Tax Risks for Inactive Companies and Holding Structures in Costa Rica

Tax Risks for Inactive Companies and Holding Structures in Costa Rica

A company that does not issue invoices is not necessarily a company without obligations. Intercompany loans, capital contributions, dividend distributions, and undocumented bank transfers may become tax contingencies when there is insufficient supporting evidence.

In Costa Rica, it is common for family-owned businesses to use several legal entities to organize their assets. One company may own real estate, another may hold investments, another may manage equity interests, while a separate company conducts the operating business.

These structures are legitimate and may be useful for corporate organization, asset protection, and succession planning. The risk does not lie in having them, but in managing them without proper traceability, internal controls, or documentation demonstrating the economic substance of each transaction.

What Is an Inactive Company?

An inactive company is a legal entity incorporated in Costa Rica that does not carry out a profit-generating business activity.

However, being inactive does not mean that the company disappears from the tax system. Depending on its status and the assets it owns, it may still be subject to formal, registry, reporting, and tax obligations.

An inactive company may own:

Real estate.
Vehicles.
Financial investments.
Shares or ownership interests in other companies.
Intellectual property rights.
Other capital or investment assets.
Because these entities continue to hold assets, they may remain subject to reporting and compliance requirements under Costa Rican law.

What Is a Holding Company?

A holding company is a legal entity whose primary purpose is to own shares, quotas, or equity interests in other companies.

It does not necessarily conduct its own operating business. Instead, it may be used to centralize ownership within a corporate group, manage investments, facilitate succession planning, or organize family wealth.

The use of a holding company is entirely legitimate. However, when it frequently transfers funds or carries out transactions with related companies, the need for proper documentation becomes significantly more important.

The Costa Rican Tax Administration may review matters such as:

The source of funds.
The economic purpose of the transactions.
Intercompany loans.
Shareholder contributions.
Dividend distributions.
The identification of ultimate beneficial owners.
The consistency between accounting records, bank transactions, corporate documents, and tax filings.
The more complex the corporate structure, the more important it becomes to maintain evidence supporting the economic substance of each transaction.

Five Common Tax Risks

1. Intercompany Loans Without Proper Documentation
It is common for one company within a corporate group to provide temporary financing to another.

The issue arises when funds are transferred without formally documenting the nature of the transaction.

An intercompany loan should generally include:

A written loan agreement.
Identification of the parties.
The amount and currency.
The repayment term.
Applicable financial conditions.
Consistent accounting records.
Banking evidence of the disbursement and repayment.
Without proper documentation, a transfer may be difficult to distinguish from a capital contribution, taxable income, a shareholder withdrawal, or an indirect distribution of profits.

It is not enough to state that the transaction was “a loan between related companies.” There should be evidence showing that the transaction was genuine and carried out according to the agreed terms.

2. Capital Contributions Without Adequate Traceability
Shareholders often contribute funds to purchase assets, cover expenses, or strengthen a company’s liquidity.

However, depositing money into a corporate bank account does not automatically make the transaction a properly documented capital contribution.

It is important to determine whether the funds correspond to:

A formal capital increase.
An additional shareholder contribution.
A shareholder loan.
Payment of an obligation.
Reimbursement of an expense.
Another type of transaction.
The accounting records, corporate resolutions, and bank transaction should all reflect the same economic reality.

Evidence regarding the source of funds should also be retained, particularly when the amounts are significant or the funds are transferred from abroad.

3. Improper Dividend Distributions
Dividend distributions require legal, accounting, and tax coordination.

Common mistakes include:

Distributing profits that do not exist in the accounting records.
Treating a withdrawal of funds as a dividend without proper approval.
Failing to prepare the required shareholders’ resolution or corporate minutes.
Failing to apply the appropriate withholding tax when required.
Recording a dividend distribution that does not match the bank transaction.
Paying dividends to a person who is not properly identified as a shareholder.
Costa Rican tax law establishes specific rules for dividend distributions and applicable withholding obligations. Each payment should therefore be reviewed based on the characteristics of the shareholder, the company, and the transaction.

4. Inconsistent Ultimate Beneficial Ownership Information
The Transparency and Ultimate Beneficial Ownership Registry, known in Costa Rica as the Registro de Transparencia y Beneficiarios Finales, or RTBF, is used to identify the individuals who ultimately own or exercise effective control over a legal entity.

Inconsistencies may arise when the information reported does not match:

The shareholders’ registry.
Transfers of ownership interests.
Corporate resolutions.
National Registry information.
The actual corporate group structure.
Tax filings submitted by related companies.
Keeping RTBF information accurate, current, and consistent with corporate records is essential to reduce the risk of observations or inquiries during a review.

5. Assuming an Inactive Company Has No Obligations
This is one of the most common misconceptions.

A company may not issue invoices or generate operating revenue and may still own assets, maintain bank accounts, hold investments, or remain subject to registry and tax obligations.

Inactive status does not automatically eliminate responsibilities related to:

The Corporate Entity Tax.
Ultimate beneficial ownership reporting.
Tax registration requirements.
Documentation of assets and liabilities.
Retention of accounting and banking records.
Obligations associated with real estate or other assets.
The specific obligations will depend on the circumstances of each company. It is therefore risky to assume that all inactive entities should receive the same treatment.

Banking Traceability Is Essential

Every significant transfer should be easy to explain and supported by documentation.

Before transferring funds between related companies, the following questions should be answered:

Where did the money come from?
Who authorized the transfer?
Why is one company providing funds to another?
Is there a written agreement supporting the transaction?
How will it be recorded in the accounting records?
Must the funds be repaid?
Does the transaction create any tax obligation?
Is it consistent with the tax filings and records of both companies?
When the explanation exists only verbally, the level of risk increases.

Proper traceability means that contracts, corporate minutes, bank records, accounting ledgers, and tax filings all tell the same story.

Best Practices for Reducing Tax Contingencies

A properly designed asset-holding structure must also be properly maintained.

Preventive measures may include:

Periodically reviewing the complete corporate structure.
Clearly identifying the purpose of each legal entity.
Keeping RTBF information up to date.
Documenting intercompany and related-party loans.
Formalizing shareholder contributions.
Retaining banking evidence showing the source and destination of funds.
Confirming that all transactions are properly recorded.
Reviewing the applicable tax treatment of dividends.
Keeping corporate books and resolutions current.
Conducting preventive reviews before a tax audit occurs.
The Structure Is Not the Problem; Lack of Documentation Is
Inactive companies, holding companies, and other asset-holding structures remain valid tools for organizing businesses, investments, and family wealth.

However, it is no longer sufficient to simply incorporate legal entities and use them to hold assets or transfer funds. Each transaction should have a clear economic purpose and sufficient evidence to support it.

Effective tax planning does not consist solely of designing a corporate structure. It also requires maintaining that structure in an orderly, documented, and consistent manner.

Is Your Corporate Structure Properly Documented?

At WeSolvo, we can review inactive companies, holding companies, and transactions between related entities to identify inconsistencies, documentation gaps, and potential tax contingencies.

A preventive review may help you:

Correct outdated records.
Organize loans and shareholder contributions.
Verify the traceability of funds.
Review dividend distributions.
Prepare the structure for a potential tax audit.
Contact us to conduct a preventive review of your corporate and asset-holding structure.