Costa Rica: Tax treatment for employees staying in Costa Rica

Scenario: A “foreign” company (such as, for example, a German entity) has an employee who should work in the same foreign country (i.e. in Germany). However,

1. due to the coronavirus, he is working remotely from his country (i.e. he returned, for instance, to Costa Rica and could not go back to Germany for work due to the coronavirus– thus, he is working for the German entity from his home office in Costa Rica),
2. even after the coronavirus crisis, he is working from his country (i.e. he works from his home office in Costa Rica, but no longer due to coronavirus-related travel restrictions, but because he has an agreement with his German employer).

Tax Treatment based on the CR – Germany’s Tax Treaty

CR Tax Administration has not issued a ruling (we do not expect it to do so) in relation to these matters, therefore, we shall comment based on the current tax provisions.

The employee can fit into two possible regimes, a. Salary Income Tax, or b. Salary on remittances abroad; the former considers the employee a tax resident, the latter does not.

If we base the analysis under the TT, the domestic rules to identify the tax residence are not applicable, therefore the TT will prevail.

According to the TT’s rules to distinguish the possible double tax residence and assuming the employee has his home, family and source income in Germany, he would be considered as non-tax resident under CR-tax regime b., therefore, the employee must pay over the gross income, at a tax rate of 10%.

If Germany also claims the employee’s tax residence, his salary can be taxable in Germany. Any double taxation in Germany would be either avoided by exemptions with progression or by a foreign tax credit.

Permanent Establishment

In the scenario between countries without TT in force, if the individual remains more than 183 days working for a foreign company, it is advisable to analyse the Permanent Establish-ment (PE) rules from the subjective perspective. If the foreign entity fulfils said rules, it must register as a CR taxpayer and the person can be deemed an employee for CR Social Security purposes.

If the foreign entity does not have a PE, the individual must register as a taxpayer and pay taxes following the Professional Services Tax Regime.

If the employee does not reach the term of 183 days, he would be deemed as a non-tax resident, being obliged to pay over the gross income, at a tax rate of 1 0%.

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