges from 0.25% to 0.55% of the home’s value and is assessed annually.
- Capital gains tax: Costa Rica imposes a capital gains tax on the sale of assets, including real estate. The tax rate is 15% of the net gain, and it is usually paid by the seller. However, there are some exemptions to the capital gains tax, such as the sale of a primary residence and the sale of a property that has been owned for more than 20 years.
- Vehicle tax: Costa Rica imposes an annual circulation tax on vehicles based on their value and age. The tax ranges from 1% to 2.5% of the vehicle’s value, and it is paid annually.
- Import duties: Costa Rica imposes import duties on many goods that are imported into the country. The duty rates vary depending on the type of goods and can be as high as 81% for some luxury items.
It’s important to note that taxes in Costa Rica can be complicated and it’s advisable to seek professional advice from a local tax expert to ensure that you are complying with all tax requirements.