In Costa Rica, residential rental activity is subject to taxation. Depending on the nature of the rental, it may be subject to sales tax, income tax or both.
All short-term rentals are subject to sales and income taxes, The definition of a short-term rental is still a bit unclear from an amount of time or days perspective. However, if the rental is transitory in nature or marketed as temporary housing (i.e. vacation) or has operating characteristics of a hotel, motel or hostel, then the it would most likely be considered subject to sales taxes.
Additionally, Law 9416 (adopted in December 2016), “Ley Mejorar La Lucha Contra El Fraude Fiscal” specifically mentions under article 3 that rentals of 30 days or less are subject to both sales and income taxes.
The sales tax law, Article 1, part ch), specifically mentions “Hoteles, moteles, pensiones y casas de estancia transitoria” (emphasis added) as being subject to sales taxes. Casas de estancia transitora translated into English means “temporary stay houses.”
As such, if you are using your home/property for rental activities of this nature, they are subject to collecting, paying and reporting sales taxes.
Additionally, the collection and payment of sales tax is considered the taxpayer’s legal responsibility. To that extent, the property manager and the legal representative of the company (i.e. all responsible parties) are considered withholding agents under the law. As such, the failure to collect and pay sales tax not only carries civil penalties but under certain circumstances can lead to criminal prosecution.
It is essential that those who are not registered with the tax authority with such business activities do so to reduce the risks associated with non-compliance.
Now lets look at residential rentals that are considered long-term. Again, there is nothing specifically mentioned in the sales tax law about being subject. However, the laws are written in a way as described above and focus more on substance rather than specific criteria. Long-term residential leases generally have a term of three years and the underlying lease agreement is written in much different manner than a “short-term lease.” As such, you need to exercise good judgement in determining a “long-term” lease and be sure to write the lease to comply with the laws of residential leasing in Costa Rica. Of course, these kinds of leases are still subject to income tax reporting.
Lets review the penalties for not non-compliance for both sales and income tax reporting and related matters.
| Civil Penalty (Source) | Amounts in Colones | Amounts in Dollars (estimated) |
|---|---|---|
| The failure to register with the tax authority | 1.293.000 | $2,300 |
| The failure to file a sales or income tax return timely | 215.500 per month | $385 per month |
| Interest on unpaid obligations | 1% per month up to 20% of unpaid obligation | |
| Not maintaining accounting books and proper records under commercial and tax codes | 431.000 | $770 |
| Failure to file an informational tax return (d-151) | Minimum of 1.293.000 up to 43.100.000 | $2,300 to $77,000 |
| Failure to present books and records when requested by tax authority | 862.000 to 1.293.000 per occurrence | $1,525 to $2,300 |
| Failure to Issue Electronic Invoices | 862.000 per occurrence | $1,525 per occurrence |
The last penalty is something new in the tax law. Starting between September and November 2018, all taxpayers must be registered with the tax authority and issue electronic invoices for all rentals activities, short and long term. As such, the tax authority will know exactly what income each company has reported and if the party is registered in Costa Rica (non-residents and citizens are reported but without a Costa Rican identification). There are software providers that can be used to register the company and issue these electronic invoices.
It should also be noted that the tax authority has recently started to become more aggressive in its collection tactics. The hacienda has the power to seize assets both at bank accounts and/or place annotation on real property. The annotation on real property is an effectively a lien which would be required to be satisfied in the event of a transfer of the property (i.e. a sale).
As the tax authority has become more sophisticated and aggressive and with the high likelihood of a new tax law for both sales and income tax being adopted this year, it is imperative property owners become complaint going into the next fiscal year. This is the time to make the changes necessary, to avoid bigger headaches and issues that arise from continued non-compliance.
Our firm stands ready to assist those who have an interest in becoming compliant and charting a new path. Please contact us at robert@richcoastaccounting.com with specific questions to your situation. All conversations are confidential.
This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.