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.

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Beach house is on its way down!

If they have property in the maritime zone, expats can look forward to a hard time this year from municipalities up and down the coasts. If that is not enough stress for 2008, the Ministerio de Ambiente y Energía will be in line to add more tension. Some expats may be losing their comfy beach houses if they are located in the wrong places.

Municipalities over the past couple of years have awakened. They are now in a fret and furor trying to make up for lost ground. The first attack is tearing down structures within the 50 meters zone. This has gone on now for a couple of years. A visit to Guanacaste over Christmas shows the momentum increasing. The first 50 meters on the coast is the public zone. All the people of Costa Rica have rights to this land, but for years some have built or encroached on this zone. The Costa Rican government has complete sovereignty to protect the area for the people. Municipalities do the policing.

In some cases, targets include certain high profile Costa Rican landmarks owned by Costa Ricans, like the Mar y Sombra restaurant in Quepos. In other areas of the country, expats are first on the destruction list.

One hotel owner in Paquera received notice in August to tear down a 50-year-old house. He loved this beach house and that is where he stayed when visiting the country, not in his hotel. His argument that the house existed way before the maritime law became effective fell on deaf ears.

The owner received official papers stating if he did not tear down the house, he and his legal representative would face criminal court action.

What made him mad is not that he had to tear down the structure. He said he respects the country’s laws and wants to contribute to its development. He is mad because his Tico neighbors with houses on the adjacent beach did not get the same legal notice.

More maddening is that as he began tearing down his beloved house, the inspectors came back and added other structures to the list. Now it looks like the municipality is going to pour salt into his wounds by increasing his taxes this year.

This poor expat has his personal troubles with his municipality. However, he is lucky, others have much bigger problems.

Most concessions in the maritime zone need to be renewed every 20 years. This means updating all the paperwork and resubmitting it for approval. Those doing so are finding the rules of the game different. The rule of thumb in Costa Rica is when things work well, change them to return to havoc.

It is the Ministerio del Ambiente y Energía’s job to determine what areas from 50 meters to 200 meters above mean high tide can and cannot be transformed into a concession in the maritime zone. This department of the government did not do its job for many years in protecting environmentally sensitive spots. The pendulum has swung from doing little to overkill.

In one concession in Guanacaste up for renewal, the Ministerio del Ambiente y Energía says there is not one concession but four and that many condominiums there are built on land that is protected because of environmental concerns. The concession holder is in a quandary. He does not know what to do. Costa Rica law states a Costa Rican can only own one concession at a time. Will the concession holder lose the other concessions? Will he need to tear down existing structures to adhere to the law?

Now the biggest scare of all for 2008. Costa Rica wants its cut on maritime property over and above the measly pittance it receives in taxes The country has figured out concessions are sold for mega
millions of dollars to international trend setters and the country gets zip on the sales. The legislature is discussing this fact, trying to come up with ideas to get a piece of the mega bucks.

In 2008, municipalities will tear down more and more structures close to the beach, including homes and businesses. The Ministerio del Ambiente y Energía will rigorously apply rules with a vengeance to make up for lost time when officials were not doing their job, making new concession applications and renewals wearisome. These events promise a frustrating year for expats and developers living or investing in the maritime zone.

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Norwegian artist Edvard Munch could have been thinking of bureaucracy as inspiration for his famous 1893 painting “Scream.”

What is Tributación Directa doing? One does not know whether to get drunk, curse or cry.

Tributación Directa is the tax collecting agency.

Last year, taking company books to be legalized was a long process in San José. A registrant had to fill out a form, play musical chairs, and then leave the five or six books for over a month.

In February, the tax department decided to become efficient. The first thing officials did was make a new rule that made all unused, printed legal books currently in existence obsolete. They wanted the first page of any book they legalized to have a special form imprinted on it.

Thousands upon thousands of legal books printed over the years that were sitting in warehouses all over Costa Rica instantly became nothing more than trash. This fact meant thousands of trees had been chopped down and made into paper for use in these books needlessly. Complaints to the workers at Tributación Directa met with blank faces. It was their way or no way — meaning they would not certify any books without the form. Registration and certification of books is required in Costa Rica for any company. One reason is to avoid fraud.

