Tax Changes in Costa Rica

We’re approaching the end of the 2019 fiscal year (which is also changing!), and there have been many changes in how to live, invest and do business in Costa Rica. It’s been quite the whirlwind.

Below is a selection of the most critical updates to laws and regulations affecting Costa Rican businesses and the population in general.

Tax Changes: VAT

Most would consider introducing the Value Added Tax (VAT – known by the initials IVA in Spanish) to be the most impactful change in the wide-ranging fiscal reform law passed last year. The VAT came into effect July 1, and nearly all products and services are subject to it, notably professional services.

The rate is set at 13%, which is the same as the Sales Tax that it replaced. Collection of the VAT is required on each invoice you furnish, and reporting and payment are made monthly. To help with the transition, there is a moratorium on fines until October 15.

Significantly for real estate investors, VAT is now charged on rentals: all commercial rentals (unless the business is registered as a MiPYME and the rent is under 1.5 times the base salary) and residential rentals over 1.5 times the base salary. The base salary is currently 446,200 colones per month, so 1.5 times that presently adds up to 669,300 colones or around $1,175 US.

Tax Changes: Passive Income

The fiscal reform also includes updates to the taxation of passive income, which provides for capital gains, interest, and rental income, effective July 1. Capital gains and interest are now taxed at 15%. Rental income is also taxed at 15%. The taxpayer can apply a standard deduction of 15% without documentation (making the effective rate 12.75%) or a higher deduction with proper documentation (such as invoices supporting the expenses).

Note that Costa Rica has retained its territorial taxation regime, so capital gains and rental income generated abroad are not taxable in Costa Rica.

Tax Changes: Fiscal Year Change

The fiscal year in Costa Rica has traditionally been from October 1 to September 30. With the new fiscal reform law, the fiscal year corresponds to the calendar year. Any existing companies before the reform will still end their current fiscal year on September 30, 2019, with the following year being a “long” year (October 1, 2019 – December 31, 2020). Any company formed at this point will end its fiscal year on December 31.

Shareholders Registry

The identity of shareholders of Costa Rican corporations will no longer be a secret. Starting September 1, companies with registration numbers ending in 0 and 1 need to submit to the shareholder’s registry by September 30. Companies ending in 2 and 3 need to register in October, and so on.

This process is done online using Firma Digital, a smart card you’ll need to get along with a card reader and software. Notably, only residents can get a Firma Digital, so if you are a non-resident with a corporation, you’ll need to provide a Special Power of Attorney to a notary to register the shareholders on your behalf. This affects a lot of foreigners in Costa Rica, so if you need any help with this process, please contact us, and we can help.

SUGEF Registration

People involved in certain activities in Costa Rica now need to register with SUGEF, the financial regulator. These activities include:

• Businesses whose primary activity is the purchase and sale of real estate;
• Any business or notary public who administers third-party funds;
• Casinos;
• Pawnshops;
• Money Lenders – please see Lenders and SUGEF Registration at the Gap Investments website.

Unlisted companies or persons may eventually be exposed to the possible closure of their financial institution accounts. Although we recommend you make registration a priority, this does not prevent you from lending money today. If you need help with the SUGEF registration process, please contact us, and we can help.

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