The Caja Costarricense de Seguro Social known to most in its abbreviated form as CCSS or just the Caja is out in force to collect money owed to the institution. Many companies owe the Caja money. Some try to play games with the system, so they do not have to pay. Here is a bit of background and a company structure that most expats and Ticos alike do not know about which can be used to avoid the game playing.

The CCSS is the foundation of the social security system in Costa Rica. It collects money each month for itself and various other institutions to cover employee health, death and old age benefits to name a few.

Many companies get behind paying their monthly dues to the Caja. This is causing a severe breakdown of the system which is already taxed by rising health costs in general.

About a month ago, there were protests all over the country by the public complaining about the inefficiencies of the CCSS system and the poor medical care the institution provides in some areas of the country.

Some companies try to play games with the usual system of putting their employees on the payroll to avoid paying social security charges. One of the most notorious ruses is to have an employee provide an invoice to the company so it appears the employee is an independent contractor and not an employee.

There are three basic proofs that make up the definition of an employee in Costa Rica: remuneration, personal service and subordination.

Remuneration means a person gets paid for the work they perform. Personal service means the worker being paid for the services they provide must do the work, they cannot simply replace themselves with someone else when they do not want to work. Subordination means the worker takes orders and must obey them.

One problem with this ruse is that the worker usually does not pay into the CCSS system and thus is not covered by any benefits. In many cases, they do not pay for worker compensation either. That is provided by the Instituto Nacional de Seguros or INS for short. This fact contributes to the financial problems of the whole system and is one of the reasons the Caja is in a financial crisis.

True, independent workers can opt into the CCSS system by paying their quotas as such “trabajadores independientes” which mean independent – or professional – workers. However, if they meet the basic proofs of an employee as listed above, they are not independent and should be on a company’s payroll.

Due to the uproar by the public, Caja inspectors are everywhere trying to find the companies that do not pay and also trying to identify the companies that are playing games with the system.

Some companies like having certain professional workers off the payroll and it is more convenient for them to pay for professional services. Even the country itself has found it more economical to pay for services rendered and keep the payroll down.

For this reason, Law 7407 was created in May of 1994 adding a type of special company structure just for independent workers. It is called a S.A.L. or Sociedad Anónima Laboral. Translated into English this means a company for workers.

This company structure was initially created for companies that work with the government so thecountry could cut costs, but anyone can use it. One example is the phone company, Instituto Costarricense de Electricidad known as ICE for short. It uses S.A.L.s to do contract work like fix telephone lines and install telephone services.

A S.A.L must have at least four workers, and the workers must own the majority of the shares of the company. Outside investors can invest in a S.A.L. but they must remain a minority. If a worker of a S.A.L. leaves, he or she must return the stock holdings back to the company.

Here is how they work: Independent or professional workers constitute a S.A.L. to work with a company or companies. They bill for their work, and then the S.A.L. is responsible for paying into CCSS system and also paying for their workers compensation.

This keeps them off the payroll of the companies they work for and gives them the ability to work independently. The CCSS gets their money, and the companies receiving services do not have to worry about big payrolls.

An interviewed Caja inspector said, “S.A.L.s work well if the people that manage them do not play internal games with the company.” He was referring to the fact that in some S.A.L.s the workers’ pay themselves more than they report to the social security system and do not pay their workers compensation.

A company that has independent workers who are not on the payroll but meet the definition as an employee probably will have problems with the CCSS sooner or later. If these independent workers number less than four, the company should put them on the Caja system and get them workers compensation as soon as possible. If they number more than four and can manage themselves according to Law 7407, they should create a S.A.L and bill the company they are working for to keep in line with the law.

Most people do not know that if they hire a company and that company is not up to date with the Caja Costarricense de Seguro Social, the Caja can collect the money from the company or people to which the delinquent firm is providing services. For example, a security firm might not have all its guards on the payroll or might cheat by not listing any. The Caja has the right to come back at the firm or person who hired the company that did not pay into the system.

The Caja is on a rampage to get non-payers. Everyone, should evaluate the payroll to be sure they are being reported correctly and check to see if the companies they work with on a continual basis are up-to-date as well.