Tributación won the battle. Everyone had to rush to buy the new books with the preprinted form. Printers took a hit.

Last week Tributación had a new surprise — a new effort at efficiency. Tributación Directa employees told an accountant getting books legalized they will no longer legalize accounting books for inactive companies. Only a few books in each company set will have firm identification stamped in them.

Tributación workers state it is a waste of time because inactive companies are not in business to make money.

This author believes Tributación Directa needs a little help. Here is a short note to them:

Tributación,

To clue you in, most property transactions in Costa Rica are done though these inactive companies amounting to billions upon billions of dollars every year. Furthermore, almost every attorney understates the value of the transactions to save their clients money on the property transfer taxes while at the same time they line their pockets with full fees on the same transactions. Look around you. The attorneys are driving fancy — and expensive — new cars and you do not have the money for new computers.

Tributación, this means you are not getting the taxes that are legally due the country.

By not requiring legalized books for inactive companies, you are just helping the tax evaders to evade taxes.

By the way, your own normative No. 2, printed in your tax bulletin of September 2004 states that when people request a full set of legalized books, you are required to legalize them.

Your normative states the extra work it entails is no excuse not to legalize all books upon request.

New laws to curb the rampant property fraud in Costa Rica end in legislative bog and mire.

New tax laws and enforcement are in the works, but the legislation is moving like a turtle through the legislature. Why? Perhaps there are too many pressures to maintain the old, faulty traditions.

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It is tax time again. Tax returns for individuals and companies are due on Friday. Yes, this Friday.

Every company is required to register with the taxman. This registration happens when one gets a set of legal books approved at the tax authority, Tributación Directa. The form to do so changed this year from one without a number to Form 406. The old form had no number and was clumsy looking. It can still be used until Friday, but starting Monday, to register a company to get legal books authorized one must use the new form.

There are several important deadlines for taxpayers in Costa Rica. The most important ones for expats are Dec. 15 when Form 101 for income taxes is due and March 31 when Form 110 for education and cultural taxes is due.

To be a contributor to the tax system one identifies him or herself on Form 140.

Registering to get legal books approved is not the same as identifying oneself as a taxpayer. However, getting legal books approved adds a company or individual to the computer system.

Many expats do not file Form 140 because they do not feel they are involved in financial activities as defined by the tax code. Others do not know about Form 140, and others just feel that if they do not file it the tax collector will not catch them.

Article 2 of the Tax Law 7092 states that every entity involved in a financial activity must file tax information in Costa Rica. However, owning a piece of property and selling it, making a bundle on the transaction, is not considered a financial activity.

Renting or leasing the land, renting out a house, villa, or condo over the Internet to others like tourists, as many homeowners here do, is considered an income-generating activity and profits are taxable. Many expats that do this type of rentals collect the money here or outside of Costa Rica and do not pay tax on the profits.

A broker who sells real estate in Costa Rica and makes a commission is also involved in an income-generating endeavor, and taxes are due on the commission earned. However, many real estate people selling properties to foreigners do not declare their earnings or pay taxes on them. Some are not even legal residents.

Tax hikes are in Costa Rica’s future. The current administration is working hard on new tax legislation. The last tax bill died due to technicalities not content. This is true even though the content would surely have destroyed the country.

More importantly, taxes in the future will have more of a bite. The tax dodging games of today will meet harsh penalties.

When a new tax law is reality, the country will be ready.

Things are changing fast in Costa Rica regarding taxes and most people are not aware of what is happening around them. Banks are perfecting their computer systems to enhance electronic banking. The reason for this is due to the worldwide movement toward transparency.

Transparency in itself is scary, but when it comes to a collection vehicle for taxes, it is a spine-chilling nightmare.

Bank accounts now are monitored very closely. Bank officers now regularly call clients asking questions regarding common transactions. All banking information is available to the tax authorities.

