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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:

Fiscal period:

  • 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.

Exchange rate:
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.

Electronic bills:
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.

  1. An active good: attached to a profitable activity (rent, agriculture, coffee planting, etc) will pay a 30% tax over profit.
  2. 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.

Periodicity
Any natural or legal person performing a lucrative activity must file a tax return on a monthly basis, profiting or not.

Exceptions to VAT

  1. 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.
  2. Interest rates.
  3. Bank commissions on disbursements.
  4. Money transfers.
  5. Commissions to retirement operators.
  6. Electric and water bills for residences as long as they do not exceed 280kw and 30 m3
  7. 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
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.

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The Author

Sebastian Alvarado

Sebastian Alvarado

Senior manager with broad experience in corporate environment. Proven results in successfully leading teams in three different countries through the Latin America Region.
Approximate 10 years’ experience with global immigration and corporate environment.

27 Comments

  1. Avatar
    Nataliya Schulman
    June 4, 2019 at 10:54 am — Reply

    What about private school tuition? Is that taxed?

    • rafavalverde
      June 4, 2019 at 8:00 pm — Reply

      Hello Nataliya,

      The tax is not applicable to school tuition for accredited schools. On the contrary, all education services that are not accredited by the CR Department of Education or MEP. will be subject to the VAT tax.

      Accredication of schools is a whole subject on its own. Parents or any other user of this type of service must pay attention to whether the education they are paying for is accredited and is providing the quality of the education as promised.

  2. Avatar
    Gerard Harteveld Ventura
    June 5, 2019 at 5:39 pm — Reply

    This new tax law has changed my opinion to consider Costa Rica as a tax heaven for elders. It’s not! I believe that with these new measures Costa Rica has and will lose more foreign investments.
    As usual my investments in this country are all in a corporation and ofwhich one house is rented. A yearly tax declaration is made by a private accountant. Would it be more advisable to put all in my name or divided in my and my wife’s personal name? We are both legal residents in Costa Rica.

    • rafavalverde
      June 26, 2019 at 9:19 pm — Reply

      Gerard,

      If you will not be running a business anymore, and will only hold the properties, it may make sense to dissolve the corporation and transfer the property into your own names. However, an important factor to consider is the costs to transfer the property in your names which will depend on the tax value of the property. You can estimate a 2.5% for the cost of the transfer.

  3. Avatar
    Jeff Parrish
    June 6, 2019 at 4:52 pm — Reply

    Question: I have a home in Atenas and a home in Texas as well. I bounce back and forth often. When I go to Texas I rent my house in Atenas for 3-5 months at a time. My house is in a corporation considered inactive. My rent is $1,200 monthly. This is not a business, just a way to have someone watch the house and earn some extra income at the same time. Do these new taxes apply to me? I read it’s based on the rent being in U.S. dollars. If I collect rent in colons does it change anything? Thanks Jeff

    • rafavalverde
      June 26, 2019 at 9:17 pm — Reply

      Jeff,

      Indeed, you will be required to charge the 13% VAT for the rental as it exceeds the threshold of 640,000 colones which currently is about $1,100 USD.
      You are also required to issue factura electrónica.

  4. Avatar
    Chris Robinson
    June 28, 2019 at 4:58 pm — Reply

    Hello. My husband and I are English teachers. Professional services. We file an electronic factura with our pay info. Do we have to pay the 13 % and submit a monthly tax return? If so, how do we go about doing this?

    • rafavalverde
      June 29, 2019 at 9:59 pm — Reply

      Chris,

      Thank you for your message.

      You are require to do two things (mainly) to add the 13% VAT to your invoices. When you do this, it means that the Client has to pay it. Then, the other thing you need to do is to pay those taxes to the government. The filing you need to do monthly is not for tax returns, it is for this VAT, it is a different thing.
      You must do your income tax returns once a year.

  5. Avatar
    Dave
    August 15, 2019 at 1:23 pm — Reply

    Hi, great post. One question though. You state “inactive corporations that own properties will need to submit income tax returns at zero, to report the asset, each month”.

    I take this that I need to file monthly on inactive corporations, but I have received conflicting information that only a zero tax return d101 must now be filed annually with zero income. Can you clarify?

    • Sebastian Alvarado
      August 19, 2019 at 5:23 pm — Reply

      Hi Dave, apologies for any confusion. When the article was published back in June, we did it under the following criteria.

      There are two types of obligations for taxpayers in Tax Law:

      1. Material obligations: payment of taxes.
      2. Formal obligations: getting registered in Hacienda, completing tax returns, etc.

      The Law 9635 of Public Finances Strengthening reforms the Article 2 of the Income Tax Law 7092 by establishing: all corporations are to be considered taxpayers of the specific tax, triggering the need for them to comply with both obligations (material and formal). At the same time, Article 4 of the Income Tax Law bylaws, confirm the needs of all taxpayers to comply with all taxpayers’ obligations despite the fact they are active or inactive. Nevertheless, since inactive corporations do not have an active lucrative activity, it has been discussed if these need to file tax returns when these possess an asset at the National Registry (car or property).

      Despite of the above, Hacienda confirmed in July they were halting this interpretation and have until December 2019 to define which formal obligations are to be complied by inactive corporations and how.

      In a nutshell, as per today, inactive corporations do NOT need to proceed with the monthly filing.

      We will be informing if this changes after December.

      Hope this clarifies.