Complimentary Article in PDF Fomat

There are several types of company structures in Costa Rica. The two most common are the sociedad anónima and the S.R.L.

However, there are only two types of tax statuses, active and inactive. This fact complicates tax filings for expats and is becoming more of a problem every day due to the enforcement of the country’s new banking regulations. There should be another status offered to filers by the tax department. This status could be called something like “nonoperational,”"static” or “passive.”

Active companies, in theory, exist to make revenues and after deducting legal costs and expenses end up with a profit, which is taxable. Inactive companies exist to hold assets but do not have revenues, costs or expenses. Active companies need to file several types of returns including, but not limited to, sales tax, education and culture tax and income tax forms. Inactive companies only need to file the education and culture tax form each year.

Here is the problem. If a household of an expat has a large domestic staff, it is recommended the employees be on a payroll in the name of a company and not the name of a person. In this case, the company whether it be a sociedad anónima or an S.R.L. has no other purpose but to exist to meet the payroll of the employees. In other cases, all the expenses of the household are paid out of the inactive company.

This is not really an active company using the rules of the tax department because the company does not have revenue. However, it is not an inactive company either because the payroll of the employees are, in theory, expenses for the company.

All companies have accounting requirements, whether they be active or inactive. In accounting there are always debits and credits.

Now in a company that is active revenues are received to pay the expenses. But where does the money come from to pay the payrolls and other household expenses in a company that has no revenues. Well, it comes from the owners of the company but not as revenues but as loans or capital inflow.

On tax returns, this kind of company will never have a profit, only losses. However, the tax departments still wants all the forms filed each year as if the company is active. This includes form D-151 and D-101. In the past, the tax department was not very careful in auditing the D-151 form. This form is an informational document that is filed by active companies as a cross checking mechanism to catch tax cheaters. The tax department was trying hard to make the filing of this form a quarterly endeavor, but after a big fight, it remained an annual filing due Nov. 30 of each year.

Now, the tax department is doing a much better job checking the D-151 form and even in companies that exist only to pay employees or other incidental expenses need to file this form. Recently, an expat couple was fined heavily because they did not file the D-151 form. They also were using their company to pay their telephone bills as well as their employees and did not report the expenses on the form.

Here is the other problem. In the past most expats left these kinds of companies as inactive but had bank accounts open to pay the bills. Most

banks in Costa Rica are updating their records due to new banking regulations. One of the many requirements to have a bank account is to submit a form proving the company is an active company. This fact means that an inactive company with a bank account will be closed by the bank unless the owners of the company go to the tax department and signs up as an active company. Once the company is active, all the other forms need to be filed or fines, and penalties will result. In addition, once a company is active, it also needs to keep a set of books, including accounting, which can be inspected at anytime by the tax department.

The good old days are gone where managing a company and maintaining a bank account was easy. Now days, it requires a lot of work and probably the services of an accountant. If many expenses are being paid out of one of these companies, an accounting program to keep track of the information needed to fill out the D-151 return will probably also be necessary.

It would be nice, but probably is only a pipe dream and will not happen, that the tax department start another tax category other than active or inactive which would facilitate the use of a company structure to pay payrolls and expenses of an activity that does not produce any revenue like a domestic household.

This would ease the tax filing requirements on expats on these kinds of companies and also alleviate the big headache of opening and maintaining a bank account. As it stands today, if an expat currently has a bank account for a company that is inactive, it will probably be frozen or closed shortly unless the owner makes the company active.

Citibank is currently in a major updating process and calling all of their customers to come bring their accounts up-to-date. Customers are being told that if they do not do so immediately, their bank accounts will be frozen, put in an inactive status, or closed.

Complimentary Article in PDF Fomat

Here is some great news for green-minded expats.

The Costa Rican tax department required all tax contributors to keep their account documents for five years and their accounting books up-to-date at all times. This meant gobs and gobs of paper and sufficient storage places to stash all the stuff. Not very green thinking.

In a country that pledges to be carbon neutral by 2021 — different politicians have used a variety of different pledge dates — not allowing companies to digitize their accounting was insane.

