In recent days amcostarica.com has been reporting, rather exclusively, on an important piece of legislation (tax reform) that has just passed the first, all important step, of legislative approval. It is very probable that this initiative will be signed into law by the president as soon as possible, since it is clear the executive branch is quite interested in having this law on the books.
This law is a part of the failed tax project that was defeated back in March. The provisions covered in this particular law essentially affect areas of tax, customs, business and property law. The first part deals with fundamental points of the tax code of Costa Rica. It redefines key legal concepts and procedures. This part covers the general area of the tax code.
The second part deals with important changes to customs law. The third part is especially sensitive since it covers specific and essential aspects of corporate law. The final area deals with an important change to the tax rules that regulate the sale and transfer of property that is being held by corporations. This law even affects trusts.
The law was processed under the legislative file number 18.041 which was the number assigned to the defeated tax project back in March. The law that was just approved was specifically numbered 9069 which will be the number under which this legislation will be identified. It was given its final draft form on Aug. 8. The law modifies 50 differentartículos or “sections” of the tax code of Costa Rica. It modifies 21 different sections of the general customs law, and it adds seven new sections to this law. It modifies four different sections of the commercial code, and it alters six sections of the law that regulates the tax on the transfer of real estate property.
As far as the general modifications to the tax code are concerned, some of the more interesting are the following:
a.) Anyone acquiring property, goods or rights from another is responsible for any fiscal liabilities upon those items up to the value of the item acquired, and shareholders of liquidated corporations will also be liable for any taxes owed by the corporation;
b.) The concept of “address,” meaning the place where a person or corporation is deemed to be for tax or notification purposes, is greatly clarified and amplified;
c.) There are a number of important changes to the process of requesting credits or reimbursements from the treasury ministry;
d.) One very important point is that established by section 51 which increases the term for the statute of limitations the tax authorities have to determine fiscal obligations upon taxpayers from three years to four years.
Admittedly it is not a great increase but it is an increase in the end. Then in the next paragraph it does make a significant change because it doubles, from five years to 10 years, the statute of limitations in favor of the government to pursue unpaid taxes for unregistered taxpayers, taxpayers who have filed returns considered as fraudulent or taxpayers who have not filed returns;
e.) In section 82 an interesting concept is introduced which is that of “resistance to activities of administrative control,” which essentially means a series of forbidden behaviors that tend to create obstacles to the functions of tax investigations and, of course, these actions will be punished with important fines;
f.) One very important point is that, those corporations which do not correctly keep a specific legal book, called the registry of shareholders, will be fined. Of course that obligation has existed up to now, but this law gives it a specific fine.
There are a number of other very specific and legally technical changes implemented by this law which would be too long and complex to present here. Suffice it to say that this may be one of the most important tax reforms passed in the last few years. This also applies to the changes made in the customs law. These tend to be more specific and more technical and apply more to importers directly but it is likely that this will mean an increase in the cost of doing business for importers which can carry over to consumers.
The important changes which affect corporations specifically and, therefore, a greater number of people are the following:
a.) This law establishes that the financial and accounting documentation no longer needs to be legalized with the treasury ministry and eliminates the use of what has up to now been known as the three accounting books;
b.) The books that have so far been known as the three legal books for a corporation (sociedad anonima) will now be legalized by the Registro Nacional and not by the treasury or the Ministerio de Hacienda’s Dirección General de Tributación. These books are the book for the minutes of shareholder’s meetings, the book of registry of shareholders and the book which keeps the minutes for the meetings of the board of directors.
The question that arises is that since the books will now be legalized by the Registro Nacional and the law gives this government entity a sweeping power to “guarantee the trustworthiness of the records,” will the Registro now become a de facto registry of the shareholders of corporations and, consequently, compromise the anonymity which these corporations have so far enjoyed.
A very important innovation established in this law is the broadening of the legal concept for a taxable transfer of property. Before this law the transfer of shares of a corporation that held a piece of real estate property did not generate a transfer tax or the corresponding tax stamps. This law now includes these types of transactions as taxable transfers. The question is how the government will monitor these types of transactions.
The totality of this law intends to give the government the powers and the tools to precisely implement new rules that will allow it to keep a greater control as to the inner dealings of corporations. Not only large companies could be affected but essentially any personal or small corporation.
The implications, for example, of transferring a $500,000 condominium by the simple sale of shares could put the buyer in a delicate position. If the buyer fails to report the sale, the fine is the amount of taxes which was not paid.
Finally, the tax exemptions for registered properties in trust that are part of a formal guarantee related to a financial or credit operation in institutions that are registered in the Superintendencia General de Entidades Financieras (a government department that regulates certain financial institutions) will be maintained. All others, when the property is transferred to a third party, will not.
It seems investors and developers will have to revisit their corporate strategies in light of this new legislation in order to safeguard the security of their personal information and that of their partners. They will also need to determine how this new legislation will affect their fiscal strategy as pertains to their developments. No element is more important to a business person than clarity in the rules by which his or her investments are governed, and it seems we will all have to adapt to a bit of change.
*Mr. Montero is a Costa Rican lawyer. He may be reached at firstname.lastname@example.org