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Tax tips for expats who want an enjoyable holiday

by Garland M Baker on December 8, 2008

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.

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