San José, Costa Rica, since 1956

New Luxury Tax Causes Headaches

The tax on luxury homes (TLH) entered into force Oct. 1. That means taxpayers now must record all their data in the unified registry kept by the Finance Ministry – including an account number from which the TLH would be paid.

Such registration is a condition precedent to filing a tax return. The Finance Ministry issued resolutions requiring every taxpayer to register, file the return and pay the tax electronically.

The TLH is an independent and provisional tax, destined to be incorporated in the general national budget, but earmarked for the Housing Ministry with the purpose of granting homes to families living in extreme poverty. The law states that no more than 7 percent of the funds collected should be spent on administrative costs. As an independent tax, it has its own tax base, tax point, tax events and rates, as well as a special, and somewhat complicated, procedure to calculate the tax. Beginning last Oct. 1, the tax will be levied for a period of 10 years.

People affected by the TLH are those owners or co-owners of real estate registered in the Public Registry, owners of rights over real estate, concessionaries or occupants of Maritime Zone or other government real estate, destined for residential purposes with a value greater than ¢100,000,000 ($172,115). For purposes of the TLH, the residential category includes occasional use, regular use, or recreational use of the property. Real estate on which no fixed buildings or permanent installations have been built would not qualify for the TLH. Two different steps must be followed to determine the value of the property. These steps should be completed following the valuation parameters determined by the tax authorities.

The first step is to calculate the value of the construction based on the material, finishes, date of construction, and other parameters found in the Manual de Valores Base Unitario por Tipología Constructiva.

This manual is used by tax officials to conduct tax valuations as well as by the municipalities to determine the tax base for purposes of the real estate tax. The manual is a rather technical document and it contains over 20 different housing categories. The highest value for houses does not exceed $850 per square meter, but all recreational and other fixed assets should be added and valued accordingly (sauna rooms, barbeque areas, swimming pools, access roads, common areas in the case of condominiums, etc.).

A depreciation factor, based on the Ross-Heidecke method, is considered.

Once the value is obtained, the condition of the taxpayer is determined. If the value exceeds ¢100,000,000, the owner must register as a taxpayer. If the value does not exceed that amount, the owner does not have to register or pay the TLH (except for other market conditions that might make the asset exceed the threshold). This value determines whether a person must pay the tax or not, but it does not constitute an exempt amount.

Once it is determined that the value of a building or buildings exceeds ¢100,000,000, the second step is to determine the value of land, according to the Mapas y Matrices de Zonas Homogeneas, which can be found on the Finance Ministry’s Web site. These are zoning charts that contain the information of the characteristics of each lot or property and the base value, established according to each zone identified on the map. However, not all districts are included in these maps.

In such cases, the value of land must be obtained from the value of an average lot with an area of 900 square meters and a value of ¢60,000, after applying all the correction factors to value a lot. These factors include location, services available, road frontage, area, topography, level, type of road and other relevant factors.

The value thereby obtained (sum of the construction value and valuation of land) would be used to file the tax return. Of course, the return must be filed electronically, using form D-179.

The TLH is an annual tax and must be paid on or before Jan. 15 of each year. Since the TLH took effect on Oct. 1 of this year, the taxpayer must file the first return and pay the tax on or before Dec. 31, 2009, for the Oct. 1 to Dec. 31 quarter. The value determined would be used for calculating the tax on 2010, 2011, and 2012 unless an event that triggers a revaluation process occurs (mortgage, sale for a higher value, destruction of the asset and similar events).

Two weeks later (that is, on or before Jan. 15, 2010) the tax must be paid again for the fiscal year 2010.

A table with marginal brackets may be found in the Finance Ministry Web site and will be used to calculate the tax. The percentages range from 0.25 percent to 0.55 percent and must be calculated without any exempt amount and marginally.

Excessive (and, as I view them, unconstitutional) sanctions apply for not filing the tax return or erroneously calculating the tax. These range from five to 10 times the tax charged, independent of the payment of the tax, plus interest and fines.n

Alonso Arroyo is the lead tax lawyer with BLP Abogados in San José. A graduate of the University of Costa Rica, Arroyo holds a master’s degree from HarvardUniversityLawSchool and is chairman of the tax affairs sub-committee of the Costa Rican-American Chamber of Commerce.

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