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Tax Law Updates on July 1st 2019 Affecting Real Estate in Costa Rica

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As of July 1st, 2019, the government of Costa Rica will be implementing a new tax law that will affect real estate in Costa Rica. Known as the “Law of Strengthening of Public Finances 9635,” this is a new set of taxes set to commence on July 1st of this year. The Ministry of Finance (Hacienda) will increase the number of goods and services that will be taxed with a more encompassing Value Added Tax. The new 13% tax will replace the current Sales Tax (also 13%) with the addition of a number of taxable items.

Although our economy in the Costa Ballena is experiencing growth in jobs and local tax revenue, there are other parts of the country that are experiencing low economic growth, especially for such an environmentally progressive nation. National unemployment is currently at around 12% and the fiscal deficit has hit a record 6% of GDP. In anticipation of economic decline, this new tax package was approved by Costa Rica’s congress in 2018.

The Costa Rican government has reaffirmed its commitment to continuing with fiscal consolidation. Their aim is to protect against tax evasion, expense contention and improper fiscal governing. In January of 2019, President Alvarado commented that the primary goals of the tax law update is to reactivate the economy. He hopes this will allow for the construction of a fair and more inclusive society that will benefit the well being of all Costa Ricans.

The new VAT Tax

The new VAT tax will be passed down to the end consumer and will include cost increases to the following goods and services, among others:

  • Professional services, such as lawyers, engineers, consultants, independent contractors
  • All commercial property rentals
  • Luxury housing rentals (where the amount exceeds 670,000 colones ($1150) per month)
  • High consumption water and electricity (30 cubic meters of water per month or 280 kilowatts/hour usage)

Other items that will experience an increase in taxes include:

  • Flights originating in Costa Rica will have an additional 4% tax on ticket prices.
  • Private health services will pay an additional 4%
  • Personal insurance will increase by 2%

Occupational risk insurance or low income housing insurance will be exempt from any tax increases.

Capital Gains Tax in Costa Rica

A capital gains tax in Costa Rica will also be implemented on July 1st. If a property in Costa Rica is sold before July 1st, the seller does not pay capital gains tax. If a property is sold after July 1st, tax must be paid on the gains from the sale of the property if it is not the seller’s primary residence in Costa Rica. This tax will amount to either 15% of the profit or a one time rate of 2.25% of the total sale value of the property.

To be able to apply for the 15% on profit rate for the first sale of the property after July 1st, the seller must demonstrate the acquisition value of the property as compared to the sale value with valid paperwork. This must be registered with INEC (the Institute of Statistics and Census) where they will deduct any improvements and investments made to the property since acquisition.

The 2.25% flat rate will be the standard charge added to the total sale value on the first sale after July 1st. After this date, all purchase prices will be recorded to calculate the 15% on capital gains tax in all future instances.

Active and inactive corporations

Both active and inactive corporations in Costa Rica will have to submit income tax returns. In the case of an inactive corporation, the income tax payable in theory would be zero. However, if the corporation’s shares differ from the value of the assets registered, the Ministry of Finance can declare that corporation as generating an income. In this instance, an inactive corporation may be subject to taxation.

It is advisable to adjust the amount of shares in relation to the value of assets in your inactive corporations prior to July 1st. Many inactive corporations have shares with a value of less than $1000, in spite of having hundreds of thousands in real estate assets tied to the corporation.

If you have an inactive corporation in Costa Rica that you are using for real estate, you will have to do the following to comply with the updates in Costa Rica’s corporate and tax laws:

  • Filing a report of shareholders (requires a digital signature)
  • Filing monthly tax returns for some corporations, depending on their activity
  • Updating the value of the shares of an inactive corporation (i.e. one being used for holding real estate)
  • Add 13% VAT onto any services you provide, including the leasing of a property

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