Important Changes For Rental Leases with the Law # 9635

October 14, 2019

taxes on rentals

Starting in July, 2019 (approval of law 9635) there is a major change on how tax is applied to the income generated from leases:

 

Sales Tax (taxes charged on all goods and some services) will become the VAT (Value Added Tax). This change means VAT replaces the “Sales Tax”.
The Tax Office made all taxpayers of Income Tax automatically registered as taxpayers of the VAT. Effective July 1st, 2019.

The VAT will now be applied to all goods and services (except some exemptions) and it will be 13%. The first filing of the VAT form will be August 2019. The Income Tax will remain yearly.

In 2021 the fiscal year will be from January to December , calendar year, rather than October to September as used to be.

More important details
Under the previous Sales Tax law, only short term rentals (1 month or less) were taxed with the Sales Tax. Long-term rentals (1 month or more) were not required to pay Sales Tax. Long-term rentals were only required to pay Income Tax on the rental income annually.

With the new law, residential long-term rentals will be taxed with VAT if the rent amount exceeds 1.5 the average Costa Rica base salary income. Currently this is CRC ¢650,000 (USD $1085). If the monthly rent is equal to, or less than, 1.5 of the Costa Rican base salary, the residential lease will be exempt from VAT (Value Added Tax). If it is more, it will be taxable and must be withheld and paid monthly to the Tax Office. Keep in mind that any commercial leases are subject to the VAT regardless the amount of the monthly rent.

Additionally, like most taxes, there are tax deduction implications as well which you will want to discuss with your attorney and/or accountant.

What does this mean if I am a landlord?
If you are a landlord, beginning in July 2019, any residential long-term lease (over 1 month) where the lease exceeds the exempt amount noted above, the VAT tax will be 13% monthly. Therefore, the VAT must be added and collected and it must be paid monthly to the Government. Short-term leases (less than 1 month) VAT tax will remain at 13%.
It is advisable to consult with your local attorney if you have questions on this how this new law will affect your specific situation.

What does this mean if I am a tenant?
If you are a tenant and your residential lease is short term (less than 1 month) the tax on your rent payment will remain at 13%. If you are long-term (1 month or more) and your lease exceeds the indicated exempt amount noted above, the rent payment will be increased due to the increase in VAT tax. Each case will be determined based on the specific circumstances of the lease. It’s easy to foresee there will be different outcomes for current tenants.

Whether owner or tenant, this is a major change in the law which will cause change in just a few months. If you would like to schedule an appointment with us to discuss questions, or for more information on the new law, please email us at info@gmattorneyscr.com. We are at your service.

Credit to GM Attorneys who provided this helpful article

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