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Tax requirements and compliance for Vacation Rentals in Costa Rica

Operating a Vacation Rental in Costa Rica is now considered running a business. It’s going to take more than simply posting the listing and receiving renters. Here is what you need to know to comply with the tax regulations.

For years the issue of “if” and “when” a vacation rental property in Costa Rica should pay income and / or sales tax has been on people’s minds and conveniently it has been a gray area. Attorneys and accountants have had different interpretations of what exactly is a vacation rental and if they were required to collect & pay taxes.

As of December 2016, the answer became a clear: YES – vacation rentals, defined as short term rentals under 30 days must collect a 13% sales tax and pay it to the tax department every month. Another complete overhaul to the tax laws was passed December 2018 and has gone into effect as of July 1st, 2019. This is referred to as the Law of Strengthening of Public  Finances number 9635.

Vacation Rental owner must now pay 2 taxes every month on all rentals:
The Sales Tax and the Income Tax

The Sales Tax

All rentals must charge a 13% sales tax now called the IVA tax. In Europe and many other countries this is also called the VAT or Value Added Tax. This includes:

  • Commercial rentals
  • Long term home rentals > 3 years
  • Short term home rentals < 3 years
  • Vacation rentals.

There are two exceptions to this broad rule:

  • Long term home rentals (with a three year written contract) under ~$1200 per month
  • Commercial rentals to registered small and medium businesses, known as PYMES, Pequeña y Mediana Empresas. The PYME must be registered and have a sales tax exemption number.
Monthly Tax Declaration

This sales tax is also now applied to almost all services. This includes property management and commissions. The property owner is required to declare all rental income at the end of the month and to pay the collected sales tax to the government. This is done via the Form D-104. Even if there has been zero activity, the tax declaration form must be presented.

There is a bit of good news on this tax! The sales tax paid on most of the expenses you have incurred during the same month can be deducted from the tax due. In other word if you collected $130 in sales tax, and spent $100 in sales tax, then you will only owe $30 of the sales tax at the end of the month. In order for an expense to be deducted, you must have received a Factura Electronica and upload it to the government tax office as an expense / deduction. This must be done within 8 days otherwise it will not be accepted as a deduction.

The Income Tax

The Income tax, or Impuesto de Renta, is now different than it used to be. This is an important change because in most cases, the government will be keeping more of your earned income.

It used to be that you filed the income tax annually by summing up the gross income and adding up your expenses as deductions and paying tax on the net income. Unless you have an active employee registered in the CAJA and you declare him / her at your local Hacienda office, this option is no longer available!

Now, every property owner is required to file form D-125 at the end of each month, declaring gross income and liquidating the calculated income tax. The tax is a simplified flat tax that allows limited deductions. Many refer to it as the 15/15 rental tax.

Here is how it works: You rent your unit for $1000. You collect $1130 from the renter. The $130 is the sales tax that will be declared and paid – as detailed above. The $1000 is the rental amount and is your gross income. The law allows you to deduct only 15%, or $150 from the $1000. There remains $850 and you are taxed 15% on that amount, for an amount of $127.50. This is the Income tax you owe at the end of the month. No other deductions! Another way to look at it is a 12.75% flat tax on your gross income.

To summarize: for that one rental of $1,000, you collected $1,130. You have to fill out form D-104 for the sales tax declaration and form D-125 for income tax declaration. You owe $130.00 in sales tax and $127.50 in Income Tax. You keep $822.50 and have no more tax declarations or liabilities to Hacienda.

How do I get started?

The tax registration declaration that must be visibly posted in front of your property / business.

The first step is to register yourself and/or your corporation with the tax department. You do NOT need to be a citizen or resident to do so. Foreigners can register. You must go to the tax department in your province and obtain a personal tax ID or NITE – for foreigners – and in case of a corporation, link your personal tax ID with the corporation.

Then from your computer, visit the tax department website:

https://www.hacienda.go.cr/ATV/Login.aspx

Once you register online with your tax ID, you must declare your economic activity (code 551001 for vacation rentals) and method of invoicing, which is now Factura Electronica for everyone. You then need to set up your Factura Electronica settings, which can be slightly complicated and not covered in this article. We recommend asking your accountant or professional manager for help. Once this is done, you are ready to start invoicing your clients.

