There is a new tax on the horizon for all types of companies, including inactive ones, that could prove to be very expensive for expats living in Costa Rica. This tax is just another way to squeeze everyone, including expats. It will surely prove to be a deterrent to investing in the country.

What is the tax department going to do with all the inactive companies if the new tax on them is passed? An inactive company exists for the sole purpose of holding an asset, but is not engaged in commercial activity. The tax is going to be somewhere between $200 and $300 per company. The exact amount is being debated now in the legislature. It is rumored the tax will probably be $200, but no definite amount is set as yet.

The tax department, Dirección General de Tributación, apparently cannot make up it mind as what to do with inactive companies.

There was a time that these inactive companies received legal books just like active ones.  That practice was canceled in 2010 with directive DGT-12-2010.  The directive stated that inactive companies should not receive legal books.  People complained and legal books were reinstated for these types of companies in June of this year.

There are two components to legal books for a company, minute books referred to as actas,and accounting books.  An active sociedad anónima gets three minute books and three accounting books. A sociedad de responsabilidad limitada gets the same number of accounting books but only two for minutes.  The difference is that the board of directors book is not required in an S.R.L. and it is omitted.

Expats need to take a hard look at their companies to see if any of them can be closed before the tax on them becomes law.  The problem is that it is not all that easy to get rid of them.  One cannot just go throw the books in the trash can.  Legal professionals questioned about the situation believe that the tax department is going to go after those people that do not pay the tax, and, of course, there will be additional fines and penalties for not paying.

The proper way to close an inactive company is to go before a notary and change the constitution.  Most companies are constituted for 99 years.  The notary would change the constitution of the company to only a few months into the future.  Once past, the company would be in theory dead.  The books then should go to the tax department for cancelation.

Sounds easy, but this process is expensive.  Here is an estimation of the costs:

A notary will charge around 20,000 colons ($40) for writing the change into the minute book and 60,000 colons ($120) to notarizing the act.  To change the constitution of a company requires publication in “La Gaceta,” the official newspaper, which costs between 7,000 and 8,000 colons (up to $16).  To file the paperwork costs about 65,000 colons ($130).

Add it all up and the result is 153,000 colons or three hundred and six dollars. A lot of money just to kill and inactive company.

The only alternative is to do nothing and wait to see if tax department tries to collect the money.  Which they probably will in time.  Now during that time, the tax, interest and penalties will all add up to more than it would have cost to close the company.

Why is the legislature trying to pass this tax? The answer is simple. Many people avoid transfer taxes on real property and other assets like vehicles by just transferring an inactive company that holds the asset.

This is perfectly legal, transferring a company to another owner, but the tax department does not get its share, the transfer taxes. It is envisioned that imposing a yearly tax on inactive companies should curtail some of this activity.

This new tax really puts expats in a dilemma. It is not a very good idea for expats to hold property in their personal name.

There are many reason for stating this but the most important is due to probate. Probate is expensive and time consuming. Judicial probates can last for many years.

It is wise to hold property separate from vehicles and employees which means many expats have at least three companies. This new tax is going to make doing so too expensive for many expats.

An amnesty would be nice, to give people a chance to get rid of old and out-of-date companies. Many expats created companies years ago. Some have forgotten about them, others have no idea where the paperwork is for those entities.

Even though an amnesty seems like the thing to do, it does not look like there will be one. The tax appears imminent for this tax year. It all comes down to money.

The Costa Rican government is trying to close the loophole and collect more transfer taxes. It would be interesting to know if the legislature has considered lost new investments into the country due to imposing a yearly tax on inactive companies.

The final kicker is that this proposed new tax would not be a deductible item on the company’s incomes taxes, according to the draft of the proposed law.

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

There is only one tax inactive companies need to pay every year. It is the education and culture tax. The tax is due by March 31 which falls on a Wednesday this year. However, it can be paid anytime during the month of March.

Law 5923 requires the paying of this tax. Many people slough off paying or do not know about it. The tax is filed and paid using tax form D.110. The form is easy to fill out and most banks will accept the payment for the tax authority. A company’s net capital amount determines the tax to be paid.

As reported on March 24, 2008, 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, the 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 fact, 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.

