Q COSTA RICA – If the draft Ley de Impuesto a las Personas Jurídicas (Corporations Tax Law) has no constitutional problems, it would come into force by the middle of the year, requiring all active and inactive corporations, including branches of foreign companies, their legal representatives and limited liability companies, as well as limited partnerships, to pay a yearly tax to maintain its legal status.

A similar law enacted by the previous administration was declared unconstitutional in January 2015, though, the Constitutional Court established that debtors (corporations) would have to pay the tax for the periods between 2012 and 2015.

According to the Contraloría General (Comptroller General), as of January 2015 there were 558,183 registered corporations. Of those, some 336,000 are delinquent (in paying the old tax), of which some 266,000 owe three periods (years) or more.

Even though the revived tax on corporations is not in force yet,  the collection of the tax starts on January 1 of each year, with 30 days to pay before incurring late fees and penalties. For 2017, the tax will be pro-rated. For example, if the law goes into effect in July, the tax would only be half.

Payment of the tax is to be made only at any Banco de Costa Rica (BCR) branch or online or directly to the Registro Nacional (National Registry).

How much do companies have to pay?

In reviving the tax on corporations, legislators modified the previous tax table, to apply a differentiated rate, not only according if the corporation is active or inactive, but also according to the yearly profit.

The rate would be:

  • ¢64.000 colones for all inactive corporations
  • ¢106,000 colones for corporations with income less than ¢51 million colones annually
  • ¢127,000 colones for corporations with income between ¢51 million and ¢119 million annually
  • ¢212,000 colones for corporations with income greater than ¢119 million colones annually

Newly registered corporations would have to pay ¢64,000 colones within 30 days of registration.

Exempt from paying the tax are the micro and small companies (PYMES) registered as such in the Ministry of Economy, Industry and Commerce (MEIC), as well as the small and medium agricultural producers enrolled in the Ministry of Agriculture and Commerce (MAG).

What are the penalties and fines for non-payment?

The fines and penalties applicable are those established in the Tax Code, that includes interest on arrears, fixed by the Tax Department.

In addition:

  • The National Registry will deny certifications of legal status or veritable certifications to corporations in default.
  • Defaulters cannot enter into contracts with State or any public institution.
  • The unpaid tax debt will become a preferential legal mortgage or lien on the assets of the corporation.
  • Corporations that go three consecutive periods without paying the tax, will be dissolved.

What will the money raised through the corporations tax be used for?

The Ministerio de Seguridad Publica (MSP) – Ministry of Public Security – will receive 90% of the proceeds, to invest in infrastructure of police stations and the purchase and maintenance of equipment for the police force.

The MSP will be prohibited from using the money to pay salaries, overtime, travel expenses, transportation and consultancies, among other items, with the exception of the hiring of 1,000 new police officers and defray the expenses corresponding to the new hiring during their existence.

5% will be allocated to the Ministry of Justice, to support the financing of the General Directorate of Social Adaptation, the entity in charge of the country’s prisons.

The remaining 5% will go to the Organismo de Investigación Judicial (OIJ) – Judicial Investigation Police – to address the fight against organized crime.

What is required for the tax to go into effect?

The draft law is awaiting a response from the Constitutional Court, responding to a consultation made by legislators before it can be submitted to a second (and final) debate and vote.

Following the vote, regulations needs to be drafted and its publications is required in the official government newsletter, La Gaceta.

Q  Analysis

What does this mean to foreigners in Costa Rica with corporations?

Many foreigners calling Costa Rica their home or home-away-from-home (as well as nationals) prefer to use corporations to hold assets such as a house, farm, vacant land or vehicles, for example.  We can expect the current administration to make a similar interpretation of its predecessor, that is that the corporations primarily to for the holding of assets, are ‘active’ and as such must pay the ‘active corporations’ tax.

Although the previous law had a similar bite, it lacked enforcement. This draft seems to have taken that into consideration, especially the constitutional part, and failure to pay could result in dissolution and loss of assets, but the tax debt will still be owed by the legal representative.

It should be made clear that the Corporation Tax is not a tax on profits or income tax or corporate tax. The Corporations Tax is a fixed annual fee that is to paid by every corporation regardless of its activity or profitability.