Moreover, the tax authorities are now doing the checks and balances matching tax returns to money movements. When the results do not look right, strange people show up at the door requesting to look at records.

Many expats play games with the money they are
making in Costa Rica. They feel they will never be caught because the country is very disorganized in its collection of taxes. Others hide their earnings from their home country’s tax department too.

Costa Rica may not currently have a capital gains tax, but the United States as well as other countries do, and citizens are required to pay it even if the money is made here.

The common prescription for a good night’s sleep is adequate doses of tax planning and staying on the up and up with all tax authorities.

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Now there is a new way to duck messy probate in Costa Rica.

Thanks to an avid reader with a ton of patience, a limited liability company called an S.R.L. in Costa Rica, is now an even better vehicle for holding assets and succession planning. Most professional people do not know this secret.

Limited Liability companies are great for holding properties and managing businesses, but if there is only one manager and the manager is taken by death, a long legal struggle can take place.

If there are multiple managers, the liability company runs the risk of internal confusion and sometimes theft.

Technically, S.R.L. stands for Sociedad de Responsiblidad Limitada in Spanish. An S.R.L. is equivalent to an L.L.C., which stands for limited liability company in other parts of the world.

Two or more people form the business structure and hold shares in the organization. One person usually manages the company, but there can be more than one, many in fact. There is no limit to the number of managers a limited liability company can have.

As flexible as a limited liability company is, if there is only one manager, his or her absence, as in death, would freeze everything in the company until there was a shareholders meeting. In many cases the manager is the majority shareholder further complicating matters.

If the limited liability company has more than one manager, too many bosses tend to mess things up as a rule. More importantly, one of the managers could go wild and sell off all the assets of others. It happens.

In succession planning, some parents make their offspring managers and create the same problem. The kids go nuts and sell off all the assets of the parents.

Now it is possible to make the second and subsequent managers’ positions conditional based on succession.

The secret is simple, but it took the Registro Nacional more than three months to approve the language. It goes this way:

In the constitution of the limited liability company in the clause outlining management there are two parts. One lists the managers and the other outlines their powers in the company.

One seeking to use this trick should list all the managers in this section giving them all the same power to manage the business affairs of the entity. However, after this is written, at the end of the clause, one should add a section stating that if the first manager is not available or incapacitated that is when the second manager can take the place of the first, not before. The same can be true for a third manager. If the second is unavailable, the third can take the place of the second.

Actually, the end of the clause on managers can be flexible. Another option would be to have managers two and three act jointly in the absence of the first.

In the clause, it is important not to mention death. The Registro Nacional at one time accepted the word death as part of the clause but will no longer do so. That’s why it rejected the setup of a limited liability company for the avid reader, who wanted to pass on assets to a third party in case of death. Fortunately, the reader was able to wait three months while this new concept of managerial sucession got approved by the technicians at the Registro.

The essence of the legal language is to substitute, not replace, someone in the management position. However, this works perfectly in the case of death, avoiding probate in the same step.

For example, Pete has a property in Costa Rica and puts it in a limited liability company, making himself the manager. Pete, with foresight, makes his son Pete Jr. a manager in his permanent absence or disability.

Pete dies. Pete Jr., as manager, can move any assets in the limited liability company to another one that he controls and does not have to go through probate to do so.

Probate is a thing to avoid in Costa Rica, much like it is in other parts of the world. Usually, it is a long road filled with legal potholes. Big ones.

It is possible to setup sociedad anonimas or S.A.s, a legal structure like a corporation, in a similar fashion, but it is much more difficult because S.A.s always have a president, a secretary, a treasurer and a fiscal. They are a more complex type of an organization usually answering to stockholders.

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First there was arithmetic, and then came new math, and now Costa Rica has introduced tax math.

Aristotle, the Greece philosopher, was the first ever to theorize this kind of geometric mathematics in his book The Physics. So no one should be surprised Tributacion Directa, the Costa Rican tax authority, much like the IRS in the United States, and Hacienda, the Costa Rican treasury, has decided to use it in calculating tax values on property.

