Tricky Tax Changes Coming in July - SRS-CR: Summerland Relocation Services

Tricky Tax Changes Coming in July

There’s only one word for the tax changes coming to Costa Rica: tricky. In researching what to write about and how to inform our readers and clients, we found a number of variations on what will be coming for all of us. With that said, please keep in mind that everything we are telling you here comes with a disclaimer that it might not be settled yet or it varies from one source to another. To add to that, while the regulations MAY have been published, they seem to be subject to various government agency interpretations, so the truth will come out as we live with all this – and may change! (Tricky!)

What we do know for certain:

As of this July 2019 a significant change is being made to the taxes applied on all goods and services.  This change has been mandated by Costa Rican law 9635 aka: Law for Strengthening Public Finances. Quite ironic since there is currently so much confusion on all of the small details. One could easily worry that after going through all this trouble, public finances might not actually be strengthened. But that is yet to be determined.

Bottom line: All goods AND SERVICES will be taxed at 13%This increase is being absorbed by the consumer. Many goods are already taxed at 13%, but few services. This tax is called a VAT or “Value Added” tax; also known as IVA tax or “Impuesto al Valor Agregado” tax. In SOME cases, the transition to the new increase will happen gradually. For instance, we have heard that for Engineers the increase will start at 4% and increase periodically to 13% over a few years – perhaps … we also heard that for engineers, it won’t start until 2020.

The fiscal year moves from ending in September to ending in December. The new period will begin in January 2020 going from January 1st through December 31st.

NOTE: The Hacienda is still determining what to do with the months of October through December for this year. We have also heard there will be 2 tax returns and that there will be monthly tax returns thereby making end of year returns obsolete!! 

Hence, the trickiness begins …

What we’ve heard:

The following is a list of what we have heard which is tricky when it comes to taxes for things like: properties and corporations, capital gains, tax for renters and landlords, etc. While we are saying this is only information “we’ve heard”, be rest assured that the tax changes are coming on these items. We are just unsure of exact details. We have spoken to lawyers and other professional individuals who would normally be “in-the-know”; we have read other articles and done quite a bit of research and asking around. The common denominator is this: most of the information varies to some degree.

1. All tax offices will automatically make all income tax payers registered as payers of VAT as of July 1st, 2019.
2. August 2019 will be the first filing date for VAT forms. If you are filing a monthly tax reporting, you will have until August the 15th to file the new VAT format.
3. Cost, expenses and deductibles associated with running a business or profit from your corporation must all be backed-up by an electronic bill (“factura digital”). This electronic bill must contain a company header, activity, name of client, commercial code of product or service, VAT code, detail lines, recipient email address and phone number, etc. (So the guy at the gas station asking for your email address and phone number is not actually (probably) flirting with you to get a date … he is likely just being compliant with the new tax laws, sorry.) 

Leasing, renting, owning or selling your property.

Here’s where things get really tricky. Property rental taxes and increases vary depending on who you speak to. The following is the first thing we learned with regard to increase in property rent: 

• Short-term rentals are defined as 1 month or less. Previously, the sales tax law was only applicable to these rentals. Long-term rentals, defined as more than 1 month, were not required to pay income tax. The new law requires VAT for long-term rentals if the rent exceeds one and a half times the average Costa Rican base salary income. Currently equates to $1,085. If the monthly rent is less than or equal to this amount, the lease will be exempt from VAT.
• Capital Gains: Some of the details around this are still being formulated. To provide an example on how this affects your property: A property of 50,000 sold at 60,000 is a profit of 10,000. An income tax will need to be declared over the 10,000 profit. The gain is calculated between the generic price at the time of the sale against the historic price. One thing we read is that MAYBE you can choose to pay 2.5% on the full sale price or 15% on the gains but the expenses have to be itemized and supported by verifiable bills (!?). These definitions are still being hashed out by the Hacienda.  

Taxes for Corporations:

Many home owners have purchased their houses in Costa Rica under the name of a corporation. If this is how you own your home, it is advisable that you review the value of the current capital as it relates to the assets held by that corporation (your property, car, bank account ?!) Most corporations have a nominal value listed – like 10,000 colones – the best advise is CONTACT YOUR LAWYER. 

The most confusing part of this is that for years most people have been told to hold their property in a corporation for the purpose of long-distance management, ease of beneficiary distribution or limit of personal liability. While those positive aspects MAY to some degree still exist they are very likely going to be diminished if in fact INACTIVE corporations are going to be required to become ACTIVE corporations and report every month and, likely, be taxed as corporations, in addition to property taxes, on the full value of their assets. Notice we say “likely” … this is because this is one of those items which varies from resource to resource. 

What do you have to do?

• Register: If you are making a profit from sales or if you have an active or inactive corporation, you must be registered with the Hacienda. The form is called a D140. If you do not do this, you could be penalized.
• Pay Your Taxes: Any delay in filing your tax returns brings the potential of generating a fine. Over time these fines accumulate. If you do not file at all, the Hacienda could claim a “presumption of income” which will allow them to compare your situation with others which are similar and charge you accordingly.
• It is advisable to discuss any and all tax implications with your attorney AND tax advisor.

Here are some links for reference to a couple of publications that have had relevant articles and MAY have some further details. Perhaps the following links will provide some other level of clarity for this very tricky tax situation coming in July:

• Howler Magazine
• Costa Rica Star

If you need our assistance with figuring out what next steps might be for you either as a property owner, landlord or a renter, contact us and we will try to steer you in the right direction.