Until the very recent past, that was the rule. Everyone needed to keep all their accounting in boxes to support what was reported to the tax authorities. Well, good news, a recent request for clarification to the Ministerio de Hacienda, the mother organization of the local tax department found that according to a resolution DGT-02-09 from the Direccion General De Tributacion, dated Jan. 9, 2009, people can keep electronic documents and forget the paper.

The only two major requirements set forth by the tax department are that individuals and companies electing to keep their documents digitally must guarantee the documents cannot be altered by others. This means good security measures to protect the documents must be in place. Also sufficient backup procedures also must be maintained.

This may sound real simple in theory, but it is not in practice. Most people are lax in both areas. Many do not keep their computers up-to-date with the latest virus and firewall software because it costs too much money. In addition, people know backups are important but just never get around to putting a good backup system in place.

There is no excuse for not doing either. These days there are a multitude of free virus and firewall programs available and they sometimes rival programs one can purchase. Backup systems have come down in price drastically, and most backup equipment is designed for computer neophytes or, better stated, the downright computer dummies of the world.

Yes, granted, most of the accounting source documents an individual gets is on paper. Cash register tapes, invoices, cash receipt forms, credit card vouchers, and the list goes on and on. Many of the papers received in Costa Rica one cannot even read because they are printed on paper with microscopic printing or printed with a printer that has not had a ribbon replacement for years.

None the less, this paper can be recycled if it is digitized instead of stored in some storage area for years and years. Better yet, the mentality of people is changing. One now can request their light, water and phone bills digitally by having them sent to an e-mail address. Once received, the bills can be paid online and the bill and payment can be put in a digital filling cabinet without ever printing a piece of paper.

For novices to this digital world, the best digital filing system for Windows operating systems to store documents is made by Nuance — once called ScanSoft — and it is called Paperport. This program is easy to install, easy to use and comes free with many scanners.

Newer cellular telephones also make excellent expense-capturing devices. One just takes a picture of an accounting document and using the telephone e-mails the photo to oneself for accounting.

Most newer accounting systems today have incorporated ways to attach digital documents to transactions. Two of the best are Quicken and QuickBooks 2010. Intuit’s Quicken and QuickBooks products have been around for years. A newer company, called NeatReciepts, is great for individuals who are looking for something very simple to use for their expense tracking and document archiving.

The secret for everyone is to “think green” and use the new Costa Rican tax law change to improve and protect the environment. Thinking green is hard at first, but it gets easy real fast because people working green save money. They do not buy as much paper and they do not have to pay for those outrageous printer cartridges or laser toner refills.

Here is one example of green thinking and an accounting trick to avoid printing paper. Request all utility bills to be sent online to an e-mail address as mentioned above. Pay the bills using online banking, but when the payment receipt screen appears, do not print it. Use a function on everyone’s computer, called “print screen” or “Grab” and send the receipt directly to the computer and not to a printer.

The transaction can be posted to an accounting system like Quicken or QuickBooks and the bill and the payment receipt can be attached to the record. So no paper printed, and the tax department states this is 100 percent acceptable.

There is an added benefit for expats and people in general that think and live green. They do not have to lug accounting stuff around. It makes them more mobile. Everything they need to work and play in Costa Rica or in any other part of the world can be kept on a computer and backed up to a multitude of online sources. The data can be encrypted to keep it out the reach of prying eyes.

Green thinking is good. It saves money, makes one more mobile. It is good for the environment, and, best of all from a legal perspective, it complies with the law. The surprise is that it took environmentally conscience Costa Rica so long to come up with a rule allowing for digitizing documents.

Complimentary Article in PDF Fomat

Here is a yearly reminder. Education and culture taxes — Timbre de Educación y Cultura — are due next Monday, March 31.

Many people, including professionals, sluff off filing form D.110 and paying these taxes. However, paying them is required by Ley 5923, and every company in Costa Rica listed at the Registro Nacional is required to pay this tax. A company’s net capital amount determines the tax to be paid.

The tax amounted to quite a bit of money in 1976, the year the general assembly enacted the law. Today, the amount is almost insignificant and is a nuisance tax to most.

