Quick answer: Moving to Costa Rica does not shrink your US tax obligations — it complicates them. As a US citizen or green-card holder you are taxed on worldwide income wherever you live, and several ordinary-seeming moves — buying local funds, opening accounts, holding property in a Costa Rican company — can trigger punitive US rules: the PFIC regime, FBAR and FATCA reporting, foreign-corporation filings, and lingering state tax. None of it is a reason not to move; all of it is a reason to plan with a cross-border CPA before you act. This is an awareness guide, not tax advice.
Costa Rica’s territorial system is genuinely favourable — foreign-sourced income generally sits outside the local net (see Costa Rica taxes for expats). But that is the Costa Rican side. The US side follows you home, and the traps below are where well-meaning Americans get hurt. [VERIFY: every US tax point here is general and simplified — confirm your specific situation with a qualified US cross-border CPA or tax attorney.]
The PFIC trap: why buying local funds can wreck your return
Direct answer: A Passive Foreign Investment Company (PFIC) is, broadly, a non-US pooled investment — most foreign mutual funds, and many ETFs and similar vehicles. The US taxes PFICs under a punitive regime (default excess-distribution rules, high tax rates and interest charges, plus onerous Form 8621 reporting). The practical rule of thumb for a US person: be extremely cautious about buying non-US mutual funds or pooled investments, whether in Costa Rica or anywhere abroad.
The trap is that it looks so innocent — a local bank or advisor offers a perfectly normal-looking fund, you invest, and you have quietly created a US tax and compliance headache that can cost more than the investment earns. Many US cross-border advisors simply steer clients away from foreign pooled funds entirely and keep investments in US-domiciled vehicles. If a Costa Rican institution offers you a fund, pause and check the PFIC implications first.
FBAR and FATCA: what your Costa Rica accounts trigger
Direct answer: Opening Costa Rican financial accounts creates US reporting obligations. The FBAR (FinCEN Form 114) must be filed if your aggregate foreign financial accounts exceed US$10,000 at any point in the year. FATCA (Form 8938) applies separately, with higher thresholds that vary by filing status and residence. Penalties for non-filing are severe — and they apply even when no tax is owed.
These are informational filings, not extra taxes, but they are not optional, and Costa Rican banks report account information to the US under intergovernmental agreements, so the accounts are visible. Factor FBAR and FATCA into your annual routine from your first year, and tell your CPA about every foreign account, including ones you consider minor. This ties directly to why how you hold assets matters.
The Costa Rican corporation problem
Direct answer: Holding your Costa Rican property or business in an S.A. or S.R.L. — often sensible for succession and local liability — can create US foreign-corporation reporting obligations (such as Form 5471-type filings), which are complex and carry steep penalties for non-filing. A structure that is clean on the Costa Rican side can be a US compliance burden.
This is the collision at the heart of cross-border planning: the entity that helps you locally can hurt you in Washington. It is exactly why the ownership-structure decision — personal name versus company — should be made with both a Costa Rican attorney and a US cross-border CPA in the room, not sequentially. For residency-qualifying property there is a further wrinkle, since Migración increasingly expects personal title anyway.
State tax: the exit you may not have made
Direct answer: Moving abroad ends your US federal filing only if you renounce citizenship — which almost no one does — but it can also fail to end your state tax obligations. Some states pursue former residents aggressively, applying domicile tests that look at where you vote, bank, hold a licence and keep family ties. Leaving the country is not automatically leaving your state for tax purposes.
The fix is to sever state residency deliberately and document it — a step people skip in the excitement of an international move, then get a surprise state assessment years later. If you are leaving a high-tax state, treat the state exit as its own project.
The territorial-vs-worldwide mismatch
Underlying all of this is a structural mismatch: Costa Rica taxes territorially, the US taxes worldwide, and there is no comprehensive US–Costa Rica income tax treaty. Relief from double taxation therefore generally runs through foreign tax credits rather than treaty provisions, and tools like the Foreign Earned Income Exclusion apply to earned income with limits. The upshot: Costa Rica’s territorial break does not erase your US bill; it removes a second national layer, and the interaction is fact-specific.
What to set up before you buy or move
- ☐ Engage a US cross-border CPA before you invest, structure or buy — not after your first US filing goes wrong.
- ☐ Avoid foreign pooled funds (PFICs) unless your CPA has cleared the specific vehicle; prefer US-domiciled investments.
- ☐ Plan the ownership structure jointly with a Costa Rican attorney and your CPA, weighing the US foreign-corporation reporting.
- ☐ Sever state residency deliberately and document it if leaving a high-tax state.
- ☐ Build FBAR and FATCA into your annual filing routine from year one.
- ☐ Keep clean records — foreign accounts, entities and property, for both reporting and eventual sale.
The honest reassurance
None of this should deter a move to Costa Rica. Thousands of Americans live here fully compliant and pay less overall than they did at home, driven by cost of living and the absence of a second national tax layer. The point is simply that the US tax code does not take a holiday when you do, and the traps above are avoidable — every one of them — with planning before you act rather than cleanup after. The single highest-value step is unglamorous: hire a good cross-border CPA before you move money, and let the Costa Rican and US sides be planned together.
Frequently asked
Do I still pay US taxes if I live in Costa Rica?
Yes — US citizens and green-card holders are taxed on worldwide income wherever they live. Costa Rica’s territorial system removes a second layer on foreign income but not your US obligation. Only renouncing citizenship ends federal filing.
Why are foreign mutual funds (PFICs) a problem?
The US taxes PFICs under a punitive regime with high rates, interest charges and heavy Form 8621 reporting. Most US cross-border advisors steer clients away from foreign pooled funds toward US-domiciled investments.
What do I have to report about my Costa Rica accounts?
FBAR (FinCEN 114) if aggregate foreign accounts exceed US$10,000 at any point in the year, and FATCA (Form 8938) at higher thresholds. These are informational filings with severe non-filing penalties, and Costa Rican banks report to the US.
Does holding property in a Costa Rican company create US filings?
It can — foreign-corporation reporting such as Form 5471-type filings, which are complex with steep penalties. Decide the ownership structure with a Costa Rican attorney and a US cross-border CPA together.
Thinking through a Costa Rica move or sale?
Whether you are buying, building, selling, or getting the cross-border tax picture right, our team works alongside Costa Rican counsel and your own advisors to keep the whole thing clean. Book a consultation and we will map it to your situation.
This article is general information, not legal or tax advice. Costa Rican and US rules change and are applied to individual facts; figures are current as of July 2026 and should be confirmed with qualified Costa Rican counsel and your own cross-border tax adviser before you act.