Exclusive to A.M. Costa Rica

The panic continues for those with a company, association, trust or other legal entity in Costa Rica that is required to file a shareholders and beneficial owners report with the Central Bank, as mandated by Law 9416.

Unbeknownst to most American expats, they have another problem, IRS Form 5471. In a month’s worth of interviews with many U.S. citizens who are owners of companies in Costa Rica, only three people could be found who file the required form. The U.S. fine for not doing so is $10,000 per instance.

For those late to the show, a summary of Law 9416 and how to file the information with the government can be found by reading, “Time to fess up or pay up!,” “How to register for Law 9416,” and “How to fill out transparency forms.” [Read more…]

Exclusive to A.M. Costa Rica

The Costa Rican government will require full disclosure starting next month of everyone’s secrets hidden in companies.

Unless the powers-that-be change their minds again, full registration of all legal entities in the country, as mandated by Law 9416, will begin on Sept. 1 and continue through the end of January.

The first deadline was March 1, six months ago, to start the process, but many business leaders complained loudly so the deadline was extended. There has been so much tax news this year, it is easy to get confused by all the information, so an update follows to refresh people’s memories. [Read more…]

Exclusive to A.M. Costa Rica

One has to wonder if the powers that make the tax laws in Costa Rica think about the logistics of enforcing them. Another interesting question is whether or not the government cares anymore about all the people who came to the country over the past 40 years to retire and invest here.

In an interview with Kevin Chavarria C.P.A., a professional who gives lectures about the new tax laws, the question was put to him: “Does Costa Rica care about all the retirees, and other little investors making this country their home?”

He replied without hesitation. “No, it does not care anymore.” He went on to add “The government likes to spend money. To get the money it needs, it needs more taxes, and it is most cost-beneficial to past laws to get them and to find big companies to invest here and tax them and not worry about individuals, families, and retirees.”

The government actions of late reflect this must be the case. Complying with the rules and regulations of Law 9416 (the law to better fight tax fraud) is going to be a hardship for many people, but especially older retired expats, most of which have not kept up with the technology required to comply with the law like digital signatures and online filing. Add to the mix the fact that now they will also be required to pay capital gains on their investments in Costa Rica to comply with Law 9635 (legislation to strengthen public finances, called in Spanish the “plan fiscal”) and you end up with some pretty unhappy people.

The legislature and tax department has a “just deal with it or get a big fine attitude,” which is not helpful to most taxpayers who as a general rule want to pay their taxes. As with most new laws, the government leaves the interpretation and execution up to lawyers to educate their clients. The problem with that plan is that many legal professionals do not have a clue about what is going on either.

The problem is that Costa Rica is not upfront with the people it enticed to come to the country with its “retire in paradise” promotions of years past. The truth is that old legislation is not working because professionals here have a “get away with it if you can attitude.”

The truth is that the country does spend lots of money as Chavarria said in his interview. Most of the money comes from loans making the situation worse.

Here are some interesting facts to understand the situation better:

Law 9416 requires all companies in Costa Rica to register with the government and file a yearly tax return. That law is so the country can collect transfer and capital gains taxes outlined in Law 9635. They work together.

There were approximately 575,000 different types of companies on the books in 2017. Now there are around 337,000. The other 237,000 were defunct and most of them liquidated by Law 9024 (the first yearly tax registration law).

Out of the remaining companies, there are an estimated 74,000 behind with Law 9428 (the second tax registration law) and in jeopardy of termination.

Most of the company entities in good standing are not actively doing business but hold assets (an estimated 75 percent). When those assets move to another person by transferring the company, the country loses out on the transfer taxes mandated by Law 6999 of 1985 and Law 9069 of 2012. Why so? Because some notaries do not do their part by enforcing the laws and cheat the country. Actually, and they will tell you, it is not their responsibility to do so.

So Law 9416 came to life to catch tax cheats moving assets without paying transfer taxes by using company structures to do so. If all legal entities have to register every year with the government at the central bank, the administration will know what sells, and it will get its money for transfer and capital gains taxes.

Expats need to understand and were not told that the new laws were required to modify old ones that were not working and to close loopholes.

Unclear is if the government of Costa Rica appreciates the logistics of what it is attempting to do. Does it understand how many of those estimated 150,000-plus companies that are only holding assets are owned by foreigners who are not in Costa Rica and do not return very often? Or they are owned by older people who do not understand the complexities or are not aware of what they need to do.

Everyone likes good public infrastructure, services, and safety. It takes taxes to pay for these. Costa Rica is notorious for wasting and spending too much money. It is also well known for those trying to circumvent the rules and cheat on permissions, taxes and other things. If the country could find a balance between the cheating and overly complicated legal and tax structure, things would undoubtedly improve.?

