Costa Rica News – The end of the Costa Rican tax year is fast approaching and if you own an/or operate a business you need to be aware of some of the highlights of tax filings and some simple strategies to defer income recognition and or reduce your Costa Rican income tax exposure
The business income tax return is for the period of October 1st to September 30th of each year and is filed on Form D101. The tax return and final tax obligation payments are due no later than December 15th. Late tax returns and payments are subject to penalties of 1% per month up to 20%, unpaid tax deficiencies are subject up to 25% or 75% if there is fraud involved.
In general all income received by a corporation is included in its income. In general, dividends paid by another Costa Rican corporation to your corporation are not includible in income and are not taxable. One very important point is to remind you if are subject to filing monthly sales tax returns reports, that the income amounts you report for your sales of services and products must equal the income reported on the income tax return under the corresponding heading.
Direct costs of purchases of products and or services used to generate the income (not general operating expenses, salaries, CCSS etc) are reported on the tax return and also must equal what has been previously reported on your monthly sales tax report filings. If you have an arrangement with some of your vendors for the maximum or other reportable purchase amounts that they are including in their income, then be sure to have this reconciled and understood before filing your tax return. Any substantial difference will be investigated by the Minsterio de Hacienda and you may receive a notice of a tax deficit.
The profit of the company is subject to three rates of taxation (amounts are shown in US dollars as an estimate; the real amounts are in colones)
- 10% on profit up to $91,000
- 20% on profit between $91,001 and $183,000
- 30% on profit over $183,000
Capital gains are not taxable and capital losses may be deducted in the year of the loss. Net losses may be carried forward for a period three years or five years if the business is the agricultural sector.
Some ways to reduce your company’s taxable income before the end of the fiscal year can include:
- Considering buying new or upgrading equipment and/or any planned remodeling or renovations to increase your depreciation expense deduction
- Liquidating and paying out all of your employees or employees you are planning to terminate
- Accelerating any payments to vendors that you can, including rent and insurance
- Paying out any earned bonuses to employees or others
- Deferring receipt of payments of contracts or sales until after the end of the fiscal year
- Verify the arrangements you have with certain vendors who are reporting the purchases you made for the year
Adequate record keeping on your business can help you decide what areas you can focus on to reduce your taxable income. At this point in the fiscal year, you should be able to determine and/or project what your taxable Costa Rican income is, so that you may utilize some of the ideas above to plan and estimate what your final tax liability will be. An accountant with experience in bookkeeping and tax projections can help address these issues and assist in projecting your tax liability now.
Remember that if you are US person that owns the foreign Costa Rican corporation that is filing a tax return, you do have certain US income tax reporting requirements as well. Dividends and interest paid to US persons who own foreign corporations are subject to taxation in the US. Additionally, you may have to disclose both foreign assets and/or bank accounts that own and or control. Balancing these two systems of reporting requirements and designing tax planning strategies is an important matter that you should be discussing with an accounting and tax professional who is familiar with both Costa Rican and US tax laws and regulations. Planning and taking action now, before the end of the tax year, is a way to reduce your tax liability in Costa Rica.
Robert L. Pioso, CPA, with 20 years of experience as a CPA, CFO and owner of a Costa Rican business can help you navigate through the complexities of US taxation for US expats and those who own investments and assets in Costa Rica. You can contact him for a free consultation – CR 6050-3831 or US 312-235-2301 or visit him at www.richcoastaccounting.com or via email at [email protected].
Rich Coast Accounting and Financial Services are focused at providing positive and tangible results that will bring real value to you or your business and offers a unique guaranty “You pay only for the value of the services received or the invoice, whichever is greater.”