Instant increase will jack up new corporate tax to about $354.50

The ink was not even dry on the president’s signature on a new corporation tax when word arrived that the amount was going up 14 percent.

President Laura Chinchilla signed the measure Tuesday. The law says that the tax will be 50 percent of what is called a base salary. This is the monthly pay of an auxiliar administrativo 1 who works in the Poder Judicial.

The original idea was to link the law, like many other laws, to an amount that would be increased with inflation as the salary of a mid-level employee was increased.

This is the same base salary referenced in a number of traffic and tax code laws.

When the president signed the bill, the base salary was  316,200 colons or about $622. So the tax on corporations, which is expected to go into force April 1 would have been $311. However, some increase was expected because salaries usually are increased every Jan. 1 and July 1.

But a 14 percent hike was not expected. The Consejo Superior del Poder Judicial approved the increase, which will take effect Jan. 1. The new base salary is 360,600 colons or about $709.  That means the corporate tax will be $354.50 or 180,000 colons when it takes effect April 1.

No mention of the jump in the base salary was made during the last day of legislative discussion when the law received final approval. Lawmakers probably did not know about the change.

Ms. Chinchilla never mentioned it either, but the increase means another small windfall for the Ministerio de Gobernación, Policía y Seguridad Pública, which gets 95 percent of the tax money.

Of course, there are ways around the tax.  The law specifically exempts small- and medium-size enterprises, known as PYMES, an acronym based on the phrase in Spanish. The designation is awarded by the Ministerio de Economía, Industria y  Comercio if the company meets certain requirements. The designation applies to firms with a small workforce and moderate incomes. The firms have to be at least 5 years old.

An inactive corporation, that is one without economic activity, only will be assessed half the tax or about 90,000 colons, according to the law. That is about $177. But there does not seem to be a way around not paying the tax. Some expats will seek to disband their corporation and do business or hold property in their own names. The law allows this and even eliminates the need for some stamps and fees to do this. But there is a catch.

As Garland Baker pointed out in July, disbanding a corporation is costly, too, because the process requires the assistance of a notary. He said:

“The proper way to close an inactive company is to go before a notary and change the constitution.  Most companies are constituted for 99 years.  The notary would change the constitution of the company to only a few months into the future.  Once past, the company would be, in theory, dead.  The books then should go to the tax department for cancelation.

“Sounds easy, but this process is expensive.  Here is an estimation of the costs:

“A notary will charge around 20,000 colons ($40) for writing the change into the minute book and 60,000 colons ($120) to notarize the act.  To change the constitution of a company requires publication in “La Gaceta,” the official newspaper, which costs between 7,000 and 8,000 colons (up to $16).  To file the paperwork costs about 65,000 colons ($130).

“Add it all up and the result is 153,000 colons or $306. A lot of money just to kill an inactive company.”

Corporate owners have six months to complete the process, under the law.

Baker also warned about the dangers of expats holding property in their own name. One reason is the need for an expensive probate process if the expat dies holding property.

The tax in 2012 will be prorated for the remaining nine months and the first tax will be just 75 percent of the stated amount. The money must be paid within 30 days, that is by April 30. Subsequent tax payments will be due Jan. 1 each year and have to be paid by the end of that month. Those amounts will be increased, too, as the base salary is raised.

The text of the new tax law can be found in the Dec. 27 digital edition of the La Gaceta. It appears that the text was published even before President Chinchilla actually signed the bill to make it a law. It is HERE. The text is linked to “Alcance Digital Numero 111-A PDF” which can be found in the right hand column.

*A.M. Costa Rica’s sister business publication HERE.

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