Long Branch, NJ · Member since 2013 · 11 posts · 0 votes
Hi,
I live in the US but am interested in purchasing a Costa Rican rental (for rent and eventual sale) with my parents who are Costa Rican. They have done this before and they establish a company as a 'sociedad anonima' (or SA) which I think is a C Corp equivalent. So the idea is I pay for a third of the property and I will receive a third of the rent after expenses and Costa Rican taxes. I want to start understanding what this implies in terms of US taxes I have to pay. Since this company is a Costa Rican entity, will it have to pay US taxes (it already pays Costa Rican taxes which is like 20%)? or do I only have to worry about paying my individual US taxes when I receive my portion of the rent? Can I use the Costa Rican taxes that the entity pays (e.g. 20%) and use it for my individual taxes as foreign tax paid?
Long Branch, NJ · Member since 2013 · 11 posts · 0 votes
11y
This is what I researched so far, but it would be good for someone to confirm. So a sociedad anonima in Costa Rica is basically a C corporation US equivalent. It will pay its own Costa Rican taxes (e.g. 10%, 20%, 30%), and not subject to US taxes. However, when I get money from the rent then this will be taxed again and treated as a qualified dividend (15%). And I cannot use the foreign tax credit for the taxes the company paid in Costa Rica to offset my individual US taxes. So I guess this is basically the double taxation a C corp is subject even though we are talking about a foreign entity. Now since the money received is from rentals, it is not taxed as ordinary income but as qualified dividends, so there is no deductions like depreciation, rental expenses that can be made, right?
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
11y
Note: I do not know anything about Costa Rican taxes. Here is how things would work from a US perspective.
IF the Sociedad Anomina works the same as a US C-Corp, then it will pay its own taxes on the profit and that has nothing to do with you. It pays only Costa Rican taxes. Just because it has a US stockholder does not mean that it has any obligation to file anything within the US.
Any distributions it then pays to you (or any stockholders) are not deductible to the corporation and you are correct, there is a double taxation component, however because the SA pays its own taxes under its own id, you do not get a foreign tax credit for this.
IF you are a US citizen or resident alien, you are taxed on your worldwide income. Therefore, any dividends that are paid to you from the SA then become taxable at the dividend rate, which can vary depending on your total taxable income.
So let's say we have the following example.
Rent Income - $30,000
Valid Costa Rican Rental Expenses - $20,000
Total Net Income - $10,000
Savings kept within the SA - $5,000
Amount distributed to you - $1,666.
You pay taxes on the $1,666 of income you received and pay it at your rate which, as I said above, can vary depending on your total taxable income.
Long Branch, NJ · Member since 2013 · 11 posts · 0 votes
11y
Thanks @Al Wilson I am definitely going to talk to a CPA versed in international tax. I will just do a little more research before doing that to get my bearings.
Thanks @Linda Weygant for the example. It seems like the rental SAs my parents have, they have little expenses (which is good because it is more income but also more tax), and also they do not have much savings kept in the SA (probably due to little expenses) which again means more tax.
I am seriously exploring having them change from 'sociedad anonima' to 'sociedad de responsabilidad limitada' which I think is a LLC US-equivalent. If it can be classified as a partnership for US tax purposes, then I think I will be able to deduct the Costa Rican taxes (taken as foreign tax paid) against my individual US income tax. This would help with the double taxation. Also, I read somewhere that it is also favorable when selling because it is taken as capital gains tax instead of ordinary income tax. It would be great if someone can confirm this or comment on this.