New Tax Law, What you need to know
With less than a month until Law 9635 (Law for Strengthening Public Finances) comes into effect, we have received a lot of questions and concerns regarding the implementation of the new law on day to day living.
The simplest way to explain the upcoming changes could be through a modest explanation: all goods and services will experience an increase of 13%. This increase in the cost will be absorbed by consumers. Nevertheless, it is not that simple to apply, implementation of all aspects on the new law become a bit more complex.
In the following lines we will focus in general changes as well as the more common queries we receive related to corporations, property, and income tax on capital gains so we will try to summarize the main changes and rules that will be enforced starting next July 1st, 2019 so keep reading.
A. General changes:
We will leave more technical changes out of this list and to a case by case study, in the meantime, some of the more relevant notes you need to write down are:
- Current is established from October 1st to September 30th.
- New period: will apply starting next year from January 1st to December 31st.
What will happen with the missing months -October to December 2019- has not yet being defined. Hacienda will need to confirm if: a) provide the annual tax return on September plus a provisional closure of the three pending months by December 2019; or b) wait until next year and file one big period from October 2019 to December 2020.
Avoid headaches by checking the official Central Bank exchange rates!
Starting July 1st all transactions in a different currency than CRC must use the exchange rate provided by the Central Bank on the day of the transaction. Rates from other banks will not be valid.
An important change that has been implemented already is the need of invoicing through electronic bills for businesses.
All transactions including costs, expenses and deductibles must be backed-up by an electronic bill. If you are running a business or just profiting from your corporation, we recommend start updating your accountable system to the electronic bills before July 1st.
The electronic bill must contain a company header, main activity, name of client, commercial code of product or service, VAT code, detail line(s), etc.
Monthly and annual tax return
In addition to the current annual tax return, inactive corporations that own properties will need to submit income tax returns at zero, to report the asset, each month, while active companies must submit income statements on earnings every month.
Natural and legal persons will have until the 15th of the next month to comply, therefore, the first declaration must be filed before August 15, 2019.
Bear in mind with the new monthly proceeds, there will be a major control of what is reported on the annual tax return. As a taxpayer that profit from your business, it is advisable to maintain an organized monthly Accounting and Finance paperwork so that everything matches.
B. Income tax to Capital gains.
Capital gains will be calculated between the generic price (at time of selling good or service) against the historic price value (what should be understood by “historic price” has not been defined yet, however we could think on the price established at the sell script back when the good was obtained for the first time).
¿How does this affect my property?
A property of 1,000 sold at 11,000 will have a profit of 10,000. An income tax return will need to be declared over the 10,000 profit.
Only profit exempted from this income tax apply selling your household (home where you live).
Applicable Tax rates on Capital gains.
- An active good: attached to a profitable activity (rent, agriculture, coffee planting, etc) will pay a 30% tax over profit.
- A passive good: not related to a profitable activity. Tax return can be filed in two ways:
- Pay a 15% tax over profit; or
- 2,25% of selling price: this option can only be paid only once, if you are planning to sell a property who’s has already applied this benefit in the past, a 30% or 15% will be applicable depending on status of good. Thus, is a good option for assets with lower historical price!
¿What if I rent?
Default scheme: from the total income a 15% on expenses can be reduced with no voucher required. A 15% tax will be applicable to the remaining 85%.
Even though this is an easier scheme, it will be more expensive to taxpayers.
Optional scheme: a back door to remain under the current system will be keeping at least one (1) employee with the corresponding social security requirements. Selecting for this option will require a deeper analysis as you could end up paying more on salary, bonuses, benefits and social security rather than staying with the new model.
This model must be informed to Hacienda and can only be switched to the default scheme after 5 years.
C. Value added tax (VAT):
A new tax to be enforced by Ministerio de Hacienda in Costa Rica where the collection of 13% for all goods and service providers will come into force.
Who is affected?
Retailers of any tangible or intangible good and service providers, despite if they are natural or legal persons.
Ok, so what is a service?
Everything that is not considered a good.
Any natural or legal person performing a lucrative activity must file a tax return on a monthly basis, profiting or not.
Exceptions to VAT
- Housing rentals are exempted to pay the 13% as long as the amount declared does not exceed the 1.5 of a base salary, which it will be around $1,100.00 USD / ₡ 640,000.00 CRC per house rented. Should this amount be exceeded, even for ₡1 CRC (one Colón), a 13% will be applied to the total amount of the rent of the house that exceeded the exempted amount. All other type of rentals is taxed.
- Interest rates.
- Bank commissions on disbursements.
- Money transfers.
- Commissions to retirement operators.
- Electric and water bills for residences as long as they do not exceed 280kw and 30 m3
- Public transportation.
D. Taxes and corporations.
Corporations are designed for commercial purposes. With the implementation of the new regulations starting July 1st, it is advisable buying goods as a natural person instead of putting your assets into a corporation.
If you are not looking forward to starting a business in Costa Rica, we recommend buying any good as a natural person instead of putting your assets into a corporation.
But my goods are already reported as assets in my corporation…
In this case, it is advisable for the social capital to be equal with the invested capital in the corporation. If the value of your assets exceeds the reported amount in the corporation, it will be advisable to equate the reported amount to a more accurate value before July 1st, 2019.
If you do not do this, you might lose some money filing your tax return or when trying to sell your property.
Compliance with your taxpayer obligations is important to avoid paying more than necessary on penalties and fines. Some of these obligations are:
- Get registered: if you profit from any activity or have a corporation (active or inactive), you must be registered with Hacienda. Not being registered does not excuse you from being penalized.
- Don’t miss a deadline: delays in filing tax returns generate a fine, which can accumulate on a monthly basis.
- Be organized: with monthly returns to be filed there will be more control of what is reported, filing inaccurate information can open the door to fines and unnecessary scrutiny on your business.
- Never neglect your obligations: not filing a tax return could also lead to an “income presumption” from Hacienda, allowing them to establish the amount to pay based on other taxpayers with similar business characteristics.
Do not hesitate to contact us should you have any questions or should you require any assistance with this matter.