02/02/2023
Costa Rica Company formation: a background overview, efficiency and tax related regulatory compliances.
A jurisdictional article by JJ Sanchez
LL.M. International Law - web: www.crlaw.info
NOVEMBER 2022 version
1. Background: Incorporation of mercantile entities in Costa Rica is regulated by the CR Code of Commerce of 1964, Section I, Title I, chapters 2 to 11th, and some sections of the Civil Code of 1888 apply as ancillary provisions. The most commonly used entities are Corporations or SAs and LLCs or LIMITADAS: Corporations being conceived as open partnerships with a four members board of directors and its shares constitute securities designed to circulate by endorsement or assignment, which makes them more cumbersome and subject to shares´ certificate loss or theft. The LLCs are simpler with one or more managers instead, personalist entities meaning the existing quota (share) holder identity is relevant to the other partners, who have first right of refusal before a third party acquisition of quotas or units, and their liability is also limited, except in case of criminal fraud by the company director – shareholder. Both entities are constituted by two constitutional shareholders, who can be nominee directors from the Law office, who latter convey the shares to the Beneficiary owners (final shareholders). Beneficiary owners can remain anonymous within the company shareholders´ registry record or be also designated company directors – managers which is public record of the Mercantile Registry. Company directors are to receive a specific power of attorney to administer the assets and relations of the company, this power of attorney can be either full unlimited, exclude acts of asset disposition and exercise jointly or independently amongst the company directors. The entity is to have a legal domicile which is a street address in Costa Rica, where it will receive legal notices and service of process of any nature either contractual, administrative or judicial action claims. In lieu of a CR physical address of the company directors they may appoint a CR Lawyer as Resident Agent with an office authorized to receive notifications or service of process. The life span of the entity is one hundred years, their articles of incorporation which is the equivalent of the birth charter gets executed before a CR Notary Public protocol book of indentures and filed and recorded in the National Registry Mercantile Registry, once recorded the articles are public record and an electronic certificate of company registration, known as “personeria” certificate can be obtained from the online service of the National Registry to attest the company´s good standing information: legal directors, their powers, company legal domicile, articles´ microfilm record data etc. Banking due diligence also requires periodically a Notary Public to issue a certification identifying the Beneficiary owners´ data based upon the company´s Shareholders´ Registry book entries. This book together with the Shareholders´ Assembly book is like the company´s passport, needed to make any shares´ transfers or changes to the company charter like adding or removing directors.
2. Efficiency: Although some commentators have questioned the efficiency of using companies as holding vehicles for the title of real estate or other valuable assets, solely on the fact that a company or corporate registration tax is levied yearly in FEBRUARY and some other tax compliances are due on MARCH and APRIL (see below); their efficiency and usefulness as holding companies for real estate and assets, remains well justified primarily because of: a) they protect real estate or valuable assets from the personal or criminal liability of the Beneficiary owner, for example under the scenario of a car accident liability, which would otherwise expose the real estate property owned by both the car driver and the legal owner of the car´s title; thus the other solution to this problem which is car liability insurance, needs to be able to cover the value of the real estate asset and not only of the cars´ damages, as there could be legal claims that surpass the value of the car, and insurance coverage of this level is also expensive in the CR market. b) companies administration clause allow for the addition of children as Sub directors and Sub-Beneficiary owners, who acquire total company control in case of death of the company´s Principals (the parents), thus making it easier to convey or sell the property and repatriate the equity, under the authority of the Judge of the succession (probate) process of the Decedents´ jurisdiction. c) companies can be used to set up and run a bank account, for example to receive property rental income and make maintenance expenses online, including real estate taxes; with no limit or cap on the sum of money allowed to flow through the account; whereas foreign property owners with no RESIDENCY, are capped to usd2,000 per month approximately in most CR banks. Note must be taken on the cumbersome anti – money laundering laws of CR, that regulate any wire or transaction above USD10,000; but this has nothing to do with banking as a company or as a physical person.
