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Hiring in Costa rica
Costa Rica, officially known as the Republic of Costa Rica, is a Central American country with coastlines on the Caribbean and the Pacific. San Jose is the capital and the largest city of Costa Rica. Ecotourism, financial outsourcing, software development and pharmaceuticals are some of the main industries in Costa Rica. Its main trading partners are the United States, Guatemala, Panama, and Mexico. Global PEO or Employer of Record (EOR) play a pivotal role in providing companies with services related to hiring employees, and ensuring compliance with Costa Rica’s legal and tax regulations. Employment regulations including probation period, holidays and termination are covered by the Labor Code. The Labor Code stipulates that employees are entitled to a 30-day probationary period. Residents and nonresidents, regardless of their nationality, are taxed on their income earned in Costa Rica. Global PEOs facilitate companies by ensuring compliance with Costa Rica’s Labor Code and tax laws.
statutory labor requirements
Probation Period
- The Costa Rican Labor Code has a specific provision that covers “Domestic Employees”.
- It provides a 30-day probationary period where either party may terminate the relationship without and severance responsibility.
Annual Leave
- Two weeks for every 50 weeks of work is the annual paid leave for all employees.
- An employee is entitled to one day's wages or earned leave which shall be compensated thus if the services of an employee are terminated before the completion of a year's work.
Public Holidays
- New Year's Day (1st January)
- Holy Week
- Maundy Thursday (9th April)
- Good Friday (10th April)
- Juan Santamaria Day (11th April)
- Labor Day (1st May)
- Annexation of Nicoya (25th July)
- Virgen de los Angeles (2nd August)
- Assumption of Mary (15th August)
- Independence Day (of Costa Rica) (15th September)
- Christmas Day (25th December)
Maternity Leave
- Pregnant employees are given 1 month of paid maternity leave before the birth of the child, and 3 months after birth.
- Employers are required to pay 50% of the salary for all four months of leave, and the Social Security Administration pays the remaining half.
Paternity Leave
- Fathers holding public sector jobs are entitled to eight days of paid paternity leave.
Sick Leave
- Employers must pay at least 50% of the employee’s salary for the first three days of the employee’s sick leave.
- The Social Security Administration pays the other 50%.
- From the fourth day of sick leave forward, Social Security pays 60% of the salary and the employer is not obligated to pay anything to the employee.
Work Hours
- In Costa Rica, there are Normal Working Days (Jornadas Ordinarias Normales) and Special Working Days (Jornadas Especiales o de Excepcion).
- Both types of work days can be subdivided into day and nightshifts. The maximum hours one may work per week is 48.
- Normal daytime working hours are between 5 a.m. and 7 p.m.
- Night time jobs are those that take place between 7 p.m. and 5 a.m.
- Night time employees may not work more than 36 hours per week.
- The maximum number of hours allowed for mixed shifts of day and night time work is 42 hours per week.
Overtime
- Overtime is paid at time and a half, or the hourly wage plus an additional 50%
- Employers may require no more than four hours of overtime, for a total of twelve working hours per day.
Notice Period
- The law requires 30 days’ advance notice to be given of impending termination.
- If no advance notice is given, 30 days’ pay is due to the employee.
- If the required number of days of advance notice is given regular pay continues for 30 days, but the employee has the right of one paid day per week to look for another job.
Severance
- If an employee is terminated without cause by the employer or if the employee quits for cause, they are entitled to severance pay.
- If the employee has worked with the employer for more than three months but less than six months, then they are entitled to the equivalent of seven days’ wages.
- If the employee has worked from six months to one year they are entitled to fourteen days of wages.
- If the employee has worked for more than one year then the following schedule applies for each year worked:
|
Years Worked |
Days Paid |
|
1 |
19.5 |
|
2 |
20 |
|
3 |
20 |
|
4 |
21 |
|
5 |
21.24 |
|
6 |
21.5 |
|
7 |
22 |
13th / 14th Month Pay
- Yes (Mandatory)
- There is a statutory requirement to pay the 13th month salary.
- This is called 'Aguinaldo'. The Aguinaldo is usually paid between the 1st and the 20th of December.
- Failure to pay will result into a fine.
- There is no evidence that there is an obligation to pay the 14th month.
income tax
- Resident and nonresident individuals, regardless of their nationality, are taxed on their income earned in Costa Rica. Foreign-source income is not taxed.
- For individuals domiciled in Costa Rica, any income obtained within the boundaries of Costa Rica is considered as Costa Rican-source income and is taxable. Costa Rican-source income is understood to be any income derived from assets used, goods located, or services rendered within Costa Rican territory.
- Non-residents are liable only for the applicable withholding taxes (WHTs), depending on the nature of the local income.
- Monthly income in excess of CRC799,000 is taxable, including salary, pensions, bonuses, premiums, commissions and allowances (for example, housing and educational allowances).
- Income derived from self-employment or from a trade or business is subject to taxation.
