The 2018 Elections
As you may or may not have known this past April the Costa Rican legislature had to take an important decision at their government elections; whether they took the right or wrong decision is up to them and it won’t be the topic of this blog. On the contrary, what will be talking about is something that relates to us and our money: taxes, taxes and more taxes.
As we all know Costa Rica is no longer the fiscal paradise it used to be in the 90’s and the last government approved important laws in order to fight fraud, terrorism, arms sales, and money laundering and regulate the different aspects of its economy and finance.
The new Public Finances Strengthening Law
This new government makes no exception and this past April 11th they approved the Public Finances Strengthening Law (Ley de Fortalezamiento de las Finanzas Publicas). What will be changing?
Before April all the sales of goods and few services paid a 13% rate of what it was known as the Sales Tax, end of story. With this new law the Sales Tax has been changed with the VAT (Value added tax) and it will be paid by ALL services as well as all non-essential goods. The general rate is still 13% but there is a differentiated rate for certain services (for example health and educational start at 4%) as well as other services that will increase over the next years such as the construction industry, among others.
Another important aspect concerns the rental market as all the commercial leases and residential leases over $800 rent/month will be taxed with the 13% VAT.
Real Estate and the new law
The story changes for the capital gains on Real Estate sales as well: historically, one-time, non “habitual” Sale of real estate capital gains (difference between the reported fiscal value and the price of sale) were NOT considered as taxable income and therefore exempt. With the new system all the capital gains will be taxed with a 15% income tax rate without any exemption. Furthermore, withholding will apply.
The new changes will have some consequences for the Real Estate industry:
- The increase in cost of services will transfer over to the price of real estate (escrow, commissions, legal fees, appraisers, surveyors etc…)
- All the new developments will need to consider an increase in construction services cost due to VAT (architects, engineers, environmental consultants, construction services etc…)
- The interest payments on Private Loans will also be subject to 13% VAT
- Capital Gains tax might also trigger higher prices to compensate
- Lease rent payments will be subject to VAT
No worries, taxes won’t ever be worse than in your country and life will still be much easier under a palm tree with a fresh Margarita looking at the sunset, Pura Vida!