The law has not changed significantly since 1983 when law 6879 modified it by increasing the tax 200 percent. There are important aspects to the law that have not changed. For example, Article 6 of the law requires the tax department, Dirección General de Tributación, to publish the names of companies that do not pay the tax on a deadbeats list in the official newspaper, La Gaceta. Article 7 allows the tax police to collect the tax using various means outlined under the different tax laws.

In actuality, the tax department does not publish the deadbeats list nor goes to great effort to collect the tax even though the law requires it to do so. Practically speaking, the now minimal tax does not justify the effort or expense. This said, people owning companies do get collection notices for this tax on occasion and this can be a bigger nuisance. Any collection process in Costa Rica means there is an attorney involved and they get their cut, so they can get pretty pushy.

The tax is for education and culture, as the name of the law suggests. The money collected goes to the Universidad de Costa Rica, continuing education programs and the national museum system. The purpose of the tax is one good reason to make the extra effort to pay it.

There were some interesting changes made by the tax department in the past calendar year worth special mention.

Legal books and the whole rigamaroo surrounding legal books changed or better stated: old rules that have existed for a long time became important again. For several years, legal books could be thin and stapled. Not so any more. They need to be thick and glued giving book makers more work. The downside to this is they will not fit in a file folder and are easier to lose. They also must have a standard pre-printed form on the first page of each book. Inactive companies can only legalize three minute books — called “acta” books — and not all the books which include accounting ledgers.

The fuzzy logic behind a tax department memo May 14 to taxpayers is that inactive companies do not hold taxable assets, thus no accounting is required.

Multi-million dollar properties held by inactive companies do not pay taxes to the Dirección General de Tributación except for the Timbre de Educacion y de Cultura, a maximum tax of $18.30. Attorneys transferring these properties from one company to another under report their value avoiding transfer taxes too. So there is no checks and balance, so why make people fill out accounting books.

Now that the tax department’s computers are working better, filing an income tax form for an inactive company can make it active. When a company is active, this puts it on the tax rolls when in fact it may not owe income taxes. Filing an income tax form is not the only thing that can make a company active. It may show up as active because an input operator made it active by mistake.

It is important to check a company by going to this link http://196.40.56.20/ruc/#consulta
and typing in the company’s identification number or legal name and see if the company is “con obligaciones,” with tax obligations, or “sin obligaciones,” without tax obligations.

If a company is “con obligaciones” when it should not be, one must file form D.140 to remove the company from the tax obligations list. To do this, one must fill out the form, get a certification of the company from the Registro Nacional and file this paperwork at the tax office along with a copy of the legal representative’s identification.

Expats with a company in Costa Rica need to file and pay their Timbre de Educacion and Cultura by Monday of next week. Most banks will accept the form and payment. Penalties and interest accrue after the due date. Checking one’s company obligations is also a prudent item to put on this week’s do list.

Complimentary Article in PDF Fomat

The sign of things to come: Banco Cuscatlan now requires citizens or resident aliens of the United States to fill out a W9 form for personal accounts at the firm’s banks in Costa Rica.

Why? Because Citigroup bought Grupo Cuscatlan from Corporación UBC Internacional S.A. for $1.51 billion in cash and stock. Grupo Cuscatlan has operations in El Salvador, Guatemala, Costa Rica, Honduras and Panamá.

Most United States citizens are familiar with a W9 form. It is an Internal Revenue Service form used to obtain a person’s taxpayer identification number. In the case of individuals, the identification number is the Social Security number.

The purpose of the form is to acquire information from taxpayers for the United States government’s tax collection efforts. A web version of the form that can be filled out online and printed.

The bank is also requiring account holders to sign a form that states the following:

“The undersigned hereby authorizes Banco Cuscatlan de Costa Rica, S.A. to report, on an annual basis, the information on the account holder and his or her account(s) and any interest earned on such product(s) or account(s) held in Banco Cuscatlan de Costa Rica S.A. to the United States Internal Revenue Service and to withhold any United States tax.”

This is just another scary story of the transparency phantom stalking bank information.

