Costa Rica's taxes, enacted into law over a year ago, are now being implemented. If you own property in Costa Rica and rent it out when not using it, it's crucial that you have already been contacted by your property manager, CPA, lawyer, or anyone else managing your affairs in the country.
Let's begin with some background. For years, those who bought vacation properties in Costa Rica realized there's a strong rental market for condos and homes, especially from December to April, the high season. With proper marketing and maintenance, an owner can easily cover all expenses and earn a significant profit—a win-win situation!
However, the tax authority, the "Ministerio de Hacienda" (akin to the U.S. Internal Revenue Service or Canada's Revenue Agency), is now stepping in. Many expatriates and local Ticos have historically not reported rental income. While existing Costa Rica taxes covered these earnings, evasion was common. Almost like a national sport, avoiding taxes is prevalent, but realistically, what country doesn't want a share of your profits or salary?
The tax administration in Costa Rica has found ways to catch up with thousands of rental properties and businesses that haven't been paying or filing income taxes. Please heed this warning.
You might think, "I don't run a business in Costa Rica, so why should I care?" But if you own property there, consider: Is it held in a Costa Rican corporation or in your personal name? Is the corporation active (doing business and receiving income) or inactive? These are crucial questions to avoid trouble with the tax authority. If unsure, consult the attorney who set up your Costa Rican corporation.
Beginning the new fiscal year on October 1, 2018, most Costa Rican corporations are legally required to issue a "factura electrónica" (a registered electronic receipt) for all business transactions or services. For instance, if your pool service is a legal company paying taxes, they must issue an electronic invoice for payment. This process also applies to renting your property. Each renter must receive a "factura electrónica" for their payment.
Now, you might think it's just about the pool service issuing a receipt. But the Tax Authority will know! The system ensures that when a service provider issues an "factura electrónica," the tax authority receives this information for cross-checking tax liabilities.
If you're renting your property, you're operating a Costa Rican business and must comply with the law. I'm not a tax officer, CPA, or legal advisor, but as an owner of a profitable Costa Rican corporation, I've ensured compliance with local tax laws.
Responsible property management firms are adhering to these laws to avoid being liable for clients' tax responsibilities. I know of a firm that terminated a client who refused to comply yet continued renting. This enforcement might phase out low-priced property managers, which is unfortunate for non-compliant owners.
My advice is to contact your rental assistant in Costa Rica before the tax authorities intervene. If you need a recommendation, feel free to email me. If you want to keep up with what is happening in Costa Rica sign up for my monthly email. I never spam and will never pass on your email to any other party.
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