Moving to Costa Rica offers incredible lifestyle benefits, but it also introduces complex tax obligations that catch many American expats off guard. Unlike most countries, the United States taxes its citizens on worldwide income regardless of where they live. Add Costa Rican tax requirements to the mix, and you’re facing a dual-jurisdiction challenge that requires careful planning.
The good news? With proper guidance and strategic planning, you can stay compliant in both countries while minimizing your tax burden. This comprehensive guide explains everything US expats need to know about taxation in Costa Rica.
The Fundamental Truth: US Citizens Pay Taxes Everywhere
Here’s what surprises many Americans moving abroad: your US tax obligations don’t disappear when you leave the country.
The United States is one of only two countries in the world (along with Eritrea) that taxes based on citizenship rather than residency. This means even if you live in Costa Rica full-time, you must continue filing US tax returns and potentially paying US taxes on your global income.
However, several provisions exist to prevent double taxation—if you understand how to use them correctly.
Understanding Costa Rica’s Tax System
Costa Rica operates on a territorial tax system, which means the country primarily taxes income earned within its borders. This is fundamentally different from the US worldwide taxation approach.
What Costa Rica Taxes:
- Employment income from Costa Rican employers
- Business income from Costa Rican operations
- Rental income from Costa Rican properties
- Capital gains from selling Costa Rican real estate
- Professional services provided within Costa Rica
What Costa Rica Generally Doesn’t Tax:
- Foreign employment income (remote work for US companies)
- Foreign investment income (US stocks, dividends, interest)
- Foreign pension income
- Foreign Social Security benefits
- Capital gains from foreign assets
This territorial approach creates planning opportunities but also requires careful structuring to ensure compliance in both jurisdictions.
Costa Rica Tax Rates and Brackets (2025)
Costa Rica uses progressive income tax rates based on monthly income:
Personal Income Tax Brackets (Monthly):
- ₡0 – ₡941,000: 0%
- ₡941,001 – ₡1,381,000: 10%
- ₡1,381,001 – ₡2,423,000: 15%
- ₡2,423,001 – ₡4,845,000: 20%
- Above ₡4,845,000: 25%
Corporate Income Tax:
- Standard rate: 30% on net profits
- Small businesses may qualify for reduced rates
Capital Gains Tax:
- Real estate sales: 15% on gains
- Securities and other assets: 15%
Value Added Tax (IVA):
- Standard rate: 13% on most goods and services
- Reduced rate: 4% on some basic necessities
- Exempt: Medical services, education, financial services
Key US Tax Provisions for Expats
The IRS provides several mechanisms to reduce or eliminate double taxation for Americans living abroad:
Foreign Earned Income Exclusion (FEIE)
For 2025, you can exclude up to $126,500 of foreign earned income from US taxation if you meet either the Physical Presence Test (330 days outside the US in a 12-month period) or the Bona Fide Residence Test (legal resident of Costa Rica for a full tax year).
This exclusion applies only to earned income (wages, self-employment income), not passive income like dividends, interest, or rental income.
Foreign Tax Credit (FTC)
If you pay income tax to Costa Rica, you can claim a dollar-for-dollar credit against your US tax liability for those same taxes. This prevents paying full tax to both countries on the same income.
The FTC is particularly valuable for income that doesn’t qualify for FEIE, such as investment income or amounts exceeding the FEIE limit.
Foreign Housing Exclusion
In addition to FEIE, you may exclude or deduct certain housing expenses above a base amount. For 2025, this can provide an additional exclusion of $15,000-$30,000 depending on your location in Costa Rica.
Qualifying expenses include rent, utilities (except phone), property insurance, and residential parking fees.
Costa Rica Tax Residency: What Triggers It?
You become a Costa Rican tax resident if you meet any of these conditions:
Permanent Residence or Citizenship – Holding legal residency (pensionado, rentista, inversionista) or citizenship makes you a tax resident.
Economic Center of Interest – Maintaining significant economic ties to Costa Rica (business ownership, property, family) can establish residency even without legal status.
183-Day Rule – Spending more than 183 days in Costa Rica during a calendar year typically triggers tax residency.
Understanding your residency status in both countries is crucial for proper tax planning and treaty benefits.
The US-Costa Rica Tax Treaty: Does It Exist?