Here is how it works. Let’s say your property has a value of $50,000 and the property is transferred, mortgaged, or sold, for $100,000. The new value is added to the original value at the Registro Nacional, the Costa Rican public records office. Please note, the new value does not replace the old value but is added to it. The tax value now is $150,000.

This is especially true if the property is mortgaged because the lender is required by law to report the appraised value immediately by computer to the records office. When the property is transferred again, for whatever reason, the new amount is added again to the existing base.

On a $100,000 property, the tax value base could easily be $400,000 in a few short years after a couple of sales.

Property taxes are levied at 2,500 colons for every 1 million colons of value. Using the current exchange rate of 430 colons to one U.S. dollar, the tax on the original value in the above case would be 53,700 colons. Once the property is transferred and the new value is added to the original, the new tax would increase to 161,500 colons. After another transfer the tax goes to 322,500 colons and so on. Someone with many properties who borrows against them often can be driven into the poor house with balooning valuations.

Collecting property taxes was passed to the municipalities in 1995, and local officials do not believe you should question the venerable judgment of the tax authority if you should go to complain. You will meet surprised faces if you take updated appraisals to the municipality office.

In other words, they will not accept your paperwork, even though they are required to by law, to bring your property value back into line. If you try to explain to the tax collectors that Aristotle was talking about geometric progression as it applies to biology and not taxes you only get blank looks.

With this kind of computerized tax assessment, you could have a tax value on your property 10 times that of your neighbors because you recently purchased it and your neighbor has lived on their property without any kind of transfer for years.

There is a way to fight back if you find your property value in outer space. You need to have an attorney prepare an acta notarial, a legal notary document, attesting to the fact you tried to deliver new property valuations to the municipality. Then you need to have the attorney send the documents via Costa Rica’s not-too-well-known EMS service, the country’s version of FedEx, to the property tax department where municipal officials blindly sign for the envelope unaware of what is inside. This acceptance will start an administrative review of the case.

Usually, officials will immediately contact you and set up a meeting to review the matter. If your valuation documents are in order, a more correct value will be assigned to the property and your taxes will immediately decrease.

The law that moved the collection of territorial property taxes to the municipalities requires individual property owners to provide new property values every five years to the tax authority. Non-compliance could mean having a tax assessor on your doorstep using a version of tax math to update the tax records.

Virtually no one complies with the five-year rule or even knows the tax value of their property in the National Registry. Actually, most foreign investors don’t even know where to pay their property taxes or if the taxes have been paid.

Fines and interest on any past due taxes in Costa Rica are outrageous, and unpaid amounts can have your property embargoed and sold at auction.

It is best to check to see if you are up-to-date with the powers-that-be and pay your municipal and territorial taxes promptly. You may have to have someone investigate whether your property is correctly registered to you and has a plano catastro, or plat plan, in your name. Most properties sold or otherwise transferred before 1998 are not registered correctly and the registration needs to be fixed before taxes can be paid or disputed.

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Individuals who own companies face a Catch-22 situation when they decide what they will do with the D-175 tax form.

A November 10, 2003 article explained how this year’s tax form D-175 is a sting operation, of sorts, by Tributación Directa, the Costa Rican tax authority. The idea is to catch all those companies not currently on the tax rolls.

The conclusion, after several tax seminars, discussions with tax attorneys and a special meeting with a tax guru, is that form D-175 also represents a Catch-22. A Catch-22 is a “damned if you do, damned if you don’t” scenario and comes from Joseph Heller’s World War II novel of the same name.

There are currently around 308,000 companies listed at the Registro Nacional, the nation’s registry, but only about one-third as many on the tax rolls. That leaves over 200,000 companies as potential taxpayers. Most of these companies only exist to hold property.

Most owners believe these companies are exempt from the normal tax process because they are not operating businesses.

However, the fact is, no company registered at the Registro is exempt, and all companies need to file tax returns. Costa Rica just has not been on top of its tax collections to insure that all companies are registered with them. It is estimated by the tax experts that Costa Rica only has the resources to police about 3 percent of all the companies inscribed as taxpayers, in other words, about 3,000.