This is really just a pesky tax for inactive companies and its due date is somewhat inconvenient too. Most relevant taxes for companies are paid in December. One can obtain the form D.110 for free at the tax department located in Barrio Don Bosco close to Jardines de Recuerdo or buy the form at some national banks. The amount is from 750 to 9,000 colons, not a very big bite.

A company in Costa Rica is either in one of two general tax categories. Active or inactive. Active companies are those that perform some commercial activity and receive revenue. Inactive companies are those that may only hold assets and only exist for that purpose. The asset could be properties or vehicles.

Many expats confuse the two and use a company to buy a property and then use the same company to pay their staff which usually requires a bank account and registration with the Caja Costarricense de Seguro Social. Once they do this, they make the company active in the eyes of the tax authority. As it is, when opening a bank account these days, the bank usually asks for the form from the tax department activating the company.

An active company requires the filing of an income tax form D.101 in December. If the form is not filed on time, a hefty fine can be levied against the company and collected judicially including penalties and interest.

All people with companies in Costa Rica should check each year to see if their company is active or inactive. This can be done by going to this link (http://196.40.56.20/ruc/#consulta) and typing in the company’s name or identification number.

If an inactive company is active, form D.140, “Declaración de Desinscripción del Registro de Contribuyentes” (declaration to unregister as a taxpayer) needs to be filed with the tax department to put it in an inactive status.

There is one big inconvenience for people that do not pay the education and culture tax. After a period of non-payment of the tax, there is the possibility the tax department will delete the inactive company from the tax rolls completely. When this happens, the company in theory does not exist as a legal entity anymore even if it shows up at the Registro Nacional.

Where this becomes a problem is when an expat goes to sell a piece of property held in an inactive company and the buyer requires all the legal paperwork up-to-date. If the company has been deleted by the tax department, workers there will not issue a certification the company is current.

What generally happens in these cases is that a seller needs to write a letter to the Dirección General de Tributación requesting the reason for the purging of the inactive company.

They begin a study which can take as long as three months to complete only to return with a letter stating the company was deleted because the education and culture taxes were not paid. They can reactivate the company after collecting all the back taxes but the process is a pain in the neck.

Generally, what happens is a seller transfers the assets of the purged inactive company to another inactive company so the asset can be sold to the buyer. All of this takes time and depending on the fiscal value of the asset being sold can be expensive because transfer taxes and legal fees need to be paid.

Expats and Ticos alike should abide by the tax law and pay this annoying tax. If they do not have someone monitoring their company, like an accountant, they should add a note to their calendar for March of each year to pay this pesky tax. By doing so, they will avoid irritating problems when trying to transfer an asset to another person.

Complimentary Article in PDF Fomat

The transparency phantom stalking clients back in 2005 was not as obvious as he is today. Now, Costa Rica is on its knees in front of the world, pleading for forgiveness for its tax haven practices and wanting to change. The country seeks to send a strong signal to the world it has done so.

This has given the specter new, ominous powers, and he wants everyone to succumb and disclose their secret nest eggs. Many expats are scared to death their secret monies and investments in Costa Rica will be found and they will be put away in that nasty place the phantom puts tax cheaters.

These policy changes are only one reason expats and Ticos alike are being inundated by phone calls from the banks here to update their account information.

Another reason is because the Banco de Costa Rica lost miserably in court and has had to return large sums of money to clients due to fraudulent transactions over the Internet. Banco de Costa Rica was the hardest hit, but all the banks have learned they’d better be more cautious and improve their due diligence.

The banking regulatory agency is also putting pressure on the banks because it is tired of being accused it was at fault for many financial scams where expats and many other people lost hundreds of millions of dollars.

Here is some background and an update as to what is happening in the world regarding transparency and banking in general:

The Basel Committee, mentioned in the 2005 transparency article, is a group composed by 10 of the most powerful nations in the world, which agree on international banking guidelines in order to avoid risks such as terrorism, fraud, economical collapse, tax evasion, among other concerns. Costa Rica has vowed to adopt and adhere to the recommendations of the Basel Committee.

In addition, at the end of April of this year, the Organization for Economic Co-operation and Development, formed by a group of 20 developed and developing countries, issued a black list of countries that have not been cooperating with international tax regulations. Costa Rica was included along with three other nations.

Almost immediately, Costa Rican government officials responded stating that the country was going to adjust to international tax stipulations by creating a law to formally demand transparency concerning banking information from clients’ accounts. This law will allow the Internal Revenue Service to assess U.S. taxes from any profit made by expat businesses abroad. The law also will give local tax officials much greater access into bank activities.

