(VAT) Value Added Tax
The tax laws in Costa Rica are changing and it is important to know and understand the new obligations so your business remains compliant when operating in the country.
The tax laws in Costa Rica are changing and it is important to know and understand the new obligations so your business remains compliant when operating in the country. Costa Rica’s tax reform law is called “The Law on Strengthening Public Finances” (Law #20.580) and will fully come into effect starting on 1 July 2019. This law contains four parts made up of two laws with the goal of helping to increase revenue and the other two are intended to manage costs for the country.
The four parts are:
1. A change from general sales tax to Value Added Tax (VAT).
2. New income tax law that includes capital revenues.
3. Modification of public administration salaries.
4. Fiscal responsibility laws.
General sales tax to VAT tax
The current sales tax rate in Costa Rica is 13% and it only applies to a limited number of products. Changing to a Value Added Tax will cover products and services. The general tax rate will remain at 13% while there will be a 4% tax on airline tickets and healthcare services. A 2% tax will be levied on medical products, raw materials and machinery used for production, insurance premiums, purchase and sale of university issued products. Basic food necessities from a specific list will be charged a 1% tax.
There are some exceptions that will not be charged the 13% VAT. These include, but are not limited to:
– Electricity consumption of less than 280 kW / h;
– Water consumption less than 30 cubic meters;
– Exports of goods and sales of goods or services for free trade zones;
– Commissions paid to complementary pension operators;
– Rental of housing where the rental amount is less than the equivalent of 1.5 base salaries (646,000 Colones);
– Orthopedic equipment, rehabilitation and wheelchairs;
– The goods and services provided or acquired by the Red Cross, the Costa Rican Fire Department, the Association Works of the Holy Spirit, the Earth University, the Boards of Education, the Community Development Associations and the Asadas;
– Enrollment in public universities and private education;
– Internal advertising space of radio and television programs;
-Interest and fees for loans and credits;
– Books in any of their formats;
– The fees and monthly payments of professional associations;
– Premiums for labor, agricultural and social interest housing;
– Services of livestock auctions;
– Care and elderly care networks, etc.
The VAT will also apply to all service providers like, lawyers, doctors, engineers, dentists, accountants and others. Previously, companies that provided services did not file and pay sales tax but they will now have to comply with the new tax rates.
Prior to this law the only alternative to a dissolved corporation was to initiate a liquidation process. This law makes it simpler to reinstate the corporation so definitely something to consider for those of you that had your corporations dissolved.
Income tax law changes
There are many intricate amends to the income tax laws in Costa Rica. Below, are some of the changes businesses will have to adhere to under the new law.
A new capital gains tax is being introduced with a rate of 15%. Shareholders that make capital contributions will have them taxed as well as the returns of capital when the company has retained earnings. The tax on interest from investment certificates will increase from 8% to 15%.
Another change will affect non-domiciled individuals or legal entities that own real estate in Costa Rica. When selling the asset, they will be subject to a 2.5% withholding tax.
There are four newly created tax brackets, two for legal entities and two for individuals. These will affect legal entities that do not generate more than C106.000.000 (approx. US$188,000) of gross income during the fiscal year and taxpayers with salaries higher than C2.103.000 (approx. US$3700).
The tax reform laws will create a Capital Gains tax of 15% that applies to real estate and investment income.
A big change that will affect all taxpayers is the move to a calendar-based tax year. Instead of the current tax year ending on September 30th, it will now run from January through December.
Modification of public administration salaries
This section of the tax reform is the start of cost containment measures for the public sector. It will limit incentive pay and bonuses for employees in the public sector with the goal of improving public finances. The limits will be 25-30% for those with master’s degrees and 10-15% for bachelor degrees. In the past, these increases could go as high as 60%. Employees will also only receive a pay increase tied to performance-based reviews as opposed to automatically receiving annual pay increases. Lastly, there will be a cap of 8 years’ worth of wages for a severance payment, if the employee is terminated without cause.
This section of the law creates a limit as to how much government expenditures can increase. This will help to contain the government spending while tying it to economic growth. If there is no growth, then the country cannot support the spending.
While no one likes increases in taxes, these reforms are necessary to help the country become more competitive in the future.
When the new tax laws come into effect in July 2019, your business will have to understand how to maintain compliance. VyM Associates, has the experience in supporting all aspects of opening and running a business in Costa Rica and can help you when it comes to tax compliance services.