Here lies the Catch-22. If you decide not to file the form D-175, there is a good probability you will not be caught. However, if you are, there is a fine of 76,500 colons,$185, plus interest and penalties. Also, during the time you have not filed you will not be able to make any transfers and/or changes to your company at the national registry. For some people, this is not a problem since they have not made changes since the original creation of their company and do not care to do so in the future.

If you do file by the Dec. 31 deadline, you will then need to complete the process, which means you will need to file forms D-140, Declaration of Inscription, and D-110, Misc. Payments, to pay the Education and Culture Stamp next year. If you do not file these forms, there is a good chance of being caught if they are cross-referenced with the form D-175.

Actually, most people are now caught for some tax infraction because of the cross-referencing of the form D-150, Sales and Payments Reporting Form, and the D-101, Income Tax Form. This process of cross-referencing a master tax database was taught to the Costa Rican government by the U.S. Internal Revenue Service.

A good rule is to comply with tax authorities at every step. It allows for a better night’s sleep if nothing else. More importantly, most people making up the international community are guests in Costa Rica, and all law should be respected and obeyed. In addition, Costa Rica is currently re-organizing its tax structure to include a powerful new tax police.

It is better to get started with the process of legitimizing your tax responsibilities today, versus have one of those new officials visit you in the future.

There are also benefits to filing D-140 and becoming fully signed up with Tributación Directa. The most important is being able to obtain totally legalized books from the tax authority which enables a company to be fully up-to-date with the registry process. Many companies over the years have been lost to the unscrupulous because they are not properly registered.

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Have you ever read that the police sent out letters or placed classified ads offering some phony promotion to catch criminals or parking ticket violators? This year Costa Rica’s tax form D-175 is a sting operation of sorts, too.

For many years, in fact since the beginning of transferring property began in Costa Rica, a company could be created and a property could be placed in that company so when the property was sold again, only the company needed to be signed over to the new owner. The sale could be done rapidly and without payment of trasnfer taxes. This kind of company is referred to as an inmobiliaria or a company holding real estate.

However, very few of these entities ever signed up with the tax department, the Tributación Directa. There are an estimated 308,000 companies listed at the Registro Nacional, the national registry. But a far fewer number are listed with the tax department, and the country wants to fix this anomaly so it will be able to collect more taxes in the future.

Here’s the catch: Most inmobiliarias generally do not have to file any tax returns because they are not operating businesses because they were just created to hold property. But this tax year all companies must file Form D-175 by Dec. 31 or be subject to a fine of 76,500 colons or roughly $185.

The fine is not the only sanction. The most important one is that companies that do not file Form D-175 will no longer be able to make any movements at the national registry. This means you will not be able to transfer a property when you want to sell it and/or make any changes to the company holding the property like adding, amending, or deleting partners, changing powers of attorney or directors, etc.

Why is this a trap? Well the International Monetary Fund has been working very hard for over 10 years to get Costa Rica to collect its taxes. In the most simplistic of terms, if Costa Rica doesn’t improve its tax collections, the monetary fund could withhold future loans and loan guarantees. Actually, Costa Rica has done a pretty good job of getting its tax house in order but needs to get inmobiliarias on the books to complete the job.

This does not mean big tax revenues now because only companies with equity more than 35 million colons will need to pay a one-tenth percent tax. Most properties held in companies have a very small book value and will not be over the minimum.

But wait. Look into the future for a moment. Once the tax department finally has all these companies inscrito or registered, they will begin to collect additional taxes like the Timbre de Educación y Cultura (Stamp of Education and Culture) which needs to be paid by all registered companies each year.

Also, if you read over the future law projects on the Tributación Directa Web site, other taxes are being proposed.

The wisest move for someone here is to file the form and bring a company up-to-date with the tax people. Benjamin Franklin once wrote to Jean-Baptiste: “In this world nothing is certain but death and taxes.” No one likes big tax penalties and interest.

Deadlines for Filing Corporate Forms

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