Legal Ease- VAT Changes Coming Soon for Rental Leases

Ivan Granados - APR 30, 2019
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Legal Ease- VAT Changes Coming Soon for Rental Leases. Tenants and Owners: This Change Affects YOU!  Effective in July 2019, with the approval of Costa Rican law 9635, a major change is being applied to the tax on income from leases:

1. Sales tax (charged on all goods and some services) becomes value added tax (VAT)).  This change means VAT replaces sales tax in this instance. 
2. Costa Rica’s tax office will make all income tax payers automatically registered as payers of VAT, also effective in July 2019.

The VAT will now be applied to all goods and services (except for some exemptions) and the rate will be 13 percent

August 2019 is the first filing date for VAT forms.

Additionally, there are tax deduction
implications, which you are advised
to discuss with your attorney and/or accountant.

 

Income tax in Costa Rica will remain payable yearly. However, starting in 2019, the fiscal year will end in December, not September. Additional changes to income tax in Costa Rica will be explained in a future Howler article.

Beginning in 2020 the fiscal year will be from January to December, the calendar year, rather than October to September.

More important details

Under the previous sales tax law, sales tax was only applicable to short-term rentals (one month or less). Long-term rentals (more than one month) were not required to pay sales tax; they were only required to pay income tax on the rental income annually.

The new law requires VAT payment for long-term rentals if the rent amount exceeds 1.5 times the average Costa Rican monthly base salary income. Currently this is CRC ¢650,000 (US $1,085). 

If the monthly rent is equal to, or less than, 1.5 of the Costa Rican base salary, the lease will be exempt from VAT.  If it is more, it will be taxable and must be withheld and paid monthly to the tax office.

Additionally, as with most taxes, there are tax deduction implications, which you are advised to discuss with your attorney and/or accountant.

What does this mean if I am a landlord?

Starting in July 2019, when your rental income from any long-term lease (over 1 month) exceeds the exempt amount noted above, the VAT tax rate is 13 percent monthly. This amount must be added to lease payments for you to collect and remit monthly to the government. For short-term leases (less than 1 month), the VAT tax will remain at 13 percent.

What does this mean if I am a tenant?

If your lease is short-term (less than 1 month), the tax on your rent payment will remain at 13 percent.  If you are a long-term renter (1 month or more) and your monthly rent exceeds the exempt amount stated above, the rent payment will be increased to cover your landlord’s  increased VAT payment to the government. 

For current tenants, different outcomes are foreseen going forward. Determinations for each case will be based on the specific lease circumstances.

Whether you are an owner or a tenant, this major change in the law will affect you shortly.

 

Other HOWLER Legal Ease articles

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HOA Meetings
Tax Time, Corporations and Property Owners
Corporate Tax Update
Power of Attorney in Costa Rica
Annual Tax Over Costa Rica Corporations
Due Diligence, Purchasing a Vehicle in Costa Rica
Costa Rica Income and Sales Tax
Estate Planning
Purchasing a Condominium in Costa Rica
Buying a Business in Costa Rica
Applying for Cost Rica Residency
Corporate Alert
Set Up a Corporation in Costa Rica

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