What Is Capital Income in the Case of Leases?
Upon entry into force of Law # 9635 (Law for the Strengthening of Public Finances), in December 2018, a new “tax category” called Capital Income was created. To grasp this concept, let us begin by saying
Upon entry into force of Law # 9635 (Law for the Strengthening of Public Finances), in December 2018, a new “tax category” called Capital Income was created.
To grasp this concept, let us begin by saying that income in Costa Rica is not taxed in the same, universal manner with a single tax, regardless of the taxpayer nature, i.e., individual vs. legal entity. In our case, the law deals with every type of income using a separate “tax category”, that is to say, every type of income is calculated using different fiscal rules.
Today, we will discuss capital income taxes more in-depth, and leases specifically. Every natural or legal person receiving income from rentals (houses, apartments, condos), as of July 1, 2019, must declare capital Income, for which purpose the D-125 form, available on the Ministry of Finance virtual platform (ATV), must be completed.
The law provides two options for taxpayers to declare said income. Firstly, it may be included on the annual tax return on profits, for which purpose, however, several requirements must be fulfilled, such as that the taxpayer must have at least one (contributing) employee registered with the Costa Rican Social Security Fund (CCSS), and remain on this regime for no less than 5 years. The second option, applying to all taxpayers not complying with the annual tax return requirements, is filing a monthly tax return (for practical purposes, as in this example an individual or company leasing their house, apartment or condo, will receive the monthly payment agreed with the tenant)*.
Based on the foregoing, taxpayers have 15 calendar days as of the end of the month to declare -and pay for- their capital income. In other words, once the previous month has ended, the taxpayer must consider their gross income for the previous month (without subtracting any expenses) and deduct a 15%, which is the percentage of expenses permitted by law, and will be the income base for calculating the tax to be paid (15%). This tax is filed through the ATV platform and, upon fulfilling of the tax return, can then be paid at any bank connected with the Ministry of Finance, such as BNCR, BCR, BAC, DAVIVIENDA, to name a few.
For instance, if a person leases a house in $1,000 per month, their gross income at the end of the month, without including expenses, is $1,000. Given that this person is part of the Capital Income regime, they are entitled to deduct on only 15% of their income as expenses, that is, $150, for a total net income of $850 (for tax calculation purposes). And the latter is the base income over which the 15% tax must be declared and paid, i.e., $127.50 must be declared and paid per month.
For clarification purposes, though, please note that the Capital Income tax is a type of income tax and must not be confused with the Value Added Tax (IVA). These are separate taxes and the conditions where the IVA tax must be applied are separate from those covered in this article.
Lastly, in the case of taxpayers whose only gainful activity is the lease of their house apartment or condo, the Real Property Capital Income tax replaces the income tax or the tax on profits. Therefore, any taxpayers filing the D-125 monthly real property tax return are not required to fulfill the D-101 income tax return at the end of the year.
*Note: We talk about the “monthly tax return” for practical purposes as the law literally states that a tax return must be fulfilled upon occurrence of a taxable event, i.e., following the generation of income as such. Nonetheless, for practical purposes, any person or company leasing a business premise, house or apartment will be construed as receiving their income every month and, as a result, be required to file the tax return on a monthly basis.