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Everyone conducting business in Costa Rica needs a license that is issued by the municipality where they reside. The term used here for the permit is a ‘patente.’ The rule is regulated by Article 79 of Law 7794. Professionals incorporated in their respective legal associations are exempt.
Article 79 is concise and translates by Google into English as follows:
“To exercise any lucrative activity, the interested parties must have a local license, which is obtained through the payment of a tax. This tax will be paid during the entire time the activity is exercised or for as long as the license is active, even if the activity has not been carried out.”
Most people believe a business license is only required if a physical place exists to conduct commercial activity. “Not true,” states attorney Marco Retana. “The spirit of Law 7794 recognizes municipal infrastructure, and Article 79 gives municipalities a way to collect money to pay for it,” he clarified.
Does this include virtual businesses like real estate agents working out of the trunk of their car with no physical office? Yes it does, says a municipal representative. Some municipal officials find new life in the law by realizing it also includes people doing business without a place to call an office, store, or shop.
All virtual businesses are targets for new revenue, not just big-ticket items like property sales. Many women make things in their homes, from popsicles to bathing suits. Men lean toward services for construction work and fixing things. Both groups offer their wares or services online in Facebook groups and have no place they call an office.
Is this law enforced? Businesses operating out of a physical place must have their license posted for the public to see. Municipal inspectors enforce the rule. Virtual activities are harder to find.
The tax department has the Dirección de Inteligencia Tributaria as their C.I.A. Municipalities have internal workers trolling Facebook, Instagram, and other websites looking for those advertising products and services that do not have physical places of business. An inspector is assigned to the case when an activity is suspected.
These new efforts should not be a big surprise.
The government of Costa Rica is in dire straits. Public debt was 45 percent of gross domestic product in 2016, and the country's Standard & Poor's rating is currently BB- with another downgrade on the horizon. Moody's and Fitch have equally bad views of the country's financial situation.
Do most virtual business operators in Costa Rica have a business license? “Are you kidding?” said a real estate agent reached on his cell phone when asked if he had a municipal business license in the area he works. He preferred not to give his name for the quote.
It is not hard to get a license. It does involve some paperwork. The strange part is, the process is set up for a physical place, not a virtual business. Some requirements include a copy of a lease, a plat map of the location, certifications from the National Registry and a health permit.
A real estate agent who went to request a ‘patente’ for his area asked about the requirements, especially the health permit, since it did not apply to his virtual business. As it turns out, the municipal officials were as perplexed as he was and said, they would work around the documents.
Of course, they will. The city hall wants their piece of the pie, which is around point 25 percent or .0025 of gross earnings as reported on a person’s national income tax return. The amount varies depending on local rules because municipalities have some autonomy to set their taxes. Activity type and other criteria also may influence rates. Some areas, like San José, have an increasing scale over time as a business grows.
Income tax returns in Costa Rica as a general rule are due Dec. 15. Municipal tax returns are due Jan.15. Not filing or non-payment meet with severe penalties and interest. If a municipal suspect someone is cheating, they have the authority to get information for verification from Hacienda, Costa Rica’s tax department.
Why now? Law 7794 is from 1998, 20 years ago. The answer goes back to Costa Rica is going broke. The current strike that has lasted around 85 days has not helped matters. Public infrastructure is suffering. Municipalities are responsible for their respective districts. When their officials look at local revenue and expenses and see red, they start searching for new sources of income. Property taxes and licensing are where the money is for them. Better enforcement of Article 79 is a logical drive to capture more taxes. Licensing is a fancy word for taxation.
What happens if a virtual business does not sign up and get a license? The answer is: The activity will be close. Most people have seen the nasty signs across the doors of a business with ‘clausurado’ stuck on it. The word means closed by some authority for nonpayment of something.
So, how does an authority close a virtual business? This is an interesting dilemma for the powers that be. The possibility exists, a municipality could penalize an individual for tax evasion by not signing up for a license and for not filing a tax return on Jan. 15 each year. This effort would involve much work, and local city halls usually stray away from excess activity.
It is a personal decision for a virtual business person to wrestle with: to get or not get a ‘patente’ with the local municipality, weighing the consequences of business closure and tax evasion.
Article first published in A.M. Costa Rica on December 3, 2018.