Here’s an important reality check: the United States and Costa Rica do not have a tax treaty.
This means you cannot rely on treaty provisions to automatically prevent double taxation or reduce withholding rates. Instead, you must strategically use US tax code provisions (FEIE, FTC) to minimize dual taxation.
The absence of a treaty also means:
- No treaty-based residency tiebreaker rules
- No reduced withholding rates on cross-border payments
- Greater importance on proper income characterization
- Increased complexity in business structuring
Common Income Scenarios and Tax Treatment
Scenario 1: Remote Work for US Company
You live in Costa Rica but work remotely for a US employer.
US Tax: Fully taxable as US-source income. May not qualify for FEIE if work is performed remotely for a US employer (consult a tax advisor).
Costa Rica Tax: Generally not taxable due to territorial system, as the income source is foreign.
Scenario 2: Costa Rican Employment
You work for a Costa Rican company with a local employment contract.
US Tax: Taxable, but you can exclude up to $126,500 using FEIE and claim FTC for Costa Rican taxes paid.
Costa Rica Tax: Fully taxable at progressive rates. Your employer withholds tax from each paycheck.
Scenario 3: US Social Security Benefits
You receive Social Security retirement benefits while living in Costa Rica.
US Tax: Potentially taxable depending on your total income level (up to 85% of benefits may be taxable).
Costa Rica Tax: Generally not taxable as foreign-source income.
Scenario 4: Rental Income from Costa Rican Property
You own and rent out property in Costa Rica.
US Tax: Fully taxable as rental income. You can deduct expenses but cannot use FEIE (passive income).
Costa Rica Tax: Taxable at 15% on gross rental income (or at progressive rates if you elect to file on net income basis).
Use FTC to offset US tax with Costa Rican tax paid to avoid double taxation.
Scenario 5: US Investment Income (Dividends, Interest)
You maintain US brokerage accounts generating dividends and interest.
US Tax: Fully taxable as US-source investment income. No FEIE available.
Costa Rica Tax: Generally not taxable as foreign-source income.
Scenario 6: Selling Costa Rican Real Estate
You sell property in Costa Rica and realize a gain.
US Tax: Capital gain taxable at US rates (0%, 15%, or 20% depending on income level).
Costa Rica Tax: 15% capital gains tax on the profit.
Use FTC to offset US tax liability with Costa Rican tax paid.
FBAR and FATCA Reporting Requirements
Beyond income tax returns, US expats must comply with foreign financial account reporting:
FBAR (FinCEN Form 114)
If the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file FBAR by April 15 (automatic extension to October 15).
This includes:
- Bank accounts
- Investment accounts
- Pension accounts
- Signature authority on business accounts
Penalties for non-compliance are severe: up to $10,000 per violation for non-willful failures, and up to 50% of account balances or $100,000 for willful violations.
FATCA (Form 8938)
Report specified foreign financial assets if they exceed certain thresholds:
- Single, living abroad: $200,000 on last day of year OR $300,000 at any point
- Married filing jointly, living abroad: $400,000 on last day OR $600,000 at any point
Form 8938 has higher thresholds than FBAR but overlapping reporting requirements. Many accounts must be reported on both forms.
Costa Rican Tax Compliance Essentials
Tax Registration
Obtain your tax identification number from Tributación (Costa Rica’s tax authority). This is required for:
- Opening bank accounts
- Purchasing property
- Starting a business
- Signing employment contracts
Monthly Income Tax (D-101 Form)
If you earn Costa Rican-source income, file monthly declarations by the 15th of the following month. Your employer may handle this through payroll withholding.
Annual Tax Return (D-101 Consolidado)
Even if you file monthly, you must submit an annual reconciliation return by March 15 of the following year.
Electronic Invoicing
If you operate a business in Costa Rica, you must use the electronic invoicing system (Factura Electrónica) approved by Tributación. This applies to:
- All registered businesses
- Service providers
- Rental property owners (in some cases)
Non-compliance results in fines and potential business closure.
Value Added Tax (IVA) Returns
Businesses registered for IVA must file monthly returns by the 15th of the following month, even if no taxable transactions occurred.