Typical tax havens — such as some Caribbean, African and European countries — have been characterized as nations that keep tax rates low and offer banking privacy in order to entice foreign businesses to establish operations in their territory. Although Costa Rica does not lure international businesses by lowering taxes, it does provide banking information privacy, which, in turn, enables individuals to evade taxes.

For years, Costa Rican banking laws had protected clients’ privacy from government surveillance to encourage the population to open business and savings accounts and trust banks with their income, thus consolidating the Costa Rican banking system. Eventually, banking laws were modified to allow government surveillance when suspecting drug-related activities and tax evasion.

By realizing that demanding transparency from clients has not weakened the banking system in the United States and it would not jeopardize the solidity of Costa Rican banking, the government increased surveillance by creating the Superintendencia General de Entidades Financieras, an organization in charge of “ensuring transparency, strengthening and promoting Costa Rica’s financial development.” Even though the Superintendencia has been operating since 1995, it has until now only supervised Costa Ricans who work under the social security system called the Caja Costarricense de Seguro Social.

Any Costa Ricans who worked independently used to be out of the Superintendencia’s radar. The Caja collects all employee information gathered by all companies registered with it and hands the information over to the Superintendencia.

This lack of reporting let private businesses whose owners decided to evade local taxes, as well as U.S-owned companies who have not reported their earnings to the Internal Revenue Service, to enjoy peaceful and profitable times, except for the occasional visit by the Costa Rican tax collection office, which imposes hefty fines on tax evaders.

However, ever since Costa Rica was blacklisted, things have gotten much more complicated. The Superintendencia is now demanding that customers update their personal and financial information at their banks in conformity with the money laundering, fraud and drug-trafficking law. Some banks have been calling clients as well as broadcasting TV commercials that instruct clients about the importance of updating banking info to avoid having their savings and business accounts closed. Some are even giving in a weekly prize of $500 to a selected winner among the clients who undergo the updating process.

Moreover, after the terrorist attacks of Sept. 11, 2001, international regulations demanded that most countries comply with anti-terrorism guidelines, which also permeated banking information and transactions. Following anti-terrorism instructions, the Costa Rican government issued the law against terrorism in 2003, which detailed all punishment, obligations and restrictions to be imposed on the country’s population. In one of its clauses, it specifies that “all companies or individuals that are not registered under any superintendencies in the country must voluntarily register at the Superintendencia General de Entidades Financieras, which doesn’t automatically mean that they will be allowed to conduct any business operations within the country. They will also be subject to inspection concerning money laundering and drug-trafficking.”

The Public finance minister, Guillermo Zúñiga, has said “we have a commitment with the Organization for Economic Co-operation to issue and send them a law regulating banking info transparency for U.S. tax reporting purposes, without needing authorization from a judge, a pending cause or the launching of a tax fraud investigation.” Such law is scheduled to be in force at the beginning of 2010.

The transparency issue will only get to be more of a problem for expats. It is a bigger problem for the old timers — the ones that currently live here — because they are accustomed to the old lackadaisical ways and they do not want things to change.

The full access granted to local and foreign tax agencies will disclose unreported rental activities, off-the-books jobs, sportsbook and gambling operations and even those expats who conduct business in the United States and elsewhere via the Internet from here.

Things are changing and they are changing fast. Expats — old timers and new arrivals alike — had better prepare themselves for today’s reality. Banks opening new accounts will be more diligent in the process. They will also be more demanding on older clients with accounts already on the books.

Complimentary Article in PDF Fomat

Here is the information everybody needs to know about this year’s tax season. Most expats hold their Costa Rican assets in a company. Whether it be a Sociedad Anónima (Corporation) or a Sociedad de Responsabilidad Limitada (Limited Resposibility Corporation) — also known as an S.R.L. or, in Gringo slang, an L.L.C. — all expats have tax obligations, just as Costa Ricans do. However, most expats use inactive companies to hold their assets, and tax obligations differ between active and inactive companies.

Active companies are those that perform some kind of commercial activity that generates revenue. These companies must file Costa Rican tax form D-101 by Monday, Dec. 15. Any taxes due must also be paid by this date.