There was a time the country begged for investment from retired people through retirement and resident programs. Not so now. It is more interested in big business.

If the past is any guide, the country tends to swing between extremes. Maybe it will find a happy place somewhere in the middle as time passes.

Article first published in A.M. Costa Rica on Abril 1, 2019.

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Exclusive to A.M. Costa Rica

The tax news coming out of the government for the last several months is complicated and confusing. Most people do not understand what is going on. Ticos do not comprehend the technical verbiage of the laws. Most expats cannot make sense of the gibberish because many of them do not read or speak the Spanish language.

Here is a concise summary focusing on the two tax policies in the news, Law 9416 and Law 9635.

“Ley para Mejorar la Lucha contra el Fraude Fiscal,” in English the law to better fight tax fraud, is the first one. It was approved two years ago on Dec. 14, 2016. It is pretty simple really. Every organization of any type or purpose must register with the government through the central bank every year so the powers that be know who has what and where it is. There are some exceptions to registration, mostly governmental and public institutions. It’s pretty obvious to figure out why. If the tax police think someone has too much and they did not pay tax on what they have, they will most probably take it away.

Last Friday was the starting date for registration. The government said its employees and systems were ready to allow everyone to signup as required. Many were skeptical that this was true. Whatever the case, Sept. 1 is the new date. In a last-minute press conference, officials said “Business people are not happy with all the requirements, and some feel an extension may help them accept and prepare better for the new rules.”

The second, the legislation to strengthen public finances, referred to as “Ley 9635, Fortalecimiento de las Finanzas Públicas” or just the “plan fiscal” in Spanish, passed the legislature in December last year. It changed four significant items in the tax code:

1.) The law replaced sales taxes with a value-added tax. This begins July 1.

2.) Income tax filing requirements and dates changed beginning July 1.

3.) Payments to public employees become varied starting Dec. 4.

4.) Law 9635 mandates fiscal responsibility by the government, and this rule starts Jan. 1.

Here are the highlights of each change directed toward expats and not the general public. In no way is this summary meant to be a complete review of this elaborate law.

1.) Before the changes, sales taxes had two targets: products and services. All products carried sale tax, except for the exceptions. All services did not, again, except for the exceptions. Under the new plan, everything will now be subject to a value-added tax, except for very few exclusions. The tax rate will remain at 13 percent for now. However, the International Monetary Fund is pushing the government to increase the tax to 15 percent.

2.) Most people are going to hate this one, especially expats happily living their retired lives in Costa Rica without paperwork. Income tax returns are now due for all organizations. Title II, Article 2, Section A of the law states active, inactive, non-profit, social and every entity considered to be doing some activity must file a tax return.

The tax year is changing to a calendar one, Jan. 1 to Dec. 31, instead of a fiscal year Oct. 1 to Sept. 30. Active companies will have to file two returns this year during the changeover. New tax rates and thresholds take effect this year too. Business people should consult their accountants for exact information.

3.) Law 9635’s section on payments to public employees does not affect expats much. It has to do with payments to professionals. Special pay is authorized for individuals with a particular education or preparation who are hired by the government, and they are prohibited from working for the public. Some examples are attorneys, notaries, public accountants, topographers, and other licensed people. The money is paid to make up for lost opportunities.

4.) Section Four of the law affects everyone because it puts pressure on the government to run a better shop. Law 9635 gives the tax department until 2021 to put things into order, specifically to put together “the necessary technology” to control the “health” of public finances. The quoted items are direct translations from the law, and seems to be vague. Anyone living in Costa Rica for a long time knows that vagueness usually turns into bureaucratic bickering in the legislature and that nothing ever gets done.

There it is. The bottom-line to two intrusive tax laws that make many people unhappy, especially many expats who were living their retirement out in Costa Rica without too much to worry about, especially details.

To sum up the summary, Law 9416 takes the “anonima” (anonymous) out of “sociedad anonima” (anonymous society). The concept of which goes as far back as the 15th and 16th centuries to promote investment in transatlantic exploration. The term later became synonymous with a corporation where investors were allowed to remain secret.

Along the same concept, many of these corporations were set up by notaries over the years to allow foreigners to invest in Costa Rica. Those investments were crucial to Costa Rica’s growth and success in the modern world over the past 50 years.

Those same investors are now talking about leaving and going home.

Law 9635 translates into more funds for the government that notoriously wastes money and less for everyone else. More taxes, more controls, and less to say about it.

The two pieces of legislation work together and complement each other. One mandates more money to be paid, and the other one gives the tax people ways to collect it, or else.

Article first published in A.M.Costa Rica on March 4, 2019.

Click this link to download a complimentary reprint in PDF format.