Residing in Costa Rica. Living tax-free in Central America

We´ve already talked about the different types of tax systems in Tax Free Today and we´ve seen how appealing countries with territorial tax systems can be. In addition to Panama, Paraguay, Uruguay or Nicaragua, you can also reside in Costa Rica and enjoy a tax-free life while your income comes from abroad.

As well as a beneficial tax system in Costa Rica, you will also find a great quality of life and incredible nature. It´s not surprising that according to certain surveys, residents in Costa Rica are considered to be the happiest people in the world.

Unfortunately, prices in Costa Rica have been increasing, which we don´t only notice when we are there, but also when it comes to acquiring permanent residence in the country.

In spite of this, it shouldn´t be any problem for retirees, traders or digital entrepreneurs who move their residence there, especially if they´re really going to live there (for at least 4 to 6 months).

Of course, if you´re only looking for residency on paper, which doesn´t require you to spend time in the country, its better to go for Paraguay, Panama or Nicaragua.

Costa Rica and it´s tax system

As we previously mentioned, Costa Rica has a very appealing territorial taxation system, similar to that of its neighbour Panama. Territorial taxation (you know, you only pay taxes on the income obtained within the country) is understood in a somewhat different way there than in other countries.

In Costa Rica, just like in Panama, it´s possible to carry out an activity in situ, with residency, an office and even employees in Costa Rica, and continue having it believed that income isn´t being obtained within the country. The only thing you have to do to avoid paying taxes in Costa Rica is to have your customers abroad, i.e., your income doesn´t come from a national source.

Even those who carry out an activity within the country will not end up paying more than half of what you´d usually pay in European countries. Costa Rica’s currency is the Colon, which is a bit difficult to get used to with its exchange rate of 1 to 595 (when this article was written). You have an approximate calculation of the progressive tax rates in Euros below.

Companies and self-employed people don´t pay taxes on the first €5,875. The following earnings scales are taxed at 10% (the following €2,900), at 15% (the following € 5,860) and at 20% (the following € 14,690). The highest tax rate of 25% applies on a profit of €29,320, which is still very manageable of course thanks to the generous deductions. The dividends of Costa Rican companies are taxed at 15%.

Income from wages and salaries is subject to other types of tax.  Around €1,320 per month is the personal tax-free amount (about € 15,860 per year). Only on amounts higher than €7,943 are taxes of 10% applied and 15% on amounts higher than that. 26.33% of social security contributions are paid by the employer and 9.34% by the employee.

Inheritance, donation and similar taxes don´t exist in Costa Rica. Price surplus obtained by individuals will be tax-free provided they don´t occur regularly, otherwise they will be taxed at 15%. But this refers exclusively to national profits, since income obtained abroad is generally tax-free thanks to territorial taxation.

Therefore, taxation in Costa Rica is relatively low, or even non-existent if, as is probably the case, your income comes from abroad.

Setting up a business in Costa Rica

Setting up a company in Costa Rica itself only makes sense in the gambling industry, but if this is your area then you’re in luck, because Costa Rica is the only country in the world where you can manage gambling companies online without a license.

Of course, it´s important these services are used by foreigners, since gambling is ilegal in Costa Rica itself.

The best thing would be to combine a company in Costa Rica with Panamanian or Nicaraguan residency, taking into account the 15% tax at source rate on dividends.

If you have an online gaming business, you can set up a company in Costa Rica for around 2,000 euros (get in touch with us).

The steps to obtaining residency in Costa Rica

Costa Rica grants the majority of nationalities a three month stay after arriving in the country. Surely this is enough time to get to know this relatively small country in depth and to consider the possibility of living there. It´s essential to present a plane or return ticket when arriving. In general, this requirement is taken very seriously in Costa Rica.

The classic visa-runs people make to go and renew residence permits, which are so popular by digital nomads, are no longer recommended in Costa Rica. Authorities are paying increasingly more attention to this type of practice, which can quickly destroy your dream of living in Costa Rica permanently. Therefore, if you return to the country soon after your departure, in many cases you´ll only be granted a two-week stay permit. Nor is it advisable to remain paper-less in Costa Rica, as this can quickly lead to deportation and then to a 12 year travel ban from the country.