Inactive companies are those created for solely holding assets, such as properties or vehicles. These companies do not need to file any forms or pay taxes on the date mentioned above. The latter constitutes great relief for expats because most of them only have inactive companies. However, expats should always make sure they get informed about the differences between active or inactive companies in terms of taxing, and they can do so at the Dirección General de Tributación (Tax Collection Agency).

Here are the steps to take: 1.) go to the Sistema de Identificación de Contribuyentes (Taxpayer identification system) 2.) in the bottom section of the Web page, called Consulta de Personas Jurídicas, type in the company’s cédula number (company’s identification number). Do not enter any dashes, just type the string of numbers with no spaces and/or the company’s razón social (the company’s name), and 3.) click the buscar (find) button under the box.

The Web page will then return the following status message under that box: 1,) sin obligaciónes, meaning the company is inactive and has no tax obligations, 2.) con obligaciónes, meaning the company does have tax obligations, or 3.) no hay registros en el rango solicitado, meaning there are no records on file for the company.

If the company being checked has a sin obligaciónes status, it is inactive. If that information is correct, the company only holds assets and is truly inactive, one can go back to having morning coffee. Everything is the way it should be and nothing needs to be done. No tax form needs to be filed and no taxes are due until March, when the pesky Timbre de Educación y Cultura (education and culture tax) , needs to be filed and paid.

If the search result comes out con obligaciónes and one is running a commercial enterprise, the person in charge has to get those tax forms filed and pay the tax before the deadline. Sometimes tax officials make a mistake when registering the corporation and it turns out con obligaciónes when it should not be. If this happens, the responsible party needs to file form D-140, called Declaración de Desinscripción del Registro de Contribuyentes (Declaration to Unregister as a Taxpayer), at the Tax Collection Office, in order to re-register the company as an inactive corporation.

Finally, if the message shows No hay registros en el rango solicitado (the company is not registered at all), the company has not been properly registered with the tax department. One then should proceed to register the company using form D-406, Solicitud de Legalización de Libros (Book Legalization Request).

There was a time during which tax officials wanted all companies to file tax forms, but this has changed. The tax department had actually not legalized books for all companies until last year, and now they do not even accept accounting books, only legal books, for registration. Today, it is very important to know that there is no need to file any tax form for inactive companies; otherwise, by doing so the company is automatically changing its status to active and con obligaciónes. The fact that the Dirección General de
Tributación will no longer legalize accounting books is somewhat in contradiction with the Costa Rican Commercial Code Article 251, which states that corporate entities must all posses legal accounting books. Most expats know that Costa Rica is a land of contradictions and that there are always multiple interpretations of the law, so one just needs to go with the flow.

All companies should also have an annual meeting as required by the Commercial Code, where a balance sheet is presented and discussed among shareholders. In practice, for inactive companies, the meeting usually does not take place physically. A Minutes Act can be written into the shareholders’ book stating that the meeting did take place somewhere, and the shareholders only have to sign the book from time to time. If these minutes are not recorded, since most legal books are blank for inactive companies, they should be registered as one entry where the shareholders approve the current state of affairs of the entity, including its balance sheet.

Expats working in Costa Rica, who receive income and who are not included on a company’s payroll, should register with the tax department as individuals, file and pay taxes by Dec. 15. However, many expats in Costa Rica are working illegally and have not registered or paid their taxes, which simply means they are working illegally and evading taxes. In the past, few have been caught because the cross-examination system has not been very good. This will significantly change for the 2009 tax year, and expats who are not paying their due amounts will surely be exposing themselves to being caught and charged with hefty fines.

With the intention of fully enjoying the Christmas holidays, I recommend getting tax obligations out of the way early. Dec. 15 is only seven filing days away. Usually, the banks that take tax forms (some do and some do not) have long lines during the days approaching the deadline. This year, avoid banks on Friday, Saturday and of course Monday of next week, the last day for filing. Some banks have also gotten into squabbles with tax authorities and have decided not to receive the forms. The best advice is to try different banks until finding the one that will take the D-101 income tax form.

Remember, inactive companies do not need to file. All expats should take the time to review their corporation(s) status in order to avoid unnecessary tax complications.

Complimentary Article in PDF Fomat

How to handle employees and their paperwork represents a continuous problem for expats.

An article on house employees produced a great deal of interest. Many people wrote and said they were not legally registering their employees in Caja Costarricense de Seguro Social — referred to in Costa Rica as the Caja — or paying all compensation as required by law. Some expats also asked if they needed to register themselves. Everyone that wrote is still confused.

