How to Pay Zero or Low Taxes in Costa Rica (Territorial Tax)

Costa Rica offers a stable political climate, a strong expat community, and good infrastructure. You couldn’t find a better place to slow down, spend lots of time outside, buy or rent an affordable property, and live closer to nature. 

We have yet to get to the best bit – paying zero or low taxes in Costa Rica is legally possible. 

If you want to live there, you combine three things: a lifestyle you like, a tax system you will benefit from, and eventually, second citizenship. There are a few caveats, however, and we will cover those later. 

If you don’t want to live there right now, getting a residency can also be an excellent backup option because there is no significant physical presence requirement to maintain the residence. It can also be cheap to obtain because you only need to show proof of income.

So, Costa Rica could fit the bill if you like the sound of a Spanish-speaking country that’s well-situated and safe. 

Why live in Costa Rica?

When describing the Latin American countries, like Costa Rica, Panama, and Chile, that are known to appeal to foreigners, it’s easy to slip into cliche mode. Why? Because, in a way, they all offer something similar despite being very different countries. 

That ‘something’ refers to good weather, friendly people, and fantastic nature. It also refers to the cosmopolitan life that’s possible in the bigger cities. So here we go. Yes, it’s true; Costa Rica offers something for everyone. Cliche box duly ticked, we can move on. 

The thing is, it’s true. Whether you’re a laid-back surfer who wants warm water, 85 degrees, we’re told, and a boho beach lifestyle, or a retiree who wants to relax and be left alone but also has security and good healthcare, Costa Rica has it. 

Of course, most of us will be somewhere in between; however, surfing is much harder than it looks. Give me a deck chair, a good book, and a cocktail any day.

But seriously, there’s a freedom about Costa Rica, a laissez-faire attitude that lets you be and create whatever it is you want. It’s perfect for families, couples, or those with fewer ties.

There are many places to live, like the capital, San Jose, which has everything you could want, from famous food markets to lively nightlife, culture, entertainment, huge green spaces, you name it. 

Then there’s the famous resort town of Santa Teresa, Costa Rica’s surfer’s paradise, which attracts backpackers worldwide. This is just one example: there are many beaches and beauty spots. 

Costa Rica is all about healthy, eco-friendly outdoor living, fresh and healthy food, and the relatively low cost of living. That may be why a reported 120,000 Americans live there, according to the State Department.

The cost of living in Costa Rica is the fourth most expensive in Latin America. The estimated monthly costs there are approximately $2500, including rent. For a single person, it’s around  $1500 a month.  

This amount would give you a standard of living comparable to the European average. A life of relative luxury for a couple will cost as little as $2500 per month. 

Costa Rica’s Territorial Taxes

A territorial tax system means the country only taxes residents on income earned within the country. Foreign-sourced income is, therefore, completely tax-free. 

For corporate tax, offshore transactions are not considered part of your local income and are not subject to income tax. If you decide to operate a business that makes income within the country, the tax rate is between 5% and 30%, depending on your earnings. 

In  Costa Rica, you will usually pay other types of personal taxes, like consumption taxes and VAT, which has a 13% rate imposed on the sale of goods and services consumed within the territory. The annual property tax in Costa Rica is 0.25%. That’s it; there are no wealth or inheritance taxes.  

To pay less tax in Costa Rica, you must first be a tax resident. There are certain conditions attached to residency that we’ll cover now. 

How to Get Residence in Costa Rica

There are several ways to obtain legal residence in Costa Rica if you’re a foreigner. The best way, if not through marriage or family relations, is to first apply for a temporary residency, valid for two years and can be renewed. You can then qualify for permanency after three consecutive years as a temporary resident. 

For example, if you’re retired and have a pension or retirement income of at least US$1000 a month, you can apply for residency under the Pensionado program. You can also include your spouse, children, and dependents under 25. 

The other category is the Rentista program. This requires a monthly income of at least $2500 for at least two years. The alternative is a $60,000 deposit in an approved Costa Rican bank. This amount covers your entire family for residency.

You can also invest in a business or property in Costa Rica for $200,000 or more. After permanent residency is granted, you still need to renew your Costa Rican ID every few years.  

Citizenship through naturalization can be obtained by a foreign national, and Costa Rica allows dual citizenship, which is a significant advantage. After seven years of living legally with a temporary or permanent residency visa, you can apply for citizenship by naturalisation. You’ll also need to have knowledge of Spanish and pass a test about Costa Rican history and values.

In terms of freedom to travel and explore the world, Costa Rica’s passport is currently ranked 30th globally. It offers Visa-free travel to 148 countries, including nations like Singapore, The United Kingdom, the UAE, and the whole European Union. 

