LOOKING FOR PRIVATE INVESTING IN COSTA RICA?
At Gap Investments, we have received questions and concerns from potential and existing lenders regarding the recent tax-related law changes affecting investing in Costa Rica. Most of these questions seem to indicate that the news and other sources of information about the changes are doing a good job — of creating confusion.
As such, let’s clear up the confusion and worry by explaining a bit more about the recent changes and their common misconceptions.
You may be wondering why so many new laws and regulations were passed in Costa Rica in the year of 2019.
There are two significant reasons for that:
1. The Costa Rican government’s balance sheet needs to improve. They have been running large budget deficits for nearly a decade. While the debt-to-GDP ratio isn’t considered very high by global standards, public debt is difficult to service in Costa Rica due to higher interest rates and lack of access to international funding sources (which gets us to reason #2). Note that the changes implemented in July have already improved public finances.
2. Costa Rica is close to joining the OECD (Organization for Economic Cooperation and Development), an intergovernmental organization to stimulate economic progress and world trade. It is considered an exclusive club of wealthier, developed countries and will allow Costa Rica access to economic and political resources never before available.
We wrote a blog article detailing some of these new laws called Tax Changes in Costa Rica. Some of these included:
– Value Added Tax (VAT);
– Passive Income Tax Reforms;
– SUGEF Registration;
– Shareholders Registry.
We introduced the Value Added Tax (VAT – known as IVA in Spanish) in our Tax Changes in Costa Rica article.
When it comes to the interest payments of equity loans, THERE IS NO VAT. We’ll repeat this because it’s the MOST common misconception, VAT is not applied to interest payments.
YOU DO NOT HAVE TO PAY (VAT/IVA) TAXES on your received interest payments.
PASSIVE INCOME TAX REFORMS
This year’s fiscal reform included updates to the taxation of passive income, including capital gains, interest, and rental income. As lenders, the primary concern is the taxation of interest, which is now taxed at a flat 15% rate regardless of amount, with some exceptions. Passive income is reported and taxed monthly. YOU MUST PAY A 15% PASSIVE INCOME TAX MONTHLY.
Private lenders should register with SUGEF (Superintendencia General de Entidades Financieras), the financial regulatory agency. This new regulation aims for banking regulators to monitor potential money laundering and terrorist financing.
Going forward, banks in Costa Rica are gradually going to start asking account holders in the lending business to show proof of SUGEF registration as part of their periodic Know Your Customer (KYC) updates.
Although we recommend you make SUGEF registration a priority, this does not prevent you from lending money today.
One question that should be asked is, what are the benefits of being registered? Once your registration is processed, this helps immeasurably when it comes time to prove a source of funds, such as when performing international transfers.
Note that SUGEF registration details are private and not shared with anyone. None of those details are in any way automatically sent to any other country. They are managed by SUGEF and SUGEF only performs their regulatory function concerning the financial industry.
At Gap Investments, we offer prospective lenders assistance in registering themselves with SUGEF.
Starting September 1, 2019, Costa Rican government is collecting details on the identity of shareholders and beneficial owners of Costa Rican companies. Why are they doing this? One of the primary reasons is that they need to have access to this information to join the OECD.
The Shareholder Registry is not public and is not shared with anyone. It is a private registry with the government and can only be made available via court order due to a local or international investigation. It is not automatically sent to any other country.
We did the registration for our company (Grupo GAP LLC SRL – 3-102-753653), and we found it quick and simple. The user interface is a little bit daunting for non-experts and is only available in Spanish.
At Gap Investments, we offer our lenders assistance with the Shareholder Registry.
Remember that Costa Rica has bank secrecy, in that bank account information is not automatically shared with authorities but can be made available to investigators through a court order. That being said, Costa Rica is also compliant with the OECD’s CRS (Common Reporting Standard) rules and the Foreign Account Tax Compliance Act (FATCA).
You can read more about Costa Rica’s CRS and FATCA obligations, as well as Tax Information Exchange Agreements (TIEA), HERE.
Got questions? – Contact us now!