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Be Sure You Don’t Toy With Tributación Directa

by Garland M Baker on December 13, 2004

Can one be thrown in jail for taxes in Costa Rica? The answer is yes. Articles 90 and 92 of the Code of Tax Norms and Procedures established jail terms for tax offenders.

Are many people put in jail? The answer is no. The whole process is new to the country. However, with the help of the International Monetary Fund and the U.S. Internal Revenue Service, Costa Rica is getting better at collecting its taxes and prosecuting those who do not pay.

The tax department of Costa Rica, Tributación Directa, is still disorganized in many areas, especially in the area of helpful assistance to the taxpayer. Actually, it can be a nightmare trying to get answers to tax questions or even to find out what one owes. This reporter waited four hours in one of those musical chair routines made famous at government offices to have someone check a company’s tax records.

If you do not live in Costa Rica or have not had the pleasure of experiencing this ritual, it is where 50 or more people are sitting in chairs and, as one is called, everyone moves over a chair until one reaches the first chair. So this reporter had to move 50 times in four hours as only one person was answering tax lookup queries.

Should one take advantage of the disorder and not file the proper forms and pay taxes in Costa Rica? The answer is a big NO.

Everyone should do their utmost to do whatever is necessary to file all the forms required of them and to pay whatever is due the tax authority. The reason for this goes far beyond the one that comes to mind — being an honest taxpayer.

No one wants Tributación Directa on his or her back. If the agency thinks you owe them something, they are relentless. They can be compared to the Borg in the TV series Star Trek: relentless, emotionless, cybernetic beings that roam the galaxy, assimilating entire civilizations to satisfy their pursuit for perfection.

Nothing stops tax agents in their quest. Not even the fact that the taxes being pursued have been paid or better yet, Tributación Directa’s own rules say something does not need to be paid.

Tributación Directa agents will listen to nothing and no one except for a ruling from the Sala IV, the supreme court, or the Tribunal Contencioso Administrativo, Administrative Complaints Tribunal, to back off.

This is not an exaggeration; this reporter has personal experience fighting the Borg, oops, the tax department. So far, a 7-year battle has continued over boat taxes that Tributación’s own rules state do not exist. Not until the appeals judges of the Administrative Complaints Tribunal, ruling 516-2004 of Oct. 8, directed the tax people to abide by their own decrees, was the case won.

However, showing this ruling to Tributación Directa agents regarding the exact same case of another boat means nothing to them and their pursuit to collect truly un-owed taxes continues on its sixth year.

This is the most important reason to file all the required tax forms and pay all required taxes.

Most people reading A.M. Costa Rica only hold property in corporations or limited companies and do not run for-profit business activities according to the tax authority. There are no capital gains on asset transactions, including property sales, in Costa Rica. Therefore, holding a property in a company and selling it for a nice profit is NOT considered a taxable activity and thus the owner does NOT need to file a yearly tax return. The filing deadline for most companies required to file returns is Friday, Dec. 31, and the return is referred to as the D.101 Version 2.

It is very important to mention that even though there are no capital gains taxes in Costa Rica, U.S. citizens and citizens of other countries may owe capital gains taxes to their country of citizenship.

This case was not always true. Some years back, all companies had to file tax returns, and those without economic activity were charged a small penalty. But the law was found unconstitutional and rescinded.

Every company needs to file form D.110 in March and pay taxes on the net assets of their company. The tax is called the education and culture tax. The tax is small (see table) but most people do not pay it, and then they are charged interest and penalties on the tax. These extras grow geometrically.

This author’s preference is to always file all returns, including the D.101 Version 2, even if the amount is with zero balances for activity, because as Costa Rica’s tax rules change, it seems as if the public is the last to know about them.

Education and Culture Taxes Paid on Company Net Assets (Due in March)

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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