All the rivers flow into the sea, Yet the sea is not full…

As most of you should know by now (I hope), President’s Chinchilla administration has proposed some new tax laws. The most ambitious was set aside by the Constitutional Court, but another one, the tax upon existing corporations did pass and entered into effect, April 30th 2012.

However, the law was drafted and approved in such a hurry that it is full of inconsistencies, and there are already several requests –before the Constitutional Court- to declare it unconstitutional.

For example, in my opinion the section of the law that imposes the responsibility to pay the tax upon the President of the Board, is totally illegal.

Why “Mr. X” will have to pay the taxes due by a reluctant “Company Y”, if both are equally considered citizens with a total separation of personalities, responsibilities and patrimony?

More, the lack of proportion of the tax is aggravating, your little holding company, that owns a car that is worth $20.000.00, will have to pay the same as the Coca Cola Company, or Intel? It does not seem rational, and for that mere principle the Court has declared most of the penalties of the Traffic Law invalid.

Another issue is the imposition of the law upon the Public Registry to function as the tax collector, which is not –at all- the responsibility of any Registry. It should record legal deeds, only that.

But the law states that the Registry will not allow any company, in arrears on the tax, to obtain any documents related to it, nor can buy, sell, or perform any corporate changes.

As well, assets recorded to such companies, will be frozen and seized as means to pay the tax debt.

Also, the law says the tax will be half for companies considered “inactivas” (non-active) before the Income Tax Office (Tributación).

Thus it has been a hassle for the Registry to know what on earth the definition of “inactivas” is for Tributación.

The lack of activity is supposedly related to such “holding” companies, which have not undertaken any commercial activity, thus have never filed income tax or sale returns. Tributación finally produced a list with a classification of all companies in one of the two categories: Activas or Inactivas.

But there are several companies, that appear in the “active” side of the list, but have never performed any business, or for any other reason (the wrong box was checked the first time; they had business but closed them many years ago, etc). Well they will have to pay the full amount of the tax, and if the company refuses, the President of the Board will have to…

Even more, the law has a few “Transitorio” articles. Such are those articles in a law that serves the purpose to help implementation of the law in the first months.

Well in the first one it says the tax becomes due on April 30th (3 months after the publication of the law in the official Gazette), but in the second, it says all companies will have the right to be dissolved within 3 months of the due date (that is until July 30) without having to pay for the tax, and the third transitorio states that companies will have the right to transfer its assets without having to pay transfer taxes, if such transfer is done within 6 months of the due date…

Thus the Public Registry has issued already 4 or 5 memos, on how it this mess going to work, modifying the previous one, upon the roar produced as reaction to each memo.

Just as an example, to transfer a house out of a company in order to dissolve the company would be exempt of all transfer taxes, and should be received by the Registry until the last day of the 6 months pass by, however, this past Monday, a new memo was published by the Registry saying that in order to benefit from the tax free pass, a note in the transfer deed shall be made, stating the number of book and entry assigned to the corporate dissolution deed.

That is, -I guess- that you should transfer the assets, then immediately dissolve the company, file the dissolution deed to the Registry, before filing the transfer deed, stating in the transfer deed that the company was dissolved and filed before the Registry, and then file the transfer.

Aha… imagine the mess it will create, when (and it is just a matter of when not if) one of those transfer deeds, comes back from the Registry with some mistake that needs to be corrected before allowed to be recorded, correction that should be done by a manifestation of the President of the Corporation, but alas, there is no more company, because it was dissolved!

Then the asset will be in the limbo for ever and ever…

One final question: Should you pay the tax right away if you have not done it yet?

I would rather wait a few months, the penalty is insignificant, just to wait for the Constitutional Chamber to decide, and figure out if they declare the tax unconstitutional, because in previous cases, when they have done so, no obligation is imposed on Tributación to give back the taxes collected…

However, if you have one or more companies that you are not using, are will not be of use in the near future, my recommendation is to dissolve them and gain the peace of mind to know you can send this new law, the interpretations of the Public Registry and all legal considerations of the Constitutional Court, right to …

At the end, taxes are like rivers they “flow into the sea, Yet the sea is not full…To the place where the rivers flow, There they flow again”. (Ecclesiastes 1:7)…

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