Fortunately, Costa Rica is still relatively open to anyone who wants to immigrate to the country through legal channels. The only condition is that these people be able to support themselves in the expensive country that is Costa Rica. There are three visa categories that can be considered for the typical self-employed, entrepreneurs and investors.

The most expensive option is the investors’ visa, which, with an investment of $200,000 into the Costa Rican economy, grants you a residence permit. After three years, during which you´ve had to have spent at least 6 months there per year, you´re granted lifelong permanent residence in Costa Rica.

Pensioners, retirees and people who receive a fixed lifetime payment of at least $1,000 per month will be much more relaxed in Costa Rica. They obtain temporary residence with the “pensionado” visa with which they must remain in Costa Rica for at least 4 months a year. Moreover, they must have local health insurance from Costa Rica.

There is the possibility of applying for a “rentista” visa for entrepreneurs and freelancers. For this, its necessary to prove you have a monthly income flow of $2,500. Since it´s often difficult to provide proof, you can alternatively deposit $60,000 into a local bank account, from which $2,500 is paid monthly. The bank must draft a letter guaranteeing that the payee can maintain a steady and permanent money flow for that amount.

The rentier will obtain a two year temporary residence with these $60,000 paid monthly in installments of $2,500, which can be renewed after two years, provided that he pays his local health insurance contributions and remains in Costa Rica for at least 4 months of the year. In order to renew residency you must deposit another $60,000 for two years into a bank account.

In all cases, permanent residence can be requested after three years, with an investor, pensioner or rentier visa. You will have to have spent at least four months of the year there during this time. To apply for it, you must show that you really live in Costa Rica, usually with Costa Rican citizens as guarantors.

The process of obtaining permanent residency lasts for approximately one year. Then, in theory, you can leave the country for a long time without losing permanent residence. Permanent residence also allows you to work in the country, something which is limited to only working in your own company with temporary residence.

In any case, Costa Rican permanent residence is not as permanent as Panama’s, since you have to renew it every two years.

The Costa Rican Passport

If you really want to remain in Costa Rica permanently, you will have to obtain Costa Rican nationality. The passport, with its right to visit 133 countries without the need for a visa, isn´t bad and, unlike Panama, allows dual citizenship.

Foreigners who want to obtain Costa Rican nationality have to wait seven more years after having obtained permanent residency and also have to overcome a complicated naturalization test.

Latin Americans and Spaniards only have to wait 5 years in order to obtain citizenship after acquiring permanent residency.

Is it worth having Costa Rican residency?

In summary, you could say that while emigrating to Costa Rica is certainly possible, there are some obstacles to overcome. Typical entrepreneurs and freelancers above all need a capital of $60,000. This capital is not lost however, as you use it to sustain yourself.

Spending 4 months in Costa Rica isn´t bad and it’s usually something that most digital nomads can afford despite their nomadic lifestyle. Perhaps the most annoying thing is having to contribute to Costa Rica’s inefficient health system.

On the other hand, if you set yourself up right, with a company outside of Costa Rica, you can live tax-free.

We can´t finish this article without mentioning Costa Rica’s nature, as brief it may be. This country has the highest percentage of national parks worldwide. So if you´re someone who enjoys nature, there are more advantages of living there than just the taxes.

As well as this, just like Panama, a country that operates without having its own army, Costa Rica also allows its citizens to live quite a free life from the impositions of the State. Costa Rica is also a great option for those who don´t want to school their children.

If we try to compare Costa Rica with its neighbour Panama, beyond the personal preferences of each one, we can conclude that Costa Rica is more appealing for those who are really going to spend time in their new country of residence, and who have $60,000.

However, if you´ve decided to live a pura vida in Costa Rica, we´ll be happy to help you with the process. Get in touch with us so that our associates can help you.