Recently, an expat sold his home in Costa Rica. He almost put the proceeds of the sale in his Cuscatlan personal account. There is no capital gains tax in Costa Rica but there is in the United States. In theory, the bank could withhold money and send it to the United States government as backup withholding to cover taxes due.

If United States expats do not fill out the form, their personal accounts can be closed and/or the bank can withhold as much as 30 percent of any money in the accounts. The deadline for compliance is the end of this January.

Many expats believe their money in Costa Rica is safe from their home country’s tax authorities. Some countries do not required the payment of taxes on holdings or gains from investments in Costa Rica. The United States does. No matter where a United States citizen goes, he or she owes taxes on the money he or she makes on investments.

Many expats from the United States try to hide their gains here by using companies to hold assets. Some go as far as to use Costa Ricans to hold their stock to hide their profits. Those that do
have no control over their assets, and some take a beating from white-collar thieves.

This kind of reporting to the United States is just the start. Cuscatlan is just taking the lead because it is a United States banking institution. GE Consumer Finance purchased 49.99 peercent of BAC San José in May 2005, and since that purchase, the bank has scrutinized accounts very closely. The bank continues to close many questionable accounts held by expats before the purchase.

HSBC recently purchased Banex. HSBC Bank USA has close ties with the Costa Rican subsidiary and will probably be requiring the same forms as Cuscatlan very soon.

All these facts mean the accounts once used by expats to hide money in Costa Rica are almost gone. Most banks, even the ones not mentioned here now, require any new customer to fill out a form or sign an agreement that permits the bank to give information about the account and the account holders to any authority, including the U. S. Internal Revenue Service.

The best practice when living and investing in Costa Rica is to be on the up and up with all of ones business dealings. This includes paying one’s taxes to Costa Rica and the home country. It makes for a better night’s sleep.

Complimentary Article in PDF Fomat

An analysis of the fiscal plan (4)

Transparency and Justice are teaming up and, using the synergy of information technologies and law, will surely prevail in collecting more taxes from everyone.

Transparency sits alongside Accountability, implying an openness and willingness to accept public scrutiny, decreasing the capacity for deception, as in hiding money from the tax people. Typically, transparency is used when discussing oversight of public officials. Now it is the individual citizen whose holdings and life is transparent. The concept has been referred to as the Transparency Phantom in a previous article.

In practice, Transparency means a free exchange of information, access to facilities, and cooperative arrangements to provide ready observation and verification of all kinds of information, especially personal financial information.

The new fiscal plan of Costa Rica, if passed on second reading, will create a new authority, The National Council of Transparency and Accountability. The new office, an organ of the legislature, will have functional and administrative independence from the rest of government.

The law also creates a national network of information. The red, Spanish for net, will operate under the authority of the ministry of planning.

The network is to gather information for the transparency council. Its objective is to catch tax dodgers and public officials using the government for enrichment. Some politicians opposing the fiscal plan refer to these entities as the gestapo.

The old tax entity, Dirección General de Tributación, the headquarters of taxation, will be eliminated, replaced by La Dirección Nacional de Tributos.

No one will be out of the grips of this team. Countries that do not cooperate with Costa Rica in reporting any and all information it requests in the name of international cooperation (transparency) will be labeled paraísos fiscales or tax haven countries.

Chapter 3, Section 1, Article 41 of the pending law requires indoctrinating the young, early, in school that paying taxes is a civic duty. This is very different from the culture of today because many Costa Ricans work hard to find ways around paying taxes.

Very few Costa Ricans, even professionals like economists, accountants and lawyers understand that the new fiscal plan would introduce a 10 percent capital gains tax to the country.

Most foreigners come to Costa Rica to invest in land because there is no capital gains tax and by hiding under an umbrella of a local corporation, they never report earnings to their home country either.

Investors will be caught in a dilemma, a “catch-22″, under the new fiscal plan. The old ploy of undervaluing the deed registered at the Registro Nacional when selling property can backfire and end in a big fine or worse. Most banks are now required, under the code name KYC (Know Your Customer), to request the source of any funds over $10,000. They are required in many cases to get a copy of the deed as verification of funds in a property transaction.

