Costa Rica has proposed a new 15% tax on certain types of income earned outside the country, a change that could affect residents who receive money from foreign investments, rental properties and other assets abroad. The proposal was presented to the Legislative Assembly yesterday and would apply to five main types of foreign income: interest, dividends, royalties, rental income and capital gains.
The legislation would apply to people and companies considered tax residents of Costa Rica, including individuals who do not operate a business here. The proposal is not yet law and it must go through the Legislative Assembly, where lawmakers can approve it, reject it or make changes before it reaches a final vote.
If approved in its current form, the legislation would mark an important change in the way Costa Rica taxes some money earned outside the country. Costa Rica has traditionally followed what is known as a territorial tax system. In simple terms, that generally means the country taxes income generated inside Costa Rica rather than income earned elsewhere.
The new proposal would keep that general system but create a broader exception for certain types of passive income coming from abroad. Passive income generally refers to money generated from investments or property rather than a salary earned from working. For example, a Costa Rican tax resident who owns a rental property in another country and receives rental income from it could potentially fall under the proposal.
The same could apply to someone receiving dividends from foreign investments, interest from money held abroad or profits from selling certain assets outside Costa Rica. However, the proposal should not be interpreted as a 15% tax on every dollar a person receives from another country.
The bill specifically focuses on foreign interest, dividends, royalties, rents and capital gains. That distinction will be particularly important for foreign residents living in Costa Rica, many of whom receive money from overseas. The legislation as presented does not simply state that all pensions, salaries, retirement income or other money coming from abroad would automatically be subject to the new tax.
The exact treatment of individual sources of income would depend on how they are classified under Costa Rican tax law. Another important issue is tax residency. Being a legal resident of Costa Rica for immigration purposes does not necessarily answer every tax question. Tax residency is determined under tax rules, and people with income abroad would need to determine whether those rules apply to their individual situation.
The proposal also includes a system intended to reduce the possibility of paying tax twice on the same income. If a person has already paid or had a similar tax withheld in another country, that amount could be taken into account when calculating what is owed in Costa Rica.
The exact calculation would depend on the amount received and the foreign tax already paid. For example, a person receiving dividends from investments in the United States may already have taxes withheld there. Under the proposal, those foreign taxes would be considered when determining the taxable amount in Costa Rica.
The government says the change is intended to create more equal treatment between people earning passive investment income inside Costa Rica and those earning similar income from assets located abroad. The issue has been debated in Costa Rica for several years. In 2023, lawmakers changed the income tax rules while Costa Rica was working to resolve concerns raised by the European Union over its treatment of foreign income.
The law that emerged from that process generally kept Costa Rica’s territorial tax system and limited taxation of foreign passive income to specific circumstances involving certain multinational companies. The government opposed parts of that legislation at the time, arguing that it left too much foreign investment income outside the Costa Rican tax system.
The new bill would go considerably further. Instead of concentrating mainly on multinational groups, the proposal would use tax residency as one of the central tests for deciding who could be required to pay. That means individuals, companies, trusts, investment funds and other legal structures based in Costa Rica could potentially fall within the new rules if they own assets or rights abroad that generate the types of income covered by the legislation.
The bill would also change the treatment of some tax credits related to investment securities, although that part of the proposal is likely to have less direct impact on most individual residents. The foreign-income proposal was presented alongside a separate bill that would overhaul the way Costa Rica manages tax exemptions and eliminate some existing exemptions.
Both measures now begin the legislative process. For residents with money or property outside Costa Rica, the most important point for now is that nothing has changed yet. Foreign interest, dividends, rent and capital gains are not suddenly subject to a new 15% tax because the proposal was introduced.
The Legislative Assembly will first have to debate the bill, and its wording could change substantially before any final approval. The proposal nevertheless deserves close attention from people who are tax residents of Costa Rica and receive investment or property income from abroad because, if approved, it would broaden Costa Rica’s ability to tax foreign passive income beyond the rules currently in place.
