ACTIVITIES OF RENTALS DECLARED THROUGH FORM D-125 AND INTEGRATION OF INCOMES DUE TO LEGAL ALLOCATION
MH-DGT-OF-119-0012-2023
San Jose, February 23, 2023
Subject: Consultation protected under Article 119 of the Code of Tax Rules and Procedures.
Factual Background:
The consultant states that their client is registered in the activities of renting commercial premises and shopping centers, as well as in the hotel industry. They declare and pay the income from renting commercial premises monthly using the self-assessment form D-125.
The leased commercial premises are fixed assets used in the hotel activity, and the company has declared and paid the corresponding tax for this throughout the fiscal year 2022.
Specific Consultations:
The consultant presents the following questions:
- By self-assessing and paying the tax obligation resulting from the income derived from real estate capital using form D-125, should it be understood that this declaration constitutes a one-time and definitive payment?
- As a consequence of the previous question, do we understand that the timely filing of form D-125, which includes the monthly income from rentals, extinguishes the material tax obligation and any other related tax relationship that may arise from it? In other words, should the income derived from rentals not be included in the income declared in form D-IOI for profit income?
- If form D-125 is an self-assessment declaration and not a withholding, since it is not a withholding tax on these amounts paid, should these amounts not be integrated into the Income Tax and the amounts paid by my client cannot be used as an advance payment for Income Tax?
Criteria of the General Taxation Directorate:
Regarding this matter, the General Taxation Directorate has expressed that, as a general rule, in accordance with articles 27 and 27 bis of the Income Tax Law (LISR), the income obtained from capital is subject to income tax on profits and losses from capital gains. However, according to articles 1, 1 bis, 27 bis, and 28 of the LISR, as well as articles 4, 5, and 6 of its regulation, there are exceptions established, indicating criteria in which capital income should and/or can be declared within the Corporate Tax (ISU) and not in the income tax on profits and losses from capital. Regarding this, the following has been pointed out:
A. Integration of incomes by allocation (legal allocation):
The legal reform of the Public Finances Strengthening Law (LFFP) introduces a criterion of globalization by allocation, according to which the income and capital gains from assets or rights related to the taxpayer’s business activity must be taxed according to the provisions of the Corporate Tax (ISU). In this sense, articles 1, 1 bis, 27 bis, and 28 of the LISR, as well as article 4 of its regulation, regulate the treatment of capital income that is subject to the ISU and must remain in that tax and not in the income tax on capital gains, through what is called “Integration of taxable income.” Conversely, when the assets used to generate income and/or capital gains are different or can be separated from the part that generates income subject to the Corporate Tax, the incomes should not be integrated, as they are not related to the taxpayer’s business activity, as provided in article 1 bis, subsection 3) of the LISR. The capital income and capital gains derived from these will be taxable according to the provisions of the income tax on profits and losses from capital.
B. Transfer to the Corporate Tax as an option for the use of a right (voluntary allocation):
The regulations also provide for another scenario in which the taxpayer can choose to stay or transfer to the Corporate Tax. In this regard, the regulatory norm recognizes the right of the taxpayer to choose and decide whether they want to declare their income derived from real estate and/or personal property in the regime of the income tax on profits, not because of the allocation of assets, but because the norm gives them that right as long as they meet the requirements established for this purpose. This consists of having at least one employee whose functions are necessary to obtain the income and/or capital gains, and the employee must be registered with the Costa Rican Social Security Fund (CCSS) (a requirement that aligns with the obligation in the Corporate Tax to be up to date with the payment of social security for employees to deduct the salary expense, in accordance with article 9, subsection j) of the LISR). Additionally, they must inform the Tax Administration of their desire to be affected by the Corporate Tax and that they have an employee hired for the purpose of generating income and/or capital gains.
In this regard, the General Taxation Directorate issued resolution DGT-R-058-2019, which establishes the obligation for the taxpayer to inform the Tax Administration that they will declare their income from real estate and/or personal property under the tax on profits, either because it is subject to the tax or because they meet the requirement of having at least one employee. This is established in article 1 of the resolution.
Therefore, considering what has been expressed by the consultant, indicating that the leased commercial premises are fixed assets used in the hotel activity, it is evident that the assets used in the hotel activity are also used to generate income and/or capital gains, so they must apply the integration of income by legal allocation.
Based on the specific consultations raised and the analysis presented, it is clear that in this case, the use of form D-125 does not apply. Instead, the integration of income by legal allocation should be presented using form D-101, starting from the fiscal period 2024, while duly informing the Tax Administration. For previous periods and the current fiscal period of 2023, the consultant must continue to report taxes as they have done so far, without being able to use the income tax paid for real estate capital as an advance payment for the Corporate Tax, which indeed has a one-time and definitive character.