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This Easter Bunny Has Pair of Very Sharp Fangs

by Garland M Baker on March 14, 2005

Annual cultural tax can really bite you

The tax bunny cometh

Everyone with a Costa Rican corporation, limited company or any other type of legally structured entity is required to file a form called D-110 in order to pay their education and culture taxes due March 31 every year.

A corporation, referred to as a sociedad anónima, or S.A., is the most widely used type of company organization in Costa Rica.

A limited company, referred to as a sociedad de responsabilidad limitada, or S.R.L., is easier to manage and is gaining wide popularity.

Other types of legally structured entities include associations, cooperatives, and limited companies of one person, just to name a few.

Foreign corporations doing business in Costa Rica are also required to pay this tax.

Law 5923 created the education and culture tax in 1976 to fund all types of educational activities, including but not limited to all public education and cultural endeavors including museums.

In 1976 only, all the money collected went to the purchase of radio and television equipment to enable Costa Rica to catch up to the rest of the world.

The net capital of a company determines the amount of tax paid. Net capital of a company is its assets minus its liabilities. For example, if a company has 100,000 colons in assets and 90,000 in liabilities, its net capital would be 10,000 colons.

Most people owning companies in Costa Rica do not pay this tax. They do not know about it or think it does not apply to them. This tax is for every company operating in Costa Rica and is due by March 31 each year.

Many expats have homes or motor vehicles that actually are owned by a corporation for protection of personal assets and for ease of transfer.

The tax is relatively small but the fine for not paying it is huge and includes geometric interest and nasty penalties.

There is also a Costa Rican twist to this tax:

The 1976 law, Article 5, mandates tax collectors to scan companies at the national registry to find out all of those required to pay the tax and to cross-reference this information with the tax collection databases.

However, most companies in Costa Rica are not in the tax collection databases because the tax authority, Tributación Directa, does not have the computer storage space necessary to store information on all the companies registered at the Registro Nacional.

Article 7 of the same law requires the tax authority to publish in La Gaceta, the country’s public record newspaper, a list of all companies in arrears each year. If the delinquency continues, the law also mandates serious tax collection measures to get the tax, including attaching liens to properties held by the companies and selling assets in tax auctions if the levy is not paid.

In simple terms, this means all companies have to pay a tax to a tax agency that does not have enough computer power to make a list of all those owing the tax.

The screwed up system creates a vicious circle prone to error. This means a company could show up on an inaccurate list of taxes owed when none is due or worse.

Companies formed many years ago owe large amounts of money if their officers have not paid the tax. Someday when Tributación Directa gets its act together and has more funds to upgrade its computer system, all these back taxes will have to be paid, including all the interest and penalties.

Ignorance of the law will not save anyone.

In Costa Rica, one needs to pay all taxes due and keep excellent records regarding all payments made. Taxpayers should keep originals, not copies, and definitely not scanned copies. Only original documents with an actual rubber or machine stamped seal are valid to fight against government institutions here.

Next week is Semana Santa, Easter Week in Costa Rica, almost every thing closes down, and everyone goes to the beach. Before packing or chasing the Easter Bunny, wise company executives will pay this educational and cultural tax, if required to do so, on Tributación Directa form D-110 at most banks and keep the receipt in a safe place.

Right now, in the legislature, there is a bill to increase and add more taxes. The bill proposes little to fix the current inefficient system. A minority of legislators believe that working to fix the current system would be a better idea.

Education and Culture Taxes Table

Book Value Amount Owed
Net assets up to ¢250,000 ¢750
from ¢250,000 to ¢1,000,000 ¢3,000
from ¢1,000,000 to ¢2,000,000 ¢6,000
from ¢2,000,000 and above ¢9,000

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