However, you will need a visa to access 55 countries globally, like the United States and Australia. So, it can be an excellent backup passport if you decide to live there.

Pay Zero or Low Taxes in Costa Rica 

To be considered a tax resident, you must spend more than 183 days during the same tax year, including departures and arrivals to the country. 

If you want to live there, the best way to lower your tax burden is by having offshore businesses that pay no tax if structured properly. Costa Rica does have taxes on locally sourced income, but if you don’t derive your income there, you’ll pay next to nothing. 

If you are the only person working in a business and living year-round in Costa Rica, they could claim it’s locally sourced income as you manage, control, and work for the company. This is a caveat you must be aware of; it’s by no means a dealbreaker, and you can navigate through it. 

That’s the whole point about ensuring everything is set up properly, that you don’t have any blind spots. With some guidance, you can do it in a way that complies with the rules. 

Buying Property in Costa Rica 

Over the years, Costa Rica has experienced steady price appreciation in its real estate market, particularly in popular areas such as coastal regions, metropolitan areas, and tourist destinations.

San Jose, as the capital and largest city of Costa Rica, has witnessed the most significant appreciation. Average annual price appreciation in San Jose can range from 6% to 12%, depending on the location, property type, and market conditions.

San Jose offers excellent growth potential in its real estate market due to urban development, infrastructure projects, and the city’s commercial and cultural hub role. Areas close to the city centre, major business districts, and transportation hubs are expected to experience continued growth and investment opportunities.

With average yields of between 4% and 8% it will cost you a reasonable $1000-$3500 per square metre to buy property in Costa Rica. In the capital, San Jose, Escazú, Santa Ana, and Rohrmoser districts are known for their investment potential. Favorable factors include easy access to shopping centers, restaurants, and entertainment options. 

There are scenic landscapes and recreational areas to be found, as well as proximity to reputable schools and universities in these places. Typically, in San Jose, you’ll find a combination of historic buildings, including colonial-style structures, alongside modern high-rise buildings housing offices, apartments, and hotels.

It’s important to note that owning property in Costa Rica doesn’t automatically grant residency rights. You need to follow the country’s immigration processes to get residency. 

Achieve Tax and Lifestyle Benefits 

Whether you want to gain residency or work towards citizenship, you can choose how to go to Costa Rica. With a residence permit, you can live there for the entire year and become a tax resident. After seven years of living there, you can apply for citizenship. 

Besides that, it can serve as Plan B, to have somewhere to go to whatever the situation, particularly if you have to move quickly. 

It’s a great back-pocket citizenship option rather than going through all the bureaucracy from scratch when you need residence. So, always be prepared, that’s our motto. 

Many retirees have been going to Costa Rica for years; it suits many people. You can emigrate there if you have money in the bank or are willing to invest. It has good beaches, peaceful surroundings, a well-developed eco-tourism brand, and many beautiful areas. Costa Rica also has a developed visitor infrastructure and a reliable healthcare and health insurance system. 

If you’re not sure about Mexico or Panama, and you’re not looking to do that much traveling, there are a lot of great places to live. It’s where you will be left alone; it comes with prestige and freedom. It’s exciting as a liberal place, the first one in central America to legalise same-sex relationships. 

Many people will enjoy the lifestyle there; there’s a lot of fantastic nature, calm, Spanish speaking, and a good location geographically speaking. Americans and Canadians like it because it’s close to home, but Australians and Europeans can also enjoy many benefits there.  

Lower Your Tax Obligations

Having a second residency, especially in a place like Costa Rica, where it won’t cost the earth, offers a variety of benefits. You can lower your tax obligations as well as the lifestyle factors we’ve discussed. 

As a location-friendly country with good connections to America, Canada, and the rest of the world, it’s appealing to those who want to avoid traveling to far-flung destinations. It’s not a tax haven or tax-free country like Vanuatu, the UAE, or one of the Caribbean islands, but with planning and strategy that works for you, it can reduce your taxes to practically zero.

To get the tax breaks, you must spend six months a year there. Then, you will only pay tax on Costa Rica-sourced income if you do it properly and set up the right business entity.   

But here’s the thing: you must sever your economic ties with your home country and become a resident there to optimise your tax. If you’re American, you can only do that if you renounce your citizenship. That’s precisely what many of the expats who live in Costa Rica have successfully done. 

At Nomad Capitalist, we like Costa Rica and have made it work for many clients. 

Nomad Capitalist is a turnkey solution for offshore tax planning, dual citizenship, asset protection, and global diversification. We have helped 1,500+ high-net-worth individuals and can help you, too. Find out how here.