Are You a Landlord in Costa Rica? Find Out About the Obligations According to the New Tax Law
If you are the owner of a property in Costa Rica and offer it for rent, you should know that Law No. 9635 (the Law for Strengthening Public Finances) introduced new obligations that you must
If you are the owner of a property in Costa Rica and offer it for rent, you should know that Law No. 9635 (the Law for Strengthening Public Finances) introduced new obligations that you must comply with.
Leases in Costa Rica are governed by Law No. 7527 (Urban and Suburban Leases Act) which includes the dispositions that need to be included in the lease contracts, as well as the minimum dispositions and obligations between the Parties.
The main sections of the lease agreements include: the identification of both Parties (this includes the Good Standing Certificate in the case one of the parties is a corporation); the property’s information as it appears in the National Registry; a detailed description of the property with the installations, services, accessories, furniture, and the status that these items need to be maintained in by the tenant; and, finally, the term, price and destination of the property.
According to the Law for Strengthening Public Finances, which introduced the Value-Added Tax (VAT) that entered into force on July 1st, 2019, 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.
If the monthly rate is less than these amounts, it will be exempt from the VAT, however, there are formal obligations that still must be complied with (see below). In addition, if you are leasing your property to microenterprises and small enterprises duly registered before the Ministry of Economy, Industry and Commerce (MEIC) or the Ministry of Agriculture and Cattle-Raising (MAG) with an authorization issued by the Department of Exemptions of the Tax Authority and with a price that does not exceed the amounts described above, the rent will not be subject to VAT.
For this reason, if the property you are renting exceeds the amounts mentioned above, you will have to comply with the following obligations:
- You must register before the Revenue Ministry, either personally, if the property is on your name, or as the legal representative of the corporation that owns it. If the lease service is being provided through a third party or a realtor, they also should be enrolled for the economic activity they are participating in.
- You must issue electronic invoices and report them at the Virtual Tax Administration (ATV). You should have an authorized system that allows for the issuance, reception and confirmation of electronic vouchers that work as a backup for your transactions. In addition, once you have billed your client, you must send a document to the Tax Authority in “XML” format. For further information regarding the electronic invoicing, please click on this link.
- You must save the electronic invoices you sent for at least 4 years, as it is the statute of limitations for tax issues. However, I recommend saving them for up to 10 years, as the Tax Authority is entitled to review your transactions for this period if you were not registered before them, or if the tax returns were not filed or if they were declared as fraudulent.
- You must declare the monthly tax returns through ATV no later than the fifteenth (15) day of each month for the previous month (i.e.—the tax return for September, must be declared before October 15th).
- You must pay the amount you retained corresponding to VAT through the Inter Banking National System (Banks or Financial Entities authorized by the Revenue Ministry for charging this tax).
- You must provide all the information required by the Tax Authority in the terms that they establish.
Properties that are leased with a price not exceeding the previously mentioned limits must comply with all the previous obligations, except the payment of the taxes, as they are exempt according to the Law; nonetheless, the tax return must be filed before ATV.
Failure to comply with these legal obligations mean that penalties can be levied according to the Tax Code (Law No. 4755), and the sanctions could vary in their severity. For example, if you fail to issue the electronic invoices, the fine can be up to CRC ¢892.400,00 or US $1.520; not filing a tax return on time could result in a sanction of approximately CRC ¢223.100,00 or US $380. This fine could be reduced if the filing is made without the intervention of the Tax Authorities and is paid in the same time to CRC ¢44.620,00 or US $75.
Please be advised that to avoid being fined, it is important to consult an accountant whom you trust in order to make sure that you are complying with all the requirements of the law.
Additional problems with short-term rental properties
As you may know, short-term rentals are not regulated in Costa Rica and platforms such as Airbnb or VRBO are providing intermediary services without further intervention from the government. However, through a law proposal currently working its way through the Costa Rican Congress, this will be changing soon.
Initially, this initiative proposes to create a Tourism Register that includes the platforms providing vacation rental services, the properties, and their owners or realtors leasing the short-term rental units. Therefore, the companies and the properties will be enrolled before the Costa Rica Tourism Board (ICT). The compliance obligations are still pending final definition by the bill.
Considering the requirements of the Touristic Declaration, also known as Declaratoria Turística, the possible documents that may need to be filed before ICT are the following:
- A timeline authorized by an engineer or an architect, if the service includes construction or improvements on the properties.
- A description of the activity including direct jobs and investment, the value of the land, and the infrastructure and services.
- A sanitary permit issued by the Ministry of Health (both the original document and a photocopy).
- A certificate of good standing which shows there are no debts before the Social Security Authorities (CCSS, FODESAF), and the Corporate Tax.
- The approval of the ICT regarding the companies and the touristic activities.
Nonetheless, this list could be added to or edited as the ICT finds it convenient. If the ICT maintains the requirements, you must bear in mind that you would need to get documents from various government institutions. For example, if you need to obtain the sanitary permit, it is mandatory to have a land permit issued by the municipality, as well as a cadastral survey issued by the National Registry and then, request the sanitary permit before the Ministry of Health that could be issued immediately or in ten business days as stipulated by national regulation.
The Bill of Law was approved in the second round of voting by the Legislature and, at the moment, the President’s signature is the only thing that is missing. Once it is signed, it will be published in the official Gazette.
Here at Outlier Legal Services, we will continue monitoring the development of this Bill of Law and inform you of any relevant changes that could affect your normal business.
One last note before wrapping up is that some municipalities have proceeded to make formal notices obligating the closure of short-term rental properties, alleging that there is a failure to comply with commercial licenses (“patentes”) that allows them take part in economic activity.
We are of the position that these notices are not well-issued as the main use of the properties is different from economic activity and these rentals are not regulated by local legislation. For these reasons, we are arguing against these positions that have been issued by some municipalities.
Should you have any further questions, please let us know. We are willing to help you with all your real estate transactions here in Costa Rica.