One person stated the Caja system was unfair. She stated a Caja employee told her she had to pay them 26,000 colons monthly (about $47) on a minimum base salary of 101,000 colons (about $184), even if her house employee worked just one hour a week.

Another wrote and asked about gardeners and maintenance workers. They tend to work for many people. Who should legally register them?

After the article “Those hidden pitfalls in hiring domestic employees” was published, a Caja inspector showed up unexpectedly to examine this writer’s payroll records. This had never happened. When asked why she made a surprise visit, she said the Caja now has a new police force in charge of checking compliance to their rules. The same day, an associate was investigated in Cartago as well. This is surprising but surely a coincidence nonetheless.

During the examination, the inspector confirmed the information about the minimum fee of 26,000 colons. She said the administration of the social security system calculated a minimum cost of adding an employee to its rolls, and the amount was 26,000 colons. This means any worker – regardless of how many hours they work – must be registered in Caja with at least a base salary of 101,000 colons, even if that is far more than what they are actually paid.

This fact seems unfair for workers as well as employers. People hiring temporary employees of any type would not be eager to legally register them if they have to pay the Caja a disproportionate share of money compared to full-time workers. Further along in the meeting, the inspector said she, too, felt the system was unfair but that it was out of her control.

More surprising information came when she said that everyone needed to be covered by the Caja, which includes the owners of the company: it does not matter if the owner has private insurance.

Many expats own a company in Costa Rica; some cover their employees and others do not. However, very few expats cover themselves. After doing some research about the statement she made that everyone must be covered by the Caja, it turns out that it is true. It is dictated by law. Since 2005, the Ley de Protección al Trabajador (Workers’ Protection Law), states that any person with an economic activity in Costa Rica must register with the Caja. Non-payment accrues interest and penalties that are collected with a court action.

The owner of a company has two options: 1.) Add themselves to their company’s payroll, or 2.) purchase trabajador independiente (independent worker’s) insurance. The later option is cheaper, and if the expat is over the
age of 50, they can exclude the insurance for disability, old age or death.

This expat said, “If that is the law, what do I need to do to sign up?” The inspector said, “If you let me sign you up, the process is easy, if you do not and I have to fill out this form, the Caja will do an extensive investigation and make your life difficult, so you better let me do it.” The decision was an easy one.

While she was filling out the forms, the question of the gardeners and maintenance workers came up. She said, according to the law, everyone needs to be registered as an employee with the Caja unless they have signed themselves up as an independent worker and file tax returns as such too.

Here are some conclusions and recommendations:

• Costa Rican labor law states all workers must be signed up with the Caja Costarricense de Seguro Social and be protected by Workers’ Compensation Insurance, which covers both employees and owners.

• Workers should be duly enrolled on a payroll, and a corresponding percentage of their salary (information issued by the Caja) must be paid to the social security system. If the employees are temporary, they should also be registered as dictated by law, even though the reasons for this seem to be unfair. The fines and headaches for not doing the latter outweigh the amount to be paid.

• A workers’ compensation policy should be purchased from the Instituto Nacional de Seguros de Costa Rica (National Insurance Company) to cover any accidents in the workplace. This coverage can be included in a homeowner’s policy if only a few workers are involved.

• Owners should purchase a separate Caja policy for themselves, which covers independent workers and professional people. It is better to do so voluntarily. However, it is advisable to wait for an inspector to show up and let them do the process because they will expedite it. Going to a Caja office and offering to file for the insurance could turn into a nightmare.

• Gardeners, maintenance, construction and other workers should be asked if they are registered with the Caja as a trabajador independiente and if they have individual coverage for workers’ compensation. If they are, doing business with them is probably safe, as long as they do business with others as well. However, if they are not legal and do not have insurance, they need to be included on a payroll or not be employed at all.

It is a simple equation: The law requires all workers, whether they are hourly, salaried or independent, to be covered by the social security system in Costa Rica. The law also requires that all workers be covered by some sort of workers’ compensation insurance for work-related accidents.

The dilemma for expats and other employers is why they should cover part-time house employees, gardeners, maintenance workers and the like if doing so only enables disproportionate assessments by the same rules made to protect workers. The answer to this dilemma is also simple: It is the law.

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