There are several types of company structures in Costa Rica. The two most common are the sociedad anónima and the S.R.L.
However, there are only two types of tax statuses, active and inactive. This fact complicates tax filings for expats and is becoming more of a problem every day due to the enforcement of the country’s new banking regulations. There should be another status offered to filers by the tax department. This status could be called something like “nonoperational,””static” or “passive.”
Active companies, in theory, exist to make revenues and after deducting legal costs and expenses end up with a profit, which is taxable. Inactive companies exist to hold assets but do not have revenues, costs or expenses. Active companies need to file several types of returns including, but not limited to, sales tax, education and culture tax and income tax forms. Inactive companies only need to file the education and culture tax form each year.
Here is the problem. If a household of an expat has a large domestic staff, it is recommended the employees be on a payroll in the name of a company and not the name of a person. In this case, the company whether it be a sociedad anónima or an S.R.L. has no other purpose but to exist to meet the payroll of the employees. In other cases, all the expenses of the household are paid out of the inactive company.
This is not really an active company using the rules of the tax department because the company does not have revenue. However, it is not an inactive company either because the payroll of the employees are, in theory, expenses for the company.
All companies have accounting requirements, whether they be active or inactive. In accounting there are always debits and credits.
Now in a company that is active revenues are received to pay the expenses. But where does the money come from to pay the payrolls and other household expenses in a company that has no revenues. Well, it comes from the owners of the company but not as revenues but as loans or capital inflow.
On tax returns, this kind of company will never have a profit, only losses. However, the tax departments still wants all the forms filed each year as if the company is active. This includes form D-151 and D-101. In the past, the tax department was not very careful in auditing the D-151 form. This form is an informational document that is filed by active companies as a cross checking mechanism to catch tax cheaters. The tax department was trying hard to make the filing of this form a quarterly endeavor, but after a big fight, it remained an annual filing due Nov. 30 of each year.
Now, the tax department is doing a much better job checking the D-151 form and even in companies that exist only to pay employees or other incidental expenses need to file this form. Recently, an expat couple was fined heavily because they did not file the D-151 form. They also were using their company to pay their telephone bills as well as their employees and did not report the expenses on the form.
Here is the other problem. In the past most expats left these kinds of companies as inactive but had bank accounts open to pay the bills. Most
banks in Costa Rica are updating their records due to new banking regulations. One of the many requirements to have a bank account is to submit a form proving the company is an active company. This fact means that an inactive company with a bank account will be closed by the bank unless the owners of the company go to the tax department and signs up as an active company. Once the company is active, all the other forms need to be filed or fines, and penalties will result. In addition, once a company is active, it also needs to keep a set of books, including accounting, which can be inspected at anytime by the tax department.
The good old days are gone where managing a company and maintaining a bank account was easy. Now days, it requires a lot of work and probably the services of an accountant. If many expenses are being paid out of one of these companies, an accounting program to keep track of the information needed to fill out the D-151 return will probably also be necessary.
It would be nice, but probably is only a pipe dream and will not happen, that the tax department start another tax category other than active or inactive which would facilitate the use of a company structure to pay payrolls and expenses of an activity that does not produce any revenue like a domestic household.
This would ease the tax filing requirements on expats on these kinds of companies and also alleviate the big headache of opening and maintaining a bank account. As it stands today, if an expat currently has a bank account for a company that is inactive, it will probably be frozen or closed shortly unless the owner makes the company active.
Citibank is currently in a major updating process and calling all of their customers to come bring their accounts up-to-date. Customers are being told that if they do not do so immediately, their bank accounts will be frozen, put in an inactive status, or closed.