VAT: Impact for Real Estate Investors
VAT and Business Changes in Costa Rica: Understand the Impact for Real Estate Investors. The year 2019 has brought several significant changes to Costa Rica’s business sector, with both macroeconomic and social impacts.
In July, the value-added tax in Costa Rica (VAT) will come into force all over the country, essentially replacing income tax. (For details, see the June 2019 LegalEase article in Howler.) All goods and services are subject to taxes ranging from 2 to 13 percent, depending on the type of commercial activity. The concept of a VAT has been contemplated for some time as a mechanism for Costa Rica’s Treasury to collect income from entities that previously had to pay only income tax. Notably, this includes independent professionals such as lawyers, doctors, architects and others.
Be alert to
“properties of opportunity.”
Another watershed change this year has been the continued transition to mandatory electronic invoicing (factura electronica) for all taxpayers in Costa Rica. Under a schedule of phased-in compliance deadlines, Resolution No. DGT-R-51-2016 stipulated which types of businesses and professional service providers would be required to use electronic billing and receipts for all customer/client transactions. (Several CR Biz articles over the past year have updated Howler readers on this initiative.) Again, this reform measure was proposed many years ago to give Costa Rica’s tax administration better control over business transactions through improved traceability. Barely a year after the electronic invoicing platform was launched, many technical and operational refinements are still needed to make it efficient.
Finally, comes a new requirement for companies dedicated to the business of casinos, private loans and real estate to register with the General Superintendent of Financial Institutions (SUGEF), Costa Rica’s regulatory agency for financial entities. This is among various measures the country has adopted, consistent with global efforts, to curb tax fraud and money laundering. Non-compliance penalties could be significant, including measures to freeze, or even close, a company’s accounts.
As an entrepreneur and investor, it is very important to be aware of these changes and understand the repercussions for the affected sectors. We offer the following recommendations for taking advantage of current real estate market conditions.
Seek financial expertise in reevaluating your company’s situation, regardless of the size. Management decisions should be analyzed with respect to these tax reform measures. For example, consider whether the applicable 13 percent value-added tax in Costa Rica (VAT) for real estate will be collected directly from your clients or a portion could be assumed within your company’s profit margins.
Be alert to “properties of opportunity.” If you have been waiting for the so-called ideal time to enter the world of real estate, this may be it. Banks and other financial institutions have reported an increase in delinquency portfolios over the past 12 months, as more clients have been unable to meet their payment obligations. With the aforementioned changes becoming effective in 2019, this trend is likely to continue.
Review your portfolio properties and update the amounts of their registered values. That way you can reduce the capital gains tax due when putting these properties on the market.
Keep your liquidity levels healthy, as well as your level of portfolio debt.