A recent trip to Liberia and Playas del Coco to check out the Mickey Mouse rumor of Dec. 4 revealed some good and bad news. The good news is that, places are full of energy and tourists abound. “The streets are bustling much more so than last year, and it seems tourists have arrived earlier too, way before Christmas.” said one property manager.
This is great news for local businesses and the country. One area that has shown significant improvement is the rental market for villas, condominiums, and apartments. One rental agent in Coco said her rentals were up significantly over last year and that everything is booked for the Christmas season. Property managers said the villas in Los Delfines, Tambor, were full through holidays and that they have great bookings into March and April.
The short-term rental market and the real estate market in general appear to beimproving in most areas of the country. If one was to gauge the market by the building and traffic, especially the crazy traffic, it would appear the country is exploding as it did in 2005.
However, in all this good news, there is a dark cloud. Here comes the bad news. Many people renting their second homes and short-term rentals are not collecting and remitting the 13 percent sales taxes, which they are required to do by law. Some are not even paying income taxes if they make a profit.
Questioning a few property managers revealed that they were unaware of current tax laws, especially those that pertain to sales taxes.
According to Marco V. Retana, a bilingual Costa Rican attorney, and Kevin Chavarria of KCPATAX, a bilingual certified public accountant, Costa Rica’s sales tax is simple and governed by Ley 6826. In effect, all products sold are taxable and services are not. Except for the exceptions.
Yes, the devil is in the details. Certain products are exempt from tax such as those deemed in the social interest like the canasta basica, the basic food basket. If the law does not exclude a product or group, it is taxable. Services, on the other hand, are not taxable, again except for the exceptions.
What property managers do not know or are willingly evading is Section (ch) of Article 1 of the law. It reads:
“Se establece un impuesto sobre el valor agregado en la venta de mercancías y en la prestación de los servicios siguientes: (ch) Hoteles, moteles, pensiones y casas de estancia transitoria o no.”
A Google translation of the text reads, “A tax on the value added in the sale of goods and the supply of the following: (ch) Hotels, motels, boarding houses or temporary stay.”
Rents and leases that are not taxable are those mentioned in Article 4 of Ley 7527, the rental law, which reads:
“Esta ley rige para todo contrato, verbal o escrito, de arrendamiento de bienes inmuebles, en cualquier lugar donde estén ubicados y se destinen a la vivienda o al ejercicio de una actividad comercial, industrial, artesanal, profesional, técnica, asistencial, cultural, docente, recreativa o a actividades y servicios públicos.”
Google translates same to: “This law applies to any contract, verbal or written lease of real property, wherever located and are intended for home or the exercise of a commercial, industrial, craft, professional, technical, health care, cultural, educational or recreational activities and public services.”
No, “recreational activities” does not mean short term rentals to tourists or motel rooms. Both are taxable, along with parking spaces and storage areas. Rental agreements in Costa Rica by default are for three years. So, it is pretty easy to figure out: If a property is being rented using the rental law and there is a clear landlord-tenant relationship, the transaction does not require sales tax. However, every other property rental does.
The same law in Article 7 clearly excludes other types of rentals and it reads:
“a) Los hoteles, las pensiones, las hospederías, los internados y los establecimientos similares, en cuanto a los usuarios de sus servicios,” and translates to, “Hotels, pensions, inns, boarding rooms and similar establishments, as users of their services.”
Now for the scary part of the bad news. Recent tax modifications changed the statute of limitations on tax debts to five years. If the tax department finds a person not paying their sales taxes they can collect up to five years of back taxes, plus interest and penalties. Worst yet, since there is a property involved, it can be attached and ultimately auctioned off for the taxes.
It is clear that property managers and owners should be collecting sales taxes when renting to tourists and locals alike on a short term basis. If they do not, they are illegally evading taxes which carries serious legal consequences. Anyone in this predicament should seek legal or accounting counsel as soon as possible.
Oh, about Mickey Mouse and the rumors. Everyone questioned in Guanacaste cannot figure out why the mayor of Liberia would make a statement on the radio that Disney was setting up a recreational facility in the canton. One well known realtor in Playas del Coco said people are still talking about the incident and that she knows some investors poking around because they believe it to be true. Another broker said in confidence, Santa is thinking about a warmer climate too.
Garland M. Baker is a 42-year resident and naturalized citizen of Costa Rica who provides multidisciplinary professional services to the international community. Reach him at firstname.lastname@example.org. Baker has undertaken the research leading to these series of articles in conjunction with A.M. Costa Rica. Find the collection at http://crexpertise.info, a complimentary reprint is available at the end of each article. Copyright 2013. Use without permission prohibited.