Costa Rica Business – Tax Tips for Entrepreneurs in Costa Rica

My name is Rocio Fernandez, I am a Costa Rican, was born in San Jose and although I have visited the USA and other countries in Europe, I have always lived in Costa Rica.

After graduating as a ‘Financial Business Administrator’ and studied for my MBA, I started working for a US company in a ‘Free Zone’ in San Jos+« and while working there, became an Accountant with a professional certification in taxes.

Apart from my work with the Free Zone US Company, I also work with many private clients, primarily Americans.This interesting experience has given me the opportunity to learn from the many painful mistakes made by non-Costa Rican business people before they realized their errors and finally asked for help.

Knowing about some of my experiences with foreigners, Scott Oliver, whom I am very pleased to know and owner of the WeLoveCostaRica website, asked me if I would share my experiences through the web. Of course I would and mostly because I think, hopefully, you too can learn from other people’s mistakes and not go through the same way.

To help Scott help you, I wanted to share with you some of the most common mistakes made by foreigners in Costa Rica.

Hopefully everything we share with you today will give you the ‘warning signals’ you need to avoid those painful mistakes that could literally lead you into bankruptcy!

1. Check and re-check your numbers! If you are planning to buy a company that’s already operating in Costa Rica, please DO NOT believe everything the sales person is telling you about the company. DO NOT rely on the numbers you see in the Balances or Financial Statements. Raising the Assets value or hiding Liabilities is not that hard to do. You must find out for yourself if they are true! It’s easy to write whatever is wanted on a piece of paper and if they can fabricate numbers for a New York Stock Exchange listed company, it can certainly be done for a small Costa Rican company.

Which reminds of the American who bought a company believing all the facts and figures he saw were true, only to find out later that the company had thousands of dollars in debts to the Social Security System and that without paying those he wasn’t able to run the business.

So take a big magnifying glass and study all papers. If you don’t want to do it yourself, then hire a qualified, honest bilingual professional to do it for you, but do it someway or another! This is the only way to truly understand if the company’s price is realistic and if there are no debts hidden in between the lines.

2. Good communication skills are essential! As you may already have found out in your daily life, communication is not always easy, even if you speak the same language. Please DO NOT make it harder by hiring an accountant or business consultant who does not speak your own language.Unless you speak very good Spanish and you are good enough to understand even technical words of the business.

An American businessman that I met didn’t speak Spanish and following the advice of a ‘friend’, he hired an accountant who did not speak English. After a few months of not knowing how things were going on, he called me asking for help. By this time, the situation with his company’s accounting and taxes had gone past the point of no return and he had serious problems with the Costa Rican Tax Administration on more than one charge and he didn’t even know why.

Believe me! It is a fairly simple matter to find very good professionals, willing to help you with your business or questions and who also speak you language.

3. Know your business inside out! Before buying a company, you have to determine exactly what kind of business you are getting into. Business running and management changes a lot from one kind to another and from one country to another.Let me tell you something that happen once to an American that bought a good company here in CR. It was a good company with big potential, but it was created and working under the Free Zone Regime. The new owner DID NOT pay enough attention and was mainly interested in the tax exemption he was allowed.

His problem? A huge lack of knowledge of the type of business he was involved with because he decided not to ’employ’ workers under the company’s name and responsibility, but instead, decided to contract them through an outsourcing employment agency.

What he did not know is that one of the most important obligations that a Free Zone Company must observe, is that it must have a minimum number of employees working directly for the company and under the company’s responsibility before the Government and Social Security System.

Because of this problem, the plant was shut down by Government’s Free Zone Administrators, it is going through a legal process and will probably end in bankruptcy.This nightmare could have been avoided with more attention from the owners and a little time invested learning about the kind of business they where getting into, and of course, wise and timely advising from a consultant.

4. The tax man in Costa Rica must be paid. Do not think that because Costa Rica is a small country from the third world you can play with the Tax Administration Bureau so easy.It’s not quite as powerful and as resourceful as the IRS, but they are not fools. So believe me, it’s worth investing some time and finding out how the Costa Rican Tax System works.

If you have more important things to do, please be sure to find a good, trustworthy, qualified tax consultant who is legally authorized before the Costa Rican Professional Accountants College to work as an accountant.

5. Play by the rules! If you want to play the game, learn the rules.You have now heard about the American who bought the Free Zone company without knowing or asking what the system was like. Well, now let me tell you about this other guy who decided co come to Costa Rica and create a travel agency.

In Costa Rica all travel agencies must be approved by the Costa Rican Tourism Bureau, but he didn’t know that and didn’t try to find out about local regulations for this kind of business. After a while he heard, because of Costa Rican incentives for the tourism industry, travel agencies could ask for vehicle tax exemption.So he asked the Tourism Bureau and ask for the exemption.

I don’t need to tell you what happened when the authorities found out they were operating without proper authorization…

There was another business man who decide to start a company here but never asked about ‘rules’ regarding his specific kind of ‘bottled drinks’ business. He made all cost estimates and set up a sales price he negotiated with wholesale distributors. The problem was he didn’t appreciate that bottled drinks have a specific industry tax that must be paid.

He ended losing serious money and had a tough time renegotiating the price with his distributors. Like any sport! If you want to play the game, learn the rules or you’ll probably make some mistakes that you will be penalized for.

6.Starting a new company?

If instead of buying a company, you want to start a brand new company in Costa Rica, get good professional advice for all the paper work you will have do in order to get the proper legal and tax inscription. The first step is to get the formal inscription in the Tributary Administration Registry:

You have to present a special document, form D-140, before the Tributary Administration. This document might be used for initial inscriptions or registrations, for any legal or commercial status modification, addresses changes or to get unsubscribed.