      • Avatar
        Dave
        August 23, 2019 at 11:27 am — Reply

        Thanks! That clarifies everything and is very much appreciated!

      • Avatar
        Dave
        December 11, 2019 at 8:53 pm — Reply

        Hi, just wondering if you fine folks have heard any more clarification on this? There is still info being passed around to friends of mine that own property, but do not have active business (rentals or otherwise) and are being told they have to file a zero tax return.

        • rafavalverde
          December 27, 2019 at 4:55 pm — Reply

          Dave,

          Thank you for your message. This coming year it will be required to file income taxes for zero income.

          • Avatar
            Dave
            January 4, 2020 at 7:52 pm — Reply

            Thanks Rafa!

        • Sebastian
          Sebastian
          December 27, 2019 at 5:10 pm — Reply

          Hello Dave,

          Per resolution Nº DGT-R-075-2019 published in La Gaceta on December 20th, 2019, the Ministerio de Hacienda has finally provided a procedure on how Inactive corporations could comply. We will publish a note on this soon.

        • Sebastian Alvarado
          January 6, 2020 at 3:43 pm — Reply

          Hello Dave, you can read more about the latest requirements for Inactive corps here: http://haleyc6.sg-host.com/2019/12/27/mandatory-filing-for-inactive-corporations/

          • Avatar
            Dave
            January 18, 2020 at 1:45 pm — Reply

            Perfect, thanks guys! Another great article. For those who don’t read the comments, just a suggestion to include how one has to register the silly code (apparently even if you did the D140 in person 2-3 years ago, eh? Uggh.) and then wait patiently for the facility to do the D135 with the actual balance sheet data… 🙂

            On another subject, but related to capital gains, what about capital losses? I am seeing people pay 2.5% on the total sale even on easily identifiable capital losses, effectively doubling closing costs. Without a clear indication of how this is filed by the seller (or buyer if the seller isn’t domiciled here — which is often rare because the corporation the most foreigners hold their property in, is obviously domiciled here) and how it should truly be calculated. It would seem straightforward accounting, but it’s like putting together a jigsaw puzzle of 10,000 pieces of a picture of a field of snow.

  6. Avatar
    Abdul
    January 3, 2020 at 8:45 am — Reply

    “n 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.”
    Now that the above date is passed how do we go about performing above?
    My home I live in is in the corporation and not reflected in the value of the corporation. Do you have a service to perform above requirement?
    Thanks
    Abdul

    • Sebastian Alvarado
      January 6, 2020 at 3:47 pm — Reply

      Hello Abdul, if you did not update the value before enforcement of the law (July 1st, 2019) you should not take action now. Evaluate options if you ever decide to sell.

      • Avatar
        Louis Meduri
        January 11, 2020 at 6:46 pm — Reply

        What options are to be evaluated? Are there any tax disadvantages at the time of sale if the share value was not updated before the July 1, 2019 deadline?
        Louis

        • rafavalverde
          January 11, 2020 at 10:24 pm — Reply

          Louis,

          Indeed, there are tax disadvantages. You may end up paying for taxes over capital gains.

          • Avatar
            Louis Meduri
            January 11, 2020 at 11:03 pm — Reply

            Can you elaborate further? How would I be paying for taxes over capital gains?
            Thank you.

            • Sebastian Alvarado
              January 13, 2020 at 8:52 pm — Reply

              Hi Louis,

              I sent you a personalized email to address your queries, please check your email, we can continue the guidance there.

              Sebastian

  7. Avatar
    Louis Meduri
    January 10, 2020 at 10:18 pm — Reply

    Hi Sebastian,
    I am a Canadian citizen who has purchased a lot in Costa Rica (through a Costa Rican corporation) a few years ago and plan to build a property on the lot shortly. It will be a family vacation home for part of the year and rented out for the remaining time.
    If I were to realize any capital gains in the future when I sell the house, can you confirm that the house would be considered a passive good and the application tax rate would be the choice between the two rates for the passive good identified in your article?
    Louis

  8. Avatar
    Louis Meduri
    January 10, 2020 at 11:55 pm — Reply

    Hi Sebastian,
    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!
    I purchased land over a year before the July 1, 2019 introduction of new law. When I build on the land this year, would the 2,25% of selling price option still apply to the combined land and built cost.
    If I were to sell that property and use the 15% option, would the 2,25% option apply to any future house purchase that produced a capital gain.
    Thanks,
    Louis

  9. Avatar
    Evelyn
    January 24, 2020 at 4:15 am — Reply

    Hi Sebastian,
    I have an inactive Limitada corporation in Costa Rica that was active last in 2015. I have kept up the corporation tax payments, and filed the ownership information required last fall. One ‘asset’ of the corporation is a car that was inoperable with many repair attempts for over a year. It was written off for accounting and tax purposes when we stopped any business activities in late 2015.
    However, I hope to be able to personally invest in more repairs to bring the car back to working order… It gets ‘fixed’ and then stops working, gets ‘fixed’ and stops working… transmission and related problems. I have been able to get the car passed by RITEVE each year… and then shortly after it doesn’t work again. I have also been paying the marchamo each year, since it would be required even if a car was not running. I would like to dissolve the corporation and transfer the car to myself personally. What are the implications, costs, and what is the best way to do this?

    • Sebastian Alvarado
      January 24, 2020 at 11:21 pm — Reply

      Hi Evelyn, I just sent you an email on this. My best, Sebastian

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