In the past, when the deposit did not balance with the amount in the deed, tax authorities could not do much because there was no tax. Lying is punishable under Costa Rican law but there needs to be dolo, deceit, and daño, damage, for conviction. Under the old system no tax means no damage, thus no convictable offense.

Under the new fiscal plan there will be a tax, so understating a value on a deed and depositing a different amount in the bank will set off judicial flares of tax fraud.

This is only one real example of the far-reaching claws transparency will have on Costa Rica and the investors who come here.

Now here is the scary part. In the pending fiscal plan, Section C, Article 7 of Chapter 1, of the Income Tax Law, the government wants foreigners residing in the country on a permanent basis to tell the tax people how much money they have outside of Costa Rica. Anyone who stays in Costa Rica more than 183 days a year will be considered “habitual or permanent” residents.

Those who fess up will not be taxed on bringing assets or money to Costa Rica. Those who do not will be taxed.

Costa Rica has a history of shooting itself in the foot. With the aid of Justice and Transparency the country may just do it again.

Complimentary Article in PDF Fomat

Accounts are open book to investigators

This is a scary story about a phantom called Transparency that is creeping secretly into everyone’s life. Thanks to Transparency, individual and corporate bank accounts are becoming open books for tax investigators from all over the world.

Everybody has noticed all the great new services available for those who use online banking in Costa Rica. One can pay telephone, water, light and other bills via a computer. There is no reason to wait in long lines at the bank or local grocery to pay most monthly bills.

Along with all these great new services, something else is happening, something frightening for those concerned about personal and business privacy.

The computers are getting better and incredibly more efficient. They are tabulating, recording, and archiving everyone’s transactions.

Those who do not use computers to do their banking probably have noticed a different treatment at their bank of choice. This, too, is because of Transparency. It is called “know your customer.”

Transparency was born out of international banking agreements, primarily by accords made by the Basel Committee, established at the end of 1974 by the Group of Ten, the major First World nations. The group’s function is to consult and cooperate on economic, monetary and taxation matters.

The term “transparency” is often used to mean openness in the way institutions work together. It is considered good for government. Originally it referred to institutions in the European Union.

Transparency now means stripping every human being of privacy, in particular financial privacy.

Basel II, the agreement that sustains Transparency, is now in full force, and most banks in the world are having to succumb to its powers or perish. Events of Sept. 11, 2001, provided an anti-terrorism veneer to the agreements.

Greater openness means any regulatory agency, anywhere in the world, can get information it wants through “transparency” cooperation. And the U.S. Internal Revenue Service is promoting training on this around the world, including in Costa Rica.

El Salvador, Nov. 22, passed tax legislation with Legislative Decree number 492. The legislation includes the elimination of access restrictions to information regarding tax matters to guarantee transparency by enabling access to taxpayers’ banking and financial information. The law also includes newfound easy ways with which judicial courts, the Attorney General’s Office, and the U.S. Internal Revenue Service may obtain the information as well.

Article 233, related to bank-client privilege, was modified so it would no longer be an obstacle for the investigation of crimes, audits, and determination of taxes.

Costa Rica has similar new rules in its new tax law, which soon may to be approved by the legislature.

Transparency has friends. For example, one is the U. S. Bureau of Diplomatic Security, which is the worldwide law enforcement and security arm of the U.S. Department of State. These special agents are assigned to U.S. diplomatic posts with a mission that includes nabbing IRS suspects.

These agents, in full cooperation with the Costa Rican government, have arrested at least five suspected U.S. tax dodgers in broad daylight in this country within three months.

In 2002, Costa Rica obligated financial institutions and other businesses to identify their clients and report currency transactions over $10,000, among many other rules. New legislation, expected in 2005, will further close the gaps on any type of secrecy and thus open the doors to full transparency — at least for official investigations.

The point is that Transparency, the phantom, will get some of the cheaters and tax dodgers it was created to find, but most criminals have learned to live with it. Honest people will get gobbled up too, probably more honest ones than bad ones.

How does one beat this phantom?

The only way is to expect full transparency. This means bank accounts had better balance — exactly — with what is reported on financial statements and tax returns.