- Tax rates for self-employed individuals for tax year 2019, based on annual taxable income, are as follows:
|
Annual taxable income (CRC) |
Tax on excess (%) |
|
|
Over |
Not Over |
|
|
0 |
3,732,000 |
0 |
|
3,732,000 |
5,573,000 |
10 |
|
5,573,000 |
9,296,000 |
15 |
|
9,296,000 |
18,631,000 |
20 |
|
18,631,000 |
25 |
|
- Tax rates for employed individuals, based on monthly salary, are shown in the table below. Individuals who are both self-employed and employees may not take the full CRC 3,549,000 deduction.
- Instead, they will only be able to take advantage of the spread of this amount and the resulting amounts from the exempt brackets of income from personal dependent work services.
|
Annual taxable income (CRC) |
Tax on excess (%) |
|
|
Over |
Not Over |
|
|
0 |
840,000 |
0 |
|
840,000 |
1,233,000 |
10 |
|
1,233,000 |
2,163,000 |
15 |
|
2,163,000 |
4,325,000 |
20 |
|
4,325,000 |
25 |
|
deductible expenses
Employment Expenses
- A domiciled individual, whether or not a national, whose only source of income is a salary for personal services cannot deduct business expenses.
Business Deductions
- Self-employed individuals whose source of income is from professional services (i.e. non-dependent work relationship), insurance brokerage, commissions (sales), fees, etc. may deduct up to 25% of the gross income as a deduction without itemizing the expenses or may elect to itemize the expenses incurred in producing the income.
Personal Allowances and Deductions
- Annual tax credits are allowed in the amounts of CRC18,000 for each dependent child and CRC26,880 for a spouse.
- The spouse tax credit may be taken by either the husband or the wife, but not by both.
|
Deductible Expenses |
|
|
Employment Expenses |
|
|
Business Deductions |
|
|
Personal Allowances and Deductions |
|
immigration
- Depending on their country of citizenship, individuals may be required to apply for and obtain an entry visa before traveling to Costa Rica.
- A Costa Rican consulate overseas grants the visa.
- Even though Costa Rica offers temporary residence permits for foreigners wanting to live in the country for longer than three months, they do not automatically allow the holder to work.
- Only Costa Rican citizens or Permanent Residence holders are allowed to work in Costa Rica without prior authorization.
- Thus, once you are in Costa Rica, you have to apply for a work permit at Costa Rica’s Immigration Department.
- A Costa Rica work permit falls under the “Special Category” of immigration permits, along with a student permit.
- This means that it will allow the holder to work and remain in the country under the conditions set by the Ministry of Labor and Social Security.
- The government of Costa Rica grants a work authorization to foreign employees who have special knowledge or experience in a certain field.
- The granting of a work authorization is subject to certain rules that must be checked on a case-by-case basis because the rules may vary.
- The main criterion applied by the Ministry of Labor is that persons in the local work force cannot be displaced by the hiring of foreigners.
- Consequently, it may not be possible to obtain a work permit for foreigners in certain occupations unless the employer is a company registered and recognized by the immigration authorities.
|
Type of Visa/ Permit |
Documentation |
Validity |
Eligibility |
|
Costa Rica Work Permit |
|
Varies (depends on a case by case bases) |
|
value added tax
- The standard rate for VAT is 13 percent, with reduced rates of 0, 5 and 10 percent.
- Excise taxes range typically between 10 and 50 percent.
- Reduced VAT rates are applicable on: wood - 10 percent; residential electricity - 5 percent; 'basic basket' of groceries and other basic goods - 0 percent; exports - 0 percent.
|
VAT |
|
|
Standard Rate |
13% |
|
Reduced Rate |
10% |
|
Reduced Rate |
5% |
|
Zero Rate |
0% |
withholding tax
Dividends
- A 15% withholding tax is levied on dividends paid to resident individuals and nonresidents
- The rate is 5% for dividends paid by stock corporations whose shares are registered on a local, officially recognized stock exchange
- No withholding tax applies on dividends paid to resident entities that carry on an economic activity
Interest
- A 15% withholding tax is levied on interest paid to a nonresident
- Payments made to a bilateral or multilateral entity/ organization are exempt from withholding tax
Royalties
- Royalties paid to a nonresident ae subject to a 25% withholding tax
- No withholding tax applies on royalties paid to residents
Fees for technical services
- Fees for technical services paid to a nonresident are subject to a 25% withholding tax
- No withholding tax applies on fees for technical services paid to residents
Other
- All Costa Rica-source income paid abroad is subject to withholding tax at varying rates (e.g., 5.5% on insurance income, 8.5% on transportation and communication income, and 15% on lease payments and professional fees, such as management fees (non-technical advice).
|
Type of Payment |
Residents |
Nonresidents |
||
|
Company |
Individual |
Company |
Individual |
|
|
Dividends |
0%/15% |
15% |
5%/15% |
5%/ 15% |
|
Interest |
0% |
15% |
0%/ 15% |
15% |
|
Royalties |
0% |
0% |
25% |
25% |
|
Technical Service Fee |
0% |
0% |
25% |
25% |
termination
- In Costa Rica, to terminate an employee for cause, the cause must be based on one of the grounds set forth in Article 81 of the Labor Code.