Costa Rican Business Structures for Expats
Choosing the right legal structure impacts your tax obligations significantly:
Sociedad Anónima (SA) – Corporation
The most common structure for foreign business owners. Offers liability protection and flexible ownership. Taxed at 30% corporate rate on Costa Rican-source income.
Sociedad de Responsabilidad Limitada (SRL) – LLC
Similar to US LLCs but with different tax treatment. Limited to 50 partners maximum. Also taxed at 30% corporate rate.
Sole Proprietorship (Persona Física)
Simple structure but no liability protection. Income taxed at personal progressive rates. Limited to certain professional activities.
US LLC vs Costa Rican Entity
Many expats wonder if they should operate through a US LLC or Costa Rican entity. Considerations include:
- Where clients/customers are located
- Nature of services provided
- Need for local business presence
- Banking and payment processing requirements
- Tax optimization opportunities
A US LLC may be pass-through for US tax purposes but could be viewed as a corporation by Costa Rica. Professional guidance is essential for proper structuring.
Tax Planning Strategies for US Expats in Costa Rica
Strategy 1: Maximize FEIE and FTC
Carefully structure your income and presence to maximize the Foreign Earned Income Exclusion. For income exceeding the exclusion or passive income, utilize Foreign Tax Credits strategically.
Strategy 2: Timing of Income Recognition
Consider timing of income recognition and expenses to optimize tax positions in both countries. Costa Rica’s territorial system creates opportunities for timing foreign-source income.
Strategy 3: Proper Business Structuring
Structure business operations to minimize Costa Rican-source income while maintaining compliance. Remote consulting for foreign clients may generate foreign-source income not taxable in Costa Rica.
Strategy 4: Real Estate Holding Structures
Hold investment properties through appropriate entities to optimize tax treatment, liability protection, and estate planning.
Strategy 5: Retirement Account Management
Understand how US retirement accounts (401k, IRA) are treated in Costa Rica. Roth conversions, distribution timing, and Costa Rican pension contributions all require careful planning.
Strategy 6: Coordinated Filing Approach
File US and Costa Rican returns in coordination to ensure consistent reporting and optimal use of foreign tax credits.
Common Tax Mistakes Expats Make
Mistake #1: Not Filing US Returns
Some expats mistakenly believe living abroad eliminates US filing requirements. Even if you owe no tax due to FEIE or FTC, you must still file annual returns.
Mistake #2: Missing FBAR Deadlines
FBAR compliance is separate from tax returns and has different deadlines. Missing FBAR filings triggers severe penalties even if you owe no tax.
Mistake #3: Incorrectly Claiming FEIE
Not meeting the Physical Presence or Bona Fide Residence tests, or claiming FEIE on passive income, results in denied exclusions and back taxes plus penalties.
Mistake #4: Ignoring Costa Rican Compliance
Focusing only on US taxes while ignoring Costa Rican obligations creates problems. Electronic invoicing requirements, monthly declarations, and IVA filings are strictly enforced.
Mistake #5: Improper Business Structure
Choosing the wrong entity type or jurisdiction for your business creates unnecessary tax burdens and compliance headaches.
Mistake #6: DIY Complex Situations
Tax software designed for domestic filers cannot handle the complexity of dual-jurisdiction taxation. Professional guidance prevents costly mistakes.
How Done Deal CR Ensures Your Tax Compliance
At Done Deal CR, our all-in-one tax and accounting services eliminate the stress of dual-jurisdiction compliance:
US-Costa Rica Coordinated Tax Planning – We develop strategies that optimize your position in both countries simultaneously.
Complete Filing Services – We prepare and file US federal returns, state returns (if applicable), FBAR, FATCA forms, and all Costa Rican declarations.
Monthly Bookkeeping and Reporting – We maintain your financial records to Costa Rican standards and provide monthly reports for decision-making.
Electronic Invoicing Setup – We implement and manage your Factura Electrónica system to ensure compliance with Tributación requirements.
Entity Formation and Structure – We help you choose and establish the optimal business structure for your specific situation.
Ongoing Compliance Monitoring – We track all filing deadlines, estimated tax payments, and regulatory changes to keep you compliant year-round.
Bilingual Support – We communicate with Tributación on your behalf and translate all official correspondence and requirements.
From your first month in Costa Rica through years of successful operations, we handle the complexity while you focus on enjoying pura vida.