If you were a physical taxpayer (person), along with the D-140 formulary, you must present a identity card, cedula or passport number. If we are talking about a company, you must commission a legal representative who must bring the ID document number of the company, and some other legal documents of the company constitution to the Tax Administration Bureau.

Legal papers must be extended by an Attorney and presented within less than three months of issued. It is important for you to know that here in Costa Rica, the legal representative of a company is for all matters the one responsible for all commercial acts and for all legal and tax obligation for the firm.

Costa Rica Taxes:

The taxpayers: For Costa Rican tributary law any person or company with business in Costa Rica becomes a taxpayer.Without importance of the nationality or residence of persons or place of constitution of a company, they qualify as taxpayers if they have commercial activities or profitable business in the country.

Income Tax is calculated over the total net income amount of the taxpayer in a fiscal period. The income tax in Costa Rica is an obligation of any person or company with a profitable business in the country.

The base for the calculation of the income tax is given by the difference between the total profit in a fiscal period and the necessary expenses made in order to achieve that profit. In other words the taxable income base is the outcome of total profit less total deductible expenses.

Taxable profit: The total income or economic benefits perceived from professional or commercial activities in a fiscal period is considered as ‘taxable profit.’, as well as any equity increase with no income justification properly declared and registered. Non-taxable profits are profits items like: Capital Stock contribution, fixed asset reevaluations, earned dividends, inheritance and lottery prices.

Deductible expenses.

The most typical deductible expenses are: cost of goods sold, like raw material and supplies, salaries and fringes, insurance expenses, interest and financial expenses, un-collectable accounts receivable, fixed assets depreciation, representation expenses, publicity, freight, professional fees, authorized donations, building, installation and furniture maintenance, etc.

All expenses must have supported invoices or documents authorized by the Tributary Administration, otherwise they could be not considered as deductible expenses.

Tributary Administration Bureau obligates all commercial agents to issue authorized invoices as an effort to control taxpayers income. The Income Tax Law of Costa Rica establishes that is an obligation to issue and give those authorized invoices with any commercial transaction, as it is an obligation for the person or company who pays for that transaction to demand that kind of document.

Non-deductible expenses:

The following are not deductible from income tax, all expenses that have not arisen from the commercial activity which generates the profit. In the same way they aren’t either deductible all the normal subsistence expenses of the taxpayer.

Entities not submitted to the Income Tax Laws: Politic parties and religious institutions, Free Zone Companies, Solidarity Associations and Non Profit associations.

Important tax dates regarding taxes:

Fiscal period in Costa Rica: The normal fiscal period in Costa Rica lasts one year, from October the first to September 30th of the next year. Nevertheless the Tributary Administration can approve different special periods when there is an important justification for the company needs.

Income tax declaration must be filed in the D-101 formulary. There is a two and a half months period after year-end closing to take this declaration to the bank. So, since the normal year-end accounting closing in Costa Rica is September the 30th, the last available day to present the Income Tax declaration is December 15th.

Forms can be bought at most of the Public Banks and taken to any bank. It is important to mention that Income Tax Declarations must be presented even if there were no taxes to pay, either because the company has an exemption, had net losses in the period or it didn’t had commercial activities during the fiscal year.

Typical Income Tax rate in Costa Rica is 30%, but there are other lower rates depending in the income. For example, for 2003 fiscal period if the income for a company was less than ñ39,000,000 but more than ñ19,000,000 the rate decreased to 20% and if total income was less than ñ19,000,000 the rate falls to 10%.So, rates depend on the amount of income gain in the period. (The exchange rate in early March 2004 is about colones 425:US$1.00)

The sales tax in Costa Rica is 13% rate of the goods sales price. There is a special tax form for the sales tax, the D-104 and it has to be taken to the bank to pay the tax monthly, no later than the 15th day of the month after the tax was collected.For example, if we are talking about paying January’s sales tax, you will have time until February the 15th. If you forgot and pay after the date you will have to pay a fine for delayed presentation.

Other obligations with the Tax Bureau: There is another document required by the Tributary Administration, which is for information purposes only, no payment due. The formulary is the D-151.In this form, all companies with commercial activities have to give a detailed report of all payments done by the company within a period that goes from October the 1st to September 30th of the next year to any client or supplier, professional services paid, rentals, interests, etc.

Get familiar with the important commercial dates in Costa Rica: As in almost any country in Europe, North America and Latin America, here in Costa Rica Christmas is a busy commercial season, but there are other dates that may change more than those in your own country. Mother’s Day is an important time. We celebrate Mother’s Day on August 15th and Mother’s Day is probably the most important date for commercial activity after Christmas.

Holy Week (Semana Santa) is very important in the Costa Rican calendar when most government offices and many stores are closed, but is a great time for Hotels and other tourist related activities, since many company use to give vacation to their employees.

Costa Rica has a lot to offer you, not only as a friendly small country to live in and as a tropical paradise to travel around, but also as a good place to build a profitable business. My advice is simple: Take the time, get your questions answered and make sure you’re getting qualified, professional advice.

Rocio Fernandez, is Costa Rican accountant who graduated as a ‘Financial Business Administrator’ and studied for her MBA. She has significant experience working with foreigners, primarily Americans, starting businesses in Costa Rica.Her knowledge will help you avoid the kind of ‘expensive’ learning experiences that could get you into serious difficulties doing busines in Costa Rica …

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.