Costa Rica | Dormant Entities and the Tax Exposure Arising from Unexplained Increases in Net Worth
Dormant entities have traditionally been used in Costa Rica as legal instruments for asset protection and estate planning, particularly by family groups, multinational corporations, and individual investors. Although these entities do not engage in business activities, they often hold assets and rights that, in some cases, have not been properly disclosed. This lack of transparency poses significant challenges for the integrity of the tax system.
Since 2018, following the entry into force of the Law for the Strengthening of Public Finances (Law No. 9635), the scope of taxpayers subject to income tax has been expanded to include dormant entities.
The reform to Article 2 of the Income Tax Law and its regulatory development under Article 7 of the corresponding Regulation mandates that these entities, even if they do not pursue profit-making activities, must register with the Tax Administration and file an annual informational return disclosing their assets, liabilities, and equity. Initially, this obligation was to be fulfilled using forms D-135 and later D-101, which led to confusion, increased compliance burdens, and repeated deadline extensions. In response, Law No. 10160 was enacted, simplifying this requirement by allowing a summarized declaration only in cases where changes in the entity’s net worth occur. Currently, compliance is carried out through form D-195, with a filing deadline of April 30, 2025, in accordance with Resolution MH-DGT-RES-0007-2023, which remains in force.
Despite these regulatory improvements, one of the most significant risks facing dormant entities is the potential for the Tax Administration to treat any asset whose origin cannot be properly documented as an unjustified increase in net worth. This concept, governed by Article 5 of the Income Tax Law and Article 14 of its Regulation, means that any asset, right, or increase in equity not supported by previously declared income or exempt income may be deemed taxable. If the acquisition date or source of funds cannot be established, the law permits the assumption that the increase occurred during a period under audit—effectively creating a scenario of factual imprescriptibly, contrary to core principles of legal certainty and tax legality.
The Critical Importance of Asset Reporting
The annual declaration is a vital mechanism through which dormant entities can shield themselves from the presumption of undeclared income. This obligation should not be taken lightly. Failing to file form D-195, or filing it without proper documentation, may result in administrative penalties and significant tax reassessments, as any unsupported asset may be presumed to represent taxable income.
Unjustified increases in net worth, referred to as "anti-avoidance norms” or "closing provisions,” enable the Tax Administration to infer the existence of undeclared income when there is evidence of wealth inconsistent with previously reported earnings. Although this presumption is rebuttable (iuris tantum), the burden of proof lies entirely with the taxpayer, who must substantiate the origin of the funds, demonstrate their tax-exempt nature, or prove they have already been taxed.
This is precisely where solid accounting practices play a crucial role. Costa Rican commercial and tax regulations require all legal entities—including inactive ones—to keep accurate accounting records and supporting documentation for a minimum of five years. This requirement isn’t just a box to check; it offers essential protection during potential tax audits. Without proper documentation, taxpayers not only breach compliance but also risk facing presumed taxable income, which can lead to steep tax assessments.
Presumption of Taxable Income: The Core Issue
Article 14 of the Income Tax Regulation, as currently drafted, empowers the Tax Administration to attribute unjustified increases in net worth to any audited tax period—even if the precise timing of the alleged acquisition or concealment of income cannot be established. In practice, this can make certain cases effectively imprescriptible, particularly when assets were acquired decades ago, at a time when there was no legal obligation to report them. The result is a troubling form of de facto retroactivity, where wealth of uncertain origin is treated as present-day taxable income.
This interpretation has drawn strong criticism for undermining core principles of tax law—particularly the principles of legality and ability to pay. Imposing tax liability solely due to a lack of documentation for an old asset is unreasonable, especially when there is no objective evidence linking the asset’s acquisition to undeclared income. In such cases, the presumption lacks a sound evidentiary basis, shifting from a logical tool of inference to a legal fiction that unfairly harms taxpayers.
The concern is even more pronounced given that many dormant entities were created solely to hold and protect family or personal assets, often during periods when there was no requirement to record each acquisition in the accounting books. Applying the presumption of unjustified enrichment without requiring the Tax Administration to establish at least a minimal factual foundation transforms this legal mechanism into a risky instrument of retroactive enforcement.
Key Takeaways
The annual informational return for dormant entities has evolved into an essential safeguard against tax reassessments based on unjustified increases in net worth. It is far more than a mere administrative requirement; it is a legal obligation that, if properly fulfilled and documented, provides crucial protection from significant tax liabilities.
Given the current legal framework and the Tax Administration’s interpretation of Article 14 of the Income Tax Regulation, non-compliance or incomplete disclosures can have disproportionate consequences, exposing entities to the risk of having legitimately acquired assets treated as undeclared income.
The legal presumption under Article 14 aggravates this risk by allowing the attribution of taxable income without establishing a clear timeline or causal link between asset ownership and undeclared income.
In this context, it is vital for all entities—regardless of whether they engage in commercial activity—to maintain up-to-date and accurate accounting records, in line with the Commercial Code and tax regulations. Robust accounting practices not only ensure compliance with formal duties but also serve as the primary means of proving the origin of assets, liabilities, and changes in equity.
Moreover, all capital contributions, whether in cash or in kind—must be properly documented through contracts, notarial deeds, receipts, or accounting entries. Failure to adequately support these contributions may lead to their classification as undeclared income, triggering tax consequences that could have been avoided with diligent documentation.
In conclusion, maintaining proper accounting and keeping clear, reliable records of contributions and assets is not just a legal obligation, it is a strategic defense mechanism against potential tax assessments based on presumed income. In an era of heightened scrutiny of dormant entities, proactive compliance through strong accounting and documentation is the most effective protection.
The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.