Income Tax
Lic. Rodrigo José Pastor Peralta
Attorney /Abogado
rpastorp@abogados.or.cr

The income tax system in Costa Rica is based on the Principle of Territoriality. This principle prays that the State of Costa Rica will only tax income that originates from a Costa Rican source, without taking into consideration the taxpayers nationality, domicile or place of incorporation. In other words, any person or corporation who gains wealth in Costa Rica must pay a percentage of what he or she earned to the government. This principle stands in comparison to the Universal Principle of income tax by which the tax payers must pay over all income perceived no matter where it came from. The latter is usually used in industrialized nations where capital is exported to create business and income in various countries. It must be said that the fiscal year in Costa Rica extends from October 1st, to September 31st, and income tax must be filed every year.

There are certain exceptions of companies who do not pay income tax. These include the Government, Municipalities, religious organizations, government agencies, and not for profit organizations. There are also some types of income that are exempt from the tax, like inheritance, donations, and lottery prizes to name a few.

Of course there are always tax deductions and this concept applies to income tax in Costa Rica too. Deductible from your income tax are all expenses made in order to produce the income. In other words whatever you spent that helped you in any way earn what you did is deductible. Your net income, over which you pay income tax, is obtained by subtracting all your deductions from your gross income.

Most companies pay 30% of their net income as income tax, with small and very small companies being able to fall in the 20% or 10% range depending on the gross income for the year. Physical persons fall into three categories depending on their net earnings for the fiscal year. If you earn less than a specific amount determined by law, you are exempt from paying income tax. If you earn more than that amount you may have to pay 10% or 25%. The ranges of net income for physical people or gross income for corporations from which the tax percentages are determined, are set by the Ministry of Treasury and vary from time to time.

Most people dislike the idea of having to pay taxes, and moreover if you have to give up a part of what you have worked so hard to earn, but apart from the social, political and economic implications, especially for countries like Costa Rica who are battling large fiscal deficits, you cannot avoid remembering the old adage that wisely states “There are two certainties in life: Death and Taxes.”