How do I collect the sales tax from my renters?

factua
Factura Electronica digital signed by the tax department

As of November 2018, for every tenant that stays in your property, the property owner is obligated to create and provide (even if not requested) an electronic invoice (factura electronica or tiquette electronica) to the tenant or online booking engine. The invoice must be approved by the department of tax revenue (Hacienda) and digitally signed. The invoice will include the 13% sales tax which is then collected by the property owner / manager.

Do I have to pay any other taxes?

  • If you are exempt from the monthly 15/15 income tax because you have a registered employee, then you will remain on the traditional annual Income Tax declaration and able to deduct your expenses to calculate your net income. That tax will be due annually. Next year the fiscal year will be 15 months and end December 31st 2020.
  • The annual Municipal Property Tax, which represents 0.25% of the declared value of your property. Most property owners are almost certainly already paying this.
  • If your home is worth more than $200,000, you should be paying the annual Luxury Tax.
  • If you have a corporation, the annual Corporate Tax, paid annually online to the Ministerio de Hacienda.

Ok that’s enough taxes!

What if the income stays in my home country?

Many property owners “operate” their vacation rental from outside of Costa Rica and get paid in an account outside of Costa Rica, meaning the income never goes through the Costa Rican bank system. This is fine, but the law is also clear: the vacation rental is located in Costa Rica and therefore the sales tax must be collected and paid. You are permitted to run your finances wherever you want, but this does not neglect your obligation to collect and pay the sales tax.

Airbnb does not collect tax. Do I have to report anything?

Airbnb allows property managers to charge the sales tax at the point of sale, but not individual homeowners. This is probably temporary, but go figure! They also handle all the finances between the renter and them.

We have consulted directly with the tax department, Ministerio de Hacienda and clarified the following:

  1. Airbnb and Hacienda are in current negotiations to soon incorporate the sales tax or report the sales tax directly to Hacienda.
  2. Unless the property is listed via a management account, a $100 rental on Airbnb includes the sales tax. $100 represents Rent of $88.50 and Sales tax of $11.50.
  3. The factura / tiquette Electronica (invoice) should be made out to the payee, in this case Airbnb. Even though Airbnb may not receive / require the invoice, the property owner is required to produce one for each rental. A renter cannot be invoiced twice. Airbnb has invoiced the renter and collected the rent. Airbnb then pays the property owner, therefore the property owner must then invoice Airbnb directly.

We highly recommend to not be tempted to hide Airbnb income. Hacienda has access to every property online and every reservation calendar. The new law has instructed them to connect to Airbnb and VRBO databases. Don’t get caught! An audit can be very stressful and fines very high.

My property manager handles all my reservations. What are his / her responsibilities?

Many vacation rentals are professionally managed and this can make managing your house guests and taxes much easier. Make absolutely sure that your manager collects the tax on your behalf for every reservation and pays that tax every month. Failure to do so is both the property owner and manager’s responsibility. We recommend that your property manager provides you a copy of the invoice(s) provided to your house guests and proof that the 13% tax is charged, declared and paid every month to the tax department, otherwise you might both be implicated. You will STILL need to pay a 13% tax on the net amount you earn from your property manager – and declare monthly sales tax and income. Your property manager should be able to assist you with this.

I want to rent my house, be in compliance, but don’t want to be bothered with invoicing, declaracions and taxes. What are my options?

Unregistered vacation homes are still a majority (though quickly changing), but the tax department (Ministerio de Hacienda) has recently taken an aggressive approach at finding and fining properties that don’t comply. You do not want to be next! Your easiest option is to work with a reputable property management service that can help with the invoicing and charging of all of your clients. Your manager should also file the monthly Sales and Income Tax declaration on your behalf and pay it for you. You can also hire an accountant. Yes, this seems like more expenses and a lot more work. It is, but it’s the law and everyone must comply.

Most accountants are flooded with the sudden new increase in work to be done – every month – and if they have time, are charging high fees.

Green Management now offers a separate Rental Accounting Service to the public. You don’t have to be a Green Property management client to take advantage of this! If you have a rental home or business and need tax help – regardless of who manages your property, we have the right solution for you or your manager so that you can be assured your property is in complete compliance – all the time.

Call us for a consultation to learn more and see how we can help you.

Additional Reading and References

Property Management

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