International Tax Planning White Paper Costa Rica

Tax Issues: How to integrate your Foreign property purchase with your tax situation at home

Maurice M. Glazer, Chief Executive Officer, The Glazer Group & All Subsidiaries

International Tax Planning

Proactive Income and Estate Tax Planning are Essential to Building Wealth

Coordinating Tax Laws in Foreign Countries with the U.S. Tax Codes
Designing Business Plans to Utilize Maximum Deductions
Utilizing Creative Concepts for Asset Protection and Tax Planning
Planning Before You Sell or Buy any Property or Investment and Before Each Year End is Imperative

"Our High Net Worth Clients have been Benefiting from our Expertise and Experience for 46 years."

Frequently Asked Questions

Q:A person selling a foreign property (not a primary residence) for a gain, is he liable for both U.S. & foreign capital gain taxes?
A:Generally, a person will get tax credits on his U.S. tax return, for foreign taxes paid (no double taxation).
Q:Can a foreign property be bought as a second home? What is deductible for tax purposes?
A:Yes, foreign property can be considered a second home, thus interest & property taxes are deductible on U.S. returns.
Q:Are there wage & housing exclusions for U.S. citizens working in a foreign country?
A:Yes, wage exclusion (up to $80K) & housing exclusion (for expenses over $34/day) apply for employees working abroad.
Q:Can one invest in Costa Rica real estate in a retirement plan?
A:Yes, with restrictions (annual appraisal / audit, bond coverage).
Q:Can we do a 1031 exchange between a foreign country and the U.S. if it is similar property?
A:No — Section 1031, (h) 1.
Q:Can we do a 1031 exchange between foreign countries.
A:Yes, International for International is appropriate. However, You would still be liable for the tax in the foreign country where the sale is made.
Q:Are real estate income & capital gains exempt from income taxes in a foreign country, if done in a U.S. IRA or Qualified Plan.
A:No, However any taxes paid in a foreign country can be offset on the U.S. tax return via a foreign tax credit. Costa Rica has no capital gains tax.

Taxes in United States

U.S. Expatriates and Lawful Permanent Residents (Green Cards) Filing of U.S. Tax Returns

Do not move to a foreign country and forget or choose not to file a U.S. tax return.
Required filing on worldwide taxable income when residing in or outside the U.S.
- Statute of limitations never runs out.
- Live abroad for 10 years and return penalties and interest may exceed the actual tax.

If you have W-2 income or self employed income you have to file.
* Reductions available against foreign income:
- Foreign earned income exclusion $82,400 for every tax payer.
- Deduction for living expenses in excess of $34 per day.
- Foreign tax credit — Form1116
* Almost 50% filing show no tax liability because of these items.

Self Employed

If no foreign social security withheld from earnings you must file a Schedule C and pay self employment tax of 15.3%
Cannot be reduced by items on D.

Special forms required:

More than 10% ownership in foreign corporation — Form 5471
If controlled foreign corporation (over 50%) tax on prorata share of profits.
If beneficiary or trustee of a foreign trust (i.e. Fideiomiso) — Form 3520
Have a foreign bank account or other financial account over $10,000 — Form TDF 90-22.I.

Special tax on former citizens and long-term permanent residents who leave to avoid U.S. taxes, regardless of intent. Section 877

Owning A Foreign Corporation

If you own 10% of the shares of a foreign corporation that operates your business or owns real property you need to file Form 5471. Failure to file can result in a $10,000 penalty.

If you own over 50% of a foreign corporation and are at least a 10% shareholder you should include your prorata share of the foreign corporation's income in U.S. tax return.

You must supply the IRS with:

Income Statement
Balance Sheet
Data on its Loans
Data on its Operations
Data on its Other Shareholders

Foreign Trust

Owning property if it is residential real property in a foreign trust requires you to file Form 3520 when the trust is established and Form 3520A each year thereafter (also applies if you are a beneficiary or creator of any foreign trust). Penalty for failure to file is 35% of the value of the property.

If you purchase property outside of the "restricted zone" and you own title in your name you do not have to file form 3520.

Real Estate As A Plan Asset

Real Estate as a Plan Investment

"Investing in real estate within a qualified retirement plan is a nontraditional investment that requires careful consideration."

Real estate includes but is not limited to Limited Partnerships, land, buildings, etc;
Some issues do not take into account issues such as changes in law or government policy or unforseen events.
Please feel free to contact

Taxes in Costa Rica

More simplified than other countries
Income tax: Graduated Tax Rates
Less than minimum — No Tax

Municipal Taxes

Clean Streets
Public Lighting
Local Government

Amounts vary but never over $10.00 US per month per resident

Property Taxes

.25% of price of property
If less than $6,000,000 Colones then you are exempt.

Sales Tax

13% on Goods & Some services

Exempt Services:

Lawyers
Doctors
Dentists
Other independent services — Home or Auto

Transfer Taxes

Real Estate — 1.5% over price inscribed in National Registry
Auto — 2.5% over retail price established by Ministry of Treasury

Income Tax

All individuals who work any corporations that are involved in commerce
Fiscal year October 1st to September 30th Individuals
Each worker has to declare even if no income or business occurred.
- Income up to 215,600 colones per month is exempt
- 10% tax — 215,600 colones up to 324,100 colones per month
- 15% tax — over 324,100 colones per month

Income Tax: Corporations

10% tax up to 13,200,000 colones (approx. $25485.82 in U.S. Dollars) in Gross Income
20% Tax on 13,200,000 to 28,560,000 colones (approx. $55,721.28 in U.S. Dollars) in Gross Income
30% Tax over 28,860,000 colones

Income Tax: Professionals

Tax on Professionals if self employed with a professional degree (i.e. Doctor, Lawyer)
- Exempt — Up to 958,000 colones
- 10% — 958,000 to 1,431,000 colones
- 15% — 1,431,000 to 2,388,000 colones
- 20% — 2,388,000 to 2,388,000 colones
- 25% — over 4,785,000 colones

Doing Business in Costa Rica

Business Resources
Buying Real Estate