Country Report Costa Rica

Economic Overview

Development is anticipated to stay strong, upheld by solid exports and inflows of outside direct speculation. Local investment is set to bounce back, driven by open framework ventures. In spite of strong yield development, joblessness will stay high, reflecting relentless aptitude bungles. Expansion will increment, yet is anticipated to remain underneath 3%.

Broad-based growth continues

While output development stays over 3%, it was lower than anticipated in the second 50% of 2017 as antagonistic climate conditions, including hurricane Nate, disturbed horticultural generation and continuous development ventures. This disturbance, alongside rising loan fees, brought about contracting private speculation. Powerful yield development has not converted into a solid work showcase, with the joblessness rate staying over 9% and over 40% of laborers holding casual occupations.

After a time of deceleration, center and feature expansion have gotten to inside the 2-4% target go. The national bank has begun to pull back its accommodative position and expanded the strategy rate in a few stages between April 2017 and February 2018. Financial execution keeps on falling apart. Focal government obligation took off from 24% of GDP in 2008 to 49% out of 2017, and accordingly intrigue installments currently represent half of the shortfall.

Development is anticipated to get because of more grounded outside request supporting fares, including tourism and aptitude serious expert administrations, which will likewise help enhance the present record. Speculation is likewise anticipated to reinforce, inferable from more grounded open framework spending and recreation identified with sea tempest Otto and hurricane Nate.

The significant household hazard to the viewpoint is the steadily high monetary deficiency and quickly developing open obligation, which, if left unaddressed, will debilitate macroeconomic solidness and Costa Rica’s effective improvement show.

In global markets, confused redresses in resource costs that make money related turbulence, and quicker than-anticipated fiscal arrangement standardization in cutting edge economies, could trigger capital surges that would prompt unexpected cash deterioration.

Key sectors in Costa Rica

Notwithstanding financial diversification, agribusiness remains a key part (representing 6.5% of GDP and 13% of the work compel). The fundamental fare items are tropical organic products, espresso, sugar, meat, and dairy items. Tourism is a development part with landings expanding 7.3% of every 2017 and contributing 5.8% to GDP. 

The surge in tourism and outside venture have helped the development of the framework division. Drawback chances instead, in this fragment are delays caused by administration and the dependence on open spending in the midst of high government obligation. Costa Rica’s pharmaceutical division is one of the biggest in the area and anticipated that would become further. 

The nation profits by outstanding amongst other human services frameworks in the area, expanding landings of ‘medical vacationers’ from the US, and is a noteworthy producer and exporter of therapeutic instruments.

Taxes in Costa Rica

Investment basics

Currency – Costa Rican Colon (CRC) Foreign exchange control – None, repatriation payments may be made in any currency. Both residents and nonresidents may hold bank accounts in any currency.

Accounting principles/financial statements – IAS/IFRS. Financial statements must be prepared annually. “Major” taxpayers must submit audited financial statements to the local tax authorities within six months after the fiscal year end.

Principal business entities – These are the corporation, limited liability company, limited partnership, general partnership and branch of a foreign company.

Compliance for individuals:

• Tax year – The fiscal year is the 12-month period from 1 October to 30 September, although the taxpayer may request a different period.
• Filing and payment – A self-assessment regime applies. Advance tax is payable in quarterly installments. The income tax return must be filed and tax must be paid within two months and 15 days after the end of the fiscal year. Payroll taxes are withheld by the employer on monthly basis.
• Penalties – A late payment penalty equal to 1% of the tax due is levied for each month the tax is outstanding, up to a maximum of 20%. The penalty for a tax deficiency varies, depending on the amount of tax due.

Corporate taxation:

• Residence – A corporation is resident if it is incorporated in or has a fixed place of business in Costa Rica.
• Basis – Costa Rica operates a territorial tax system, under which both residents and nonresidents are taxed on their Costa Rica-source income. Residents are subject to profit tax, and nonresidents are subject to withholding tax. Branches and permanent establishments of foreign companies are taxed in the same way as subsidiaries.
• Taxable income – Income tax is imposed on net income of a company. Unrealized gains are not part of gross income (including capital gains in specific cases). Expenses that are considered relevant and necessary for generating taxable income may be deducted in computing taxable income.
• Taxation of dividends – Dividends received by a Costa Rica entity from another domestic entity are exempt from corporate income tax.
• Capital gains – Capital gains generally are not subject to taxation in Costa Rica, except when the activity that generates the income is “habitual” (i.e. from the operation of a normal trade or business); or the gain is generated as a result of the transfer of assets subject to depreciation/amortization for corporate income tax purposes. Such gains are taxed at a 30% rate.
• Losses – Industrial losses may be carried forward for three years (five years for agricultural losses). The carry back of losses is not permitted.
• Rate – The standard rate is 30%, with lower rates of 10% and 20% applying to companies that earn income below certain thresholds.
• Participation exemption – There are no formal participation exemption rules in the tax law, but Costa Rica operates a territorial system of taxation, under which certain foreign income (such as dividends and royalties obtained abroad) is tax-exempt.
• Holding company regime – See under “Taxation of dividends” and “Participation exemption.”
• Incentives – Industrial, processing and service companies located in free trade zones are entitled to tax holidays, such as a 100% exemption from corporate income tax for the first eight years of operation and a 50% exemption for the next four years. Other tax holidays are available, as are forest sustainability and tourism incentives.

