The purpose of this article is for legal expats and candidate-expatriates who have not come to Costa Rice to live, to understand how the proposed tax plan might affect them.

None of this is etched in bronze which means the plan is not yet law and open for seemingly endless debate.

It is often times referred to as a Fiscal Plan but that is incorrect terminology adopted by the Central Government in order to sell the tax plan. A Fiscal plan would require the Central Government to enter into an austerity program, and that is highly not doable after 63 years of a social democracy.

The big question is, “Will expats be required to pay taxes on pensions, Social Security and other passive income?

First, using the United States IRS´ definition of “passive income” it is all income received on a regular basis with little effort required to maintain it.

From Costa Rica´s proposal, passive income is identified as  that income which is generated by cash deposits (Interest), foreign property rental income, loans, securities (Dividends), bonds, notes and other income such as royalties on books, music, publications, etc. (No mention of pensions and Social Security)

Notice that the word “includes” with those examples that are given and it does not mention pension funds or retirement income as in Social Security. The U.S. does include pension funds as “passive income” in its IRS definition.

The current proposal also stipulates that passive income will be taxed only upon repatriation of money to Costa Rica. Therefore, money in a U.S. bank is not taxable until it is brought here.

This is important to define our position: Passive income is taxed on all income generated abroad (Outside Costa Rica) at the time of repatriation. Basically, it is grouped in three concepts: Rental income from property abroad, Interest on bank investments (Deposits) and dividends earned by foreign investment.

While “income generated from a passive source” is used in the plan´s verbiage, with a totally different interpretation of the tax law which by omission says, expat retirement income including pensions and Social Security payments are not taxable.

Believe me when I say this all sounds like a lot of double talk, and it is. I have asked the legal opinion of a Costa Rican lawyer who got his MBA in the States along with a C.P.A. who works as well as lives in Costa Rica.

The verbiage of my small “aviso” comes from a “guide to then new Tax Law” published by El Financier.

My advice, three things:

Next, it is highly unlikely that the Pimps of Poverty would be able to target and collect individual passive income unless your pension fund and Social Security deposits go directly to any one of the approved banks in Costa Rica.

The safest way to play the game, until we have some solid opinions, for now is to have the funds and Social Security deposit money directly into your home country account. Then obtain a debit card from that bank with a limit of $1,000 and bring in needed cash to your bank account here.

If the local banks jump on you regarding taxes, it is time to think serious about moving.

Sorry for not being more specific but the crummy tax plan is up in the air and not specific.

Please stay tuned for more updates.

Sources:  Ministerio de Hacienda, El Financiero, Unnamed CPA and Unnamed Attorney.