- The termination must be well substantiated as the employer carries the burden of proof that the termination was for cause.
- The employer will only be liable for the payment of wages, proportional vacation time and Christmas Bonus.
- Employees that are fired or laid off without cause are entitled to severance pay, which is paid on the last day of employment.
- If an employer terminates the employee without cause then the employee must be compensated with severance which is referred locally as “Prestaciones Laborales”
- The law requires 30 days’ advance notice to be given of impending termination.
- If no advance notice is given, 30 days’ pay is due to the employee.
- If the required number of days of advance notice is given regular pay continues for 30 days, but the employee has the right of one paid day per week to look for another job.
statutory benefits
- These are mandatory benefits as postulated by law
- These include probationary period, annual leave, public holidays, sick leave, maternity leave, paternity leave, overtime pay, notice period, severance pay and13th month pay.
- Statutory benefits also include social security benefits
|
Statutory Benefits |
|
Probationary Period |
|
Annual Leave |
|
Public Holidays |
|
Maternity Leave |
|
Paternity Leave |
|
Sick Leave |
|
Overtime Pay |
|
Notice Period |
|
Severance Pay |
|
13th Month Pay |
|
Social Security Benefits |
payments and invoicing
- Employers are responsible for withholding income taxes and social security contributions from employees’ salaries on a monthly basis.
- Employees are not required to file an annual income tax return if their only source of income is employment compensation.
- Nonresidents are not required to file tax returns if they are only subject to income tax withholding at source.
- The ordinary fiscal year runs from 1 October to 30 September. Returns must be filed, and any tax liabilities due must be paid, no later than 15 December.
- However, in certain specific circumstances, taxpayers may elect to file using a calendar tax year (1 January to 31 December).
- Self-employed individuals and individuals with a trade or business must make advance quarterly tax payments.
ease of doing business
- The ease of doing business index is an index created by Simeon Djankov, an economist at the Central and Eastern Europe sector of the World Bank Group.
- Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.
- According to the World Bank Costa Rica ranked 74th in the World in 2019 in terms of ease of doing business.
employee accruals
| Christmas Bonus% |
Based on one month bonus |
| Christmas Bonus Over Vacations % |
0% |
| Severance per Year % |
Employees are entitled to seevrance pay that equals 19.5 days of pay after completion of one year of employment (5.34% of annual salary) |
| Vacations % | Two weeks for every 50 weeks of work is the annual paid leave for all employees (2.74% of annual salary) |
| Notice % |
Employees are entitled to 30 days of notice period for one year of service or more (8.24%) |
| Christmas Bonus Over Notifications% | 0% |
| Vacations Plus% | Note that vacation is calculated with the average of the salary of the previous 50 weeks including any bonuses. |
| Total percentage of Salary (yearly) | The total employment accruals as a percentage of salary per anum are equal to 24.75%. |
employer accruals
Additional information (Country Accruals)
| Caja |
34.50% |
| Maternity |
4 months |
| Christmas Bonus |
8.33% |
| Vacation |
5.31% |
| Description |
The Social Security system, known as the Caja, provides employees with free health care, sick leave, disability pensions and retirement benefits. It is mandatory for all employers to register employees with the Caja. Total contributions amount to roughly 26.5% of the salary by employers, and 10.5% by employees. |
Employer Accruals Additional information
| Employment Accruals | ||
| Annual Leave | Two weeks for every 50 weeks of work is the annual paid leave for all employees. | This equals 3.8% (2/52 weeks) of annual income |
| Maternity Leave | Pregnant employees are given 1 month of paid maternity leave before the birth of the child, and 3 months after birth. Employers are required to pay 50% of the salary for all four months of leave, and the Social Security Administration pays the remaining half. |
This equals 50% of 33.33% of annual income |
| Paternity Leave | Fathers holding public sector jobs are entitled to eight days of paid paternity leave. | This equals 2.2% (8/365 days) of annual income |
| Sick Leave | Employers must pay at least 50% of the employee’s salary for the first three days of the employee’s sick leave. The Social Security Administration pays the other 50%. |
This equals 50% of 0.82% of annual income |
| Overtime | Overtime is paid at time and a half, or the hourly wage plus an additional 50% Employers may require no more than four hours of overtime, for a total of twelve working hours per day. |
Normal hourly rate is around 14,750 CRC. Overtime is paid at a additional 7375 CRC. |
| Severance | If the employee has worked with the employer for more than three months but less than six months, then they are entitled to the equivalent of seven days’ wages. If the employee has worked from six months to one year they are entitled to fourteen days of wages. |
This equals 1.92% of annual income |
| 13th Month Pay | Employees in Costa Rica are entitled to a 13-month salary called ‘Aguinaldo’, which is based on one month of an employee’s salary and must be paid within the first 20 days of December each year. | This equals 8.33% (1/12 months) of annual income |
| Social Security | Social security contributions are levied on salaries, at a rate of 26.33% for the employer | This equals 26.33% of annual income |