Withholding tax

• Dividends – A 15% withholding tax is levied on dividends paid to a nonresident or a resident individual. The rate is 5% for dividends paid by stock corporations whose shares are registered on a local, officially recognized stock exchange.
• Interest – The general withholding tax on interest is 15%. Payments made to a bilateral or multilateral organization are exempt from withholding tax. Royalties – Royalties paid to a nonresident are subject to a 25% withholding tax.
• Technical service fees – Technical service fees are subject to a 25% withholding tax.
• Branch remittance tax – Remittances by a branch to its nonresident head office are taxed in the same way as a dividend distribution (meaning a 15% withholding tax will be imposed).
• Other – All Costa Rica – source income paid abroad is subject to withholding tax at varying rates (e.g. 5.5% on insurance income, 8.5% on transportation and communication income and 15% on lease payments and professional fees, such as management fees (nontechnical advice)). Services provided entirely abroad (i.e. marketing services) may be exempt from withholding tax.

Other taxes on corporations:

• Payroll tax – The employer acts as a withholding agent for its employees. The withholding rate ranges from 0% to 15% of gross wages, and tax is paid to the tax authorities on a monthly basis.
• Real property tax – The municipal authorities levy an annual 0.25% tax on the value of real property (land plus any buildings).
• Social security – The employer must contribute 26.33% of the gross wages paid to its employees, and the employees contribute 10.84%.
• Stamp duty – Stamp duty is levied on agreements and contracts, at a rate of 0.5% calculated on the economic value of the document. A culture and education stamp tax is payable annually on the net capital of entities. The amount ranges from USD 1.50 to USD 18.
• Transfer tax – A 2.5% transfer tax applies to the transfer of movable property subject to registration; the rate on the transfer of immovable property is 1.5%.
• Other – A business license tax is levied annually by the municipalities, at rates ranging from 0.15% to 0.35%.

Anti-avoidance rules

• Transfer pricing – The transfer pricing rules are based on the OECD guidelines. The following transfer pricing methods may be used: comparable uncontrolled price, resale price, cost plus, profit split and transactional net margin methods. Taxpayers subject to the transfer pricing rules must maintain documentation to support the pricing of relatedparty transactions. Taxpayers engaged in domestic or cross-border transactions with related parties, or those defined as large taxpayers, must file an annual transfer pricing information return. Advance pricing agreements (APAs) are available, under which the taxpayer and the tax authorities may agree to the price of related-party transactions in advance. An APA is valid for a three-year period.
• Thin capitalization – There are no specific thin capitalization rules, but limits are imposed on the payment of interest by a domestic limited liability company to its head office (these rules do not apply to a corporation (i.e. an S.A.)).

Compliance for corporations

• Tax year – The tax year is the 12-month period from 1 October to 30 September, although the taxpayer may request an alternative period that runs from 1 January to 31 December.
• No consolidated returns. Each company must file a separate return.
• Self-assessment regime. Advance corporate tax is payable in quarterly installments. The corporate income tax return must be filed and tax must be paid within two months and 15 days after the fiscal year end.
• Late payment penalty applies. 1% of the tax due is levied for each month the tax is outstanding, up to a maximum of 20%. The penalty for a tax deficiency varies, depending on the amount of tax due.
• Rulings – A ruling may be obtained from the tax authorities, but it is not binding on the taxpayer (merely informative regarding the tax administration´s position).