3. Tax related regulatory compliances: as of NOVEMBER 2022, three tax related regulatory compliances are mandatory on a yearly basis, for the existence and operation of a Corporation or an LLC:
a) Corporation or Company tax: this is a flat rate, tiered company registration tax, proportionate to a percentage of the base salary of an administration clerk (usd800 aprox), which for non active entities that own real estate passively, is currently about usd120 due in FEBRUARY each year. The applicable law is Law of Juridical Persons´ Tax number 9428 (and its precedent repealed Law number 9024), it establishes the obligation to pay the tax during the month of February each year, late payment or lack of payment results in administrative immobilization i.e. the company becomes “frozen” by the Mercantile Registry and, on the 2nd or 3rd year of tax arrears the Registry dissolves the entity administratively and puts a tax lien or “hipoteca legal” on the assets owned by the company in the National Registry: land or cars for example. The solution to this problem is to pay the taxes in arrears with interests and either: i) apply for a company re inscription or reinstate its legal validity before the Mercantile Registry, through the means of ex*****on of a petition by the company director or the shareholders, before a CR Notary Public who files and records the petition; or ii) to appoint an Executor for the company´s liquidation with authorization to sell or allocate company assets.
b. Non – active company income tax declaration: while previously to 2022, non active (non income generating) companies or corporations were regarded as irrelevant for the CR Revenue administration (www.hacienda.go.cr), which only dealt with tax active companies which executed or performed active economic business like run a hotel, bar, restaurant or store; this scenario changed with the introduction of the capital gains tax and capital rents tax, under the law that reformed the CR Income tax law: Law for Strengthening of Public Finances Law number 9635 of DEC 2018 and its simplification Law number 10160 of MARCH 2022, which amended article 2 of the Income Tax Law of CR, to include non active companies or corporations, as actual tax payers with the obligation to declare yearly in MARCH a simplified version of the income tax return or declaration D101, to include a summary of the company´s assets, passive and capital equity. The provision of this information on a yearly basis has become relevant to CR Revenue, for the purpose of enforcing capital gains tax under the scenario of a future sale of a company asset, if applicable. The procedure and online tools to process this declaration are very cumbersome and challenging for foreigners who, do not have CR residency and a tax payer id number and online user name and password to the online processing system: ATV on the CR revenue website, therefore it is strongly advised to hire an accountant or business lawyer with a tax power of attorney, so they can produce the tax payer registration process (D 140) and the yearly income tax declaration D101. The penalty for not filing this declaration is approximately a half salary of admin clerk as indicated earlier and the entity can also become frozen or immobilized before the National Registry.
c) Central Bank Shareholders´ Registry declaration: this is an OECD - Financial Action Task Force mandated legislation: Law to enforce Fiscal Fraud number 9416 of DECEMBER 2016, which created a digital record of the identity of the final Beneficiary owners or shareholders of any legal or juridical entity, like LLC or corporation, civil partnership, association, foundation or trust domiciled in Costa Rica. The declaration must be done since the year 2019, to a special depository section of the CR Central Bank, which is the bank that prints money and has a safe vault, where the server is: www.centraldirecto.fi.cr; the procedure has to be done, digitally, by the company legal representative (president or manager) or a Proxy through a tax power of attorney, which is granted before a CR Notary Public protocol book of indentures and recorded, on a case basis, with the Central Bank section by the Notary. The declaration has to attest the data is issued, based upon the records of the company´s Shareholders´ Registry book which is the only legal record of the identity of the shareholders or Beneficiary owners (pursuant to article 140 of the CR Code of Commerce). If the shareholders are foreign or offshore entities, their respective shareholders need to be disclosed or their respective legal representatives are presumed to be the shareholders. The only two exclusions of the law are foreign holding entities that are publicly traded companies or based in a jurisdiction where “bearer” shares operate, in which case the CR legal representatives are presumed to be the shareholders. The only possible legal uses for this data are for anti-money laundering law and tax law enforcement, under the request of a jurisdiction authority like a Tax or Criminal court, under the due process of law. There are criminal, civil and administrative penalties for the clerks who access, share, disclose or disseminate this information illegitimately. Thus this information cannot be accessed nor used for civil, commercial or divorce judicial proceedings, as their nature would be of illegal evidence.
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