On July 1, 2019, Costa Rica a major Tax Reform went into effect nationwide. The government did not provide enough information before July 1. This has led to quite a bit of mis-information being circulated on social media and elsewhere. Many expats and locals alike were left with questions. Here are some of the most frequently asked questions and our answers.
1. If I sell my property for a profit, will I pay Income Tax and Capital Gains tax as well?
Profits from the sale of Real Estate can be subject to the payment of Capital Gains Tax orIncome Tax, depending on the habitually of the transactions. Habitual transactions (when a person's or company's main source of income is the sale of real estate properties) are subject to the Income Tax, while isolated transactions are subject to the Capital Gains Tax.
2. Do I need to file a monthly tax form (for 0) if my corporation is inactive?
If the corporation is 'inactive': meaning that no income or no activity that generates income and it's not registered as taxpayer, there are no monthly tax filling needed. However, with law 9635 a new tax form must be submitted to disclose the assets and or patrimony of the corporation, it must be done yearly. We are still waiting on final information from the Tax Office for this.
3. How is the extra 3 months in FY 2019 being handled for payment of annual taxes? Will the 3 months be paid separately or will the annual Tax filing be for the full 15 months?
Tax payers must submit the 2019 filings as usual with the FY completing September 30, 2019.
NOTE: October, November and December will be a part of FY 2020 and considered a special term.
4. What taxes are new regarding healthcare?
There is a new 4% tax on private healthcare fees. Also, depending on your method of payment (cash or credit card) how that tax is handled is different. If you pay for your doctor's visit with a credit card, that 4% tax will be charged to you and subsequently reimbursed to you. If you pay with cash, the 4% tax will not be reimbursed to you.
5. What are the tax changes regarding medicine?
When you purchase medicine from a pharmacy, there is a 2% tax applied to the medicine. This is not reimbursed to you and it makes no difference as to your method of payment.
6. Are there any new taxes related to education costs or fees?
Any school costs (public or private) as long as the school has been approved by MEP or CONENSUP will be tax exempt. If not, the school is not approved by those government agencies, there will be a 13% tax applied.
After school activities are now taxed at 2% or 13% depending on the activity. This applies to public and private schools. This would include sports activities. This applies to anything that you are paying directly to the school, as these activities are considered services.
7. What changes are there to how utilities are taxed?
Residential Water costs exceeding 30m3 ( ~ 20,000 colones) and residential electricity costs exceeding 25,000 colones will be taxed at 13%.
The 13%, over commercial billed, will be applied on total consumption
While these were some of the most frequently asked questions, there are several other questions that have come up which we cannot encompass within this article. We are available to serve you and help you navigate all of these changes at firstname.lastname@example.org
Important Changes For Rental Leases with the Law # 9635
Starting in July, 2019 (approval of law 9635) there is a major change on how tax is applied to the income generated from leases:
Sales Tax (taxes charged on all goods and some services) will become the VAT (Value Added Tax). This change means VAT replaces the 'Sales Tax'.
The Tax Office made all taxpayers of Income Tax automatically registered as taxpayers of the VAT. Effective July 1st, 2019.
The VAT will now be applied to all goods and services (except some exemptions) and it will be 13%. The first filing of the VAT form will be August 2019. The Income Tax will remain yearly.
In 2021 the fiscal year will be from January to December , calendar year, rather than October to September as used to be.
More important details
Under the previous Sales Tax law, only short term rentals (1 month or less) were taxed with the Sales Tax. Long-term rentals (1 month or more) were not required to pay Sales Tax. Long-term rentals were only required to pay Income Tax on the rental income annually.
With the new law, residential long-term rentals will be taxed with VAT if the rent amount exceeds 1.5 the average Costa Rica base salary income. Currently this is CRC ¢650,000 (USD $1085). If the monthly rent is equal to, or less than, 1.5 of the Costa Rican base salary, the residential lease will be exempt from VAT (Value Added Tax). If it is more, it will be taxable and must be withheld and paid monthly to the Tax Office. Keep in mind that any commercial leases are subject to the VAT regardless the amount of the monthly rent.
Additionally, like most taxes, there are tax deduction implications as well which you will want to discuss with your attorney and/or accountant.
What does this mean if I am a landlord?
If you are a landlord, beginning in July 2019, any residential long-term lease (over 1 month) where the lease exceeds the exempt amount noted above, the VAT tax will be 13% monthly. Therefore, the VAT must be added and collected and it must be paid monthly to the Government. Short-term leases (less than 1 month) VAT tax will remain at 13%.
It is advisable to consult with your local attorney if you have questions on this how this new law will affect your specific situation.
What does this mean if I am a tenant?
If you are a tenant and your residential lease is short term (less than 1 month) the tax on your rent payment will remain at 13%. If you are long-term (1 month or more) and your lease exceeds the indicated exempt amount noted above, the rent payment will be increased due to the increase in VAT tax. Each case will be determined based on the specific circumstances of the lease. It's easy to foresee there will be different outcomes for current tenants.
Whether owner or tenant, this is a major change in the law which will cause change in just a few months. If you would like to schedule an appointment with us to discuss questions, or for more information on the new law, please email us at email@example.com. We are at your service.