• Personal taxation:
  • Basis – Residents and nonresidents are taxed on their Costa Rica-source income. Residents are subject to income tax, while nonresidents are subject to withholding tax.
  • Residence – Costa Rican permanent residents and individuals who have been in the country for six months or more in a tax year are ordinarily resident.
  • Filing status – Each individual must file a return; joint filing is not permitted.
  • Taxable income – Income is taxed under a schedular system. Gross employment income is taxable. Net profits from the carrying on of a trade or profession are taxed in the same way as profits derived by companies. Investment income in the form of dividends is subject to withholding tax.
  • Capital gains – Capital gains generally are not subject to taxation in Costa Rica, except when the activity that generates the income is “habitual” (i.e. from the carrying on of a normal trade or business); or the gain is generated as a result of the transfer of assets subject to depreciation/amortization for corporate income tax purposes. Such gains are taxed at a 30% rate.
  • Deductions and allowances – No deductions are granted in respect of employment income, although personal allowances are granted for the taxpayer’s spouse and children. A taxpayer carrying on a trade or business is entitled to the same deductions as a corporation.
  • Rates – Personal income tax rates are progressive up to 25%. Investment income in the form of dividends is subject to a 5% withholding tax.
• Other taxes on individuals:
  • Real property tax – The municipal authorities levy an annual 0.25% tax on the value of real property (land plus building values). An annual luxury house tax also may apply, with the rate depending on the value of the property.
  • Social security – Employed individuals contribute 10.84% of wages, and the rate may range from 10.5% to 18.5% for the self-employed.
• Compliance for individuals:
  • Tax year – The fiscal year is the 12-month period from 1 October to 30 September, although the taxpayer may request a different period.
  • Filing and payment – A self-assessment regime applies. Advance tax is payable in quarterly installments. The income tax return must be filed and tax must be paid within two months and 15 days after the end of the fiscal year. Payroll taxes are withheld by the employer on monthly basis.
  • Penalties – A late payment penalty equal to 1% of the tax due is levied for each month the tax is outstanding, up to a maximum of 20%. The penalty for a tax deficiency varies, depending on the amount of tax due.
• Sales tax:
  • Taxable transactions – Sales tax is imposed on the sale of certain goods and the provision of a few services. Rate – The sales tax rate is 13%.
  • Registration – Registration is compulsory for businesses, but a simplified regime is available for small and medium-sized enterprises.
  • Filing and payment – Sales tax is payable on a monthly basis at the time the tax return is filed.
  • Source of tax law: Income Tax Law, VAT Law and Tax Norms and Procedures Code
  • Tax treaties: there are only two double taxation treaties in force, with Germany and Spain. Costa Rica signed the OECD MLI on 7 June 2017.
  • Tax authorities: General Tax Agency and General Customs Agency

Investing in Costa Rica

• Costa Rica’s GDP growth rate has been among the most dynamic in the Latin American region. The economy expanded by +4.3% in 2016 and should grow by +3.8% in 2017. The output gap is closed by now, as the economy should continue growing at +3.8% in 2018 and +3.9% in 2019. Favorable global and local financial conditions and a positive terms-of-trade shock (low oil prices) have supported activity.
• While inflation plummeted with the sharp decline in oil prices, it has swung back to +1.6% in 2017. It should increase to +2.9% in 2018 and stabilize at +3.0% in 2019. This, along with the will to follow the US Fed’s momentum, explains the gradual monetary tightening: policy rates rose by 275 bps since April 2017, to 4.5%.
• Two factors explain the robust growth outlook. First, the moderate energy import bill supporting private consumption and net exports. Then there is strong external demand. The acceleration of the US economy, Costa Rica’s first trade partner, should help offset Intel’s withdrawal from the country.
• Costa Rica’s business environment ranks 5th in Latin America, and 62nd globally, according to the World Bank Doing Business survey. In terms of access to credit, electricity, control of corruption and rule of law, Costa Rica outperforms most of its regional peers. Hence, it is a very attractive destination for foreign investment, notably in the tourism sector, which accounts for 7% of total GDP.
• Costa Rica’s external position is rather comfortable. Foreign exchange reserves cover around 4 to 5 months of imports. The current account deficit is financed to a large extent (134%) by foreign direct investment flows. It is expected to stabilize at -4.0% going forward. This should allow external debt to gradually decrease back to 2014 levels (around 35% of GDP). While a diversification strategy has been initiated, the country remains exposed to the volatility in commodity prices.
• Perceived risks stem from fiscal vulnerabilities. Public debt-to-GDP ratio is on a sharp rise. In 2014, it stood at 38.3%. It could surpass the 50% mark in 2018. The fiscal deficit should exceed -6% in 2017, as attempts to pass a holistic tax reform ran into political opposition. Only minor fiscal adjustments (e.g. to pensions) have partially limited damages.