U.S. citizens selling property in Costa Rica better think twice about failing to report any gains made on those transactions on their U.S. tax returns. There are no capital gains taxes in Costa Rica but there sure are in the United States, and all citizens are required to report and pay a hefty tax on the gain regardless of where the gains were made.

A wise taxpayer will plan for the inevitable and get used to living with full transparency. And get a really, really good tax adviser.

Complimentary Article in PDF Fomat

Corporations have at least six of them

Believe it or not, these are the books of a corporation worth millions of dollars.

Everyone doing business or owning assets in Costa Rica using a company is required to have legal books.

The books, referred to in Spanish as libros legales, are obtained at the stationery store and then taken to the tax authority, Dirección General de Tributación or DGT for short. To obtain the agency’s blessing on the books, company operators fill out a form called Solicitud de Legalización de Libros. This translates into English as application to legalize books.

Tributación puts a notation and legal stamps on the first page of each book.

Legalizing books for the first time usually goes hand-in-hand with filing Form D-140 called Declaración de Inscripción, Modificación y Desinscripción en el Registro de Contribuyentes. This translates into English as declaration of enrollment, modification, and un-enrollment in the tax contributor’s registry.

Whether a company is active and paying taxes each year or just holding property (and not required to file an income tax return or pay tax), the company is required to have legal books.

Most people have heard of these books but have no clue as to what they do and why they are important. Very often they have been misplaced and, unbeknown to the owner, serve as a home for hungry termites.

There are around 12 types of books. However, most companies only have five or six. The run-of-the-mill sociedad anomima, usually referred to as an S.A., has six, and a limited company, referred to as an S.R.L., has five.

The books common to both company structures are: 1) Actas Asamblea de Socios or Actas Asamblea de Cuotistas (stockholders’ or shareholders’ minutes); 2) Actas Registro de Socios or Registro de Cuotistas (registry of stockholders or shareholders); 3) Diario (general journal); 4) Mayor (general ledger); 5) Inventario y Balances (inventory and balances).

The book that is unique to an S.A. is the Actas Junta Directiva or Actas Consejo Administration, the directors’ or administrators’ minutes. This minute book records board of director decisions and is unique to this company structure because limited companies do not have directors, only a manager.

Why are these books so important? Why can’t the termites have them?

Two classes divide the legal books. One class is the actas or minutes, three books for an S.A. and two books for an S.R.L. The other class is accounting, three books for both S.A.s and S.R.L.s.

The actas are important because without them, movements in the Registro Nacional or national registry cannot be made legally.

Notaries are required to have minutes up-to-date and written in the minute books to make most changes to a company that requires public registration.

This means that a company is dead-in-the-water without books if important changes are needed to corporate structure, addresses, board of director makeup, ownership, and other corporate makeup.

Making an important change in the makeup of an S.A. or S.R.L. is impossible without having the books available.

The accounting books are important because Costa Rica’s Commerce Code, Article 251, requires the special books as part of doing business.

Most people think all this seems really dumb: writing by hand in books in the computer age.

Actually, there is some good sense to the laws mandating legal books. True, the origins come from times before computers, but hand-written entries in books are harder to “fudge” than easy-to-manipulate computer programs, applications and data.

Costa Rica’s national registry is full of fraud and mistakes regarding property ownership and company records. Having a good hand-written record of important transactions can save the day in some cases.

It is the responsibility of a company’s secretary to keep the minute books current. This includes bugging the company attorney to death until any appropriate registrations are filed, and most importantly, duly registered at the National Registry. It is the responsibility of the treasurer to keep the accounting books up-to-date. In an S.R.L., all three responsibilities fall on the shoulders of whoever is designated as the manager.

One great benefit of keeping a company’s corporate records, including legal books, in perfect order is that such a company can be transferred quickly and easily to another person or entity, as in a sale, without paying any kind of transfer tax. This can be a real tax savings when selling property or other assets.

Those who own corporations should rescue their books and make sure they accurately match the important decisions of the company. They should keep the books in a safe place or with an honest professional so they are handy when needed. The effort could keep corporation owners out of trouble and/or save them money down the road.

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