Some Legal Considerations for Living or Investing in Costa Rica
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Registration System. Costa Rica has a centralized registration system called National Registry (“Registro Nacional”) where corporations, vehicles, mortgages and real estate transactions are registered. The Costa Rican registration system is very advanced and the Registry records not only documents (like other Registries all along other countries), but it also registries rights inherent of those documents. A very timely and strict system records the transactions presented giving legal certainty to the legal acts.
Most properties in Costa Rica are registered in a computer system and each property has an identification number called: "Folio Real". For different reasons there are some properties that are not registered meaning they don´t have a Folio Real number and therefore cannot be tracked properly in the Registry.
Due Diligence. Before purchasing any property or even before seriously considering buying it is advisable to perform a detailed study before the Public Registry. Such study should include not only the folio real with it measurement, boundaries, ownership, location, survey plan, annotations, encumbrances and liens, but also a study of the transfer chain since the property was originally registered.
Pending registration (“Anotaciones”) may be due to filing of incomplete or erroneous documents, lack of payment of taxes, etc. A document filed on a property while an annotation appears will not be registered until the annotated document or documents are either registered or removed following a special procedure.
There are properties on sale that have actual ownership rights and another ones have only a right of possession or occupation rights. In the first case the property is registered, but in the second case the land hasn´t being registered and a study of ownership cannot be performed before the National Registry.
When you buy a business it is important to perform a more detailed study including: lease contracts, employment contracts, sales, income and property taxes paid to date, permits in place such as: Municipal permits, liquor licenses, Ministry of Health authorization, Insurance, Social Security, among others. Of course the advice of a lawyer and accountant are preferable in any case.
Property transfer require for buyer and seller to sign a deed before a Costa Rican Notary Public (whose concept is different than the one in many other countries such as the United States or Canada and is required to formalize all transactions dealing with real estate) and for such deed to be recorded at the Public Registry.
Although titled land can be purchased in Costa Rica in the name of an individual as well as in the name of a company, and foreign ownership is fully permitted, it is advisable to purchase property through a corporation. This structure allows having flexibility and more predictability on areas ranging from estate planning, tax management, and representation.
Concession Land. Like in many other countries the maritime zone (“Zona Marítimo T errestre”) land is owned by the Government and given in lease to third parties, this is known as concession. This concession grants the authority to a private party to use the land for a renewable period of time. Almost the 95% of maritime zones in Costa Rica are concessions and therefore have special requirements regarding the zoning, occupation and density, among others.
Cost of property transfer. In general, the cost involved in a real estate transaction are divided in 3 categories: a) Transfer Tax (1,5% of the purchase price); b) Transfer Stamps (1% of the purchase price) and c) Legal Fees (1,25% of the purchase price). So the cost are: 2,5% in tax and stamps plus a 1,25% legal fees. If you purchase shares of the owning entity (no transfer deed as explained bellow) the only charge for the transfer is the legal fees.
Title Insurance. Title Insurance works the same that in other latitudes such as Canada and United States and although it is not necessary is advisable. In Costa Rica some of the title companies are: Chicago Title, Land America, Stewart Title, among others, you can get this service trough your lawyer in Costa Rica.
Maps. Each property must have a registered map or survey (“Plano Catastrado”) to be locating the property in the field with exact measurement, actual boundaries, and description of buildings or structures. No property transfers can be made if the land does not have a registered map, and such map must be quoted in the transfer deed. If such map does not exist, it must be made by a specialized registered surveyor (“Topografo”), and then the transaction can be effectively achieved.
Buying Property trough acquiring the corporation (share transfer). Buying the shares of the company that owns the property instead of transferring it through the Register is a common practice. This way the seller transfers the shares of an existing company that owns the property to be purchased, instead of transferring it through the Public Registry to a third party. In this case a transfer deed is not necessary but other legal documentation such as: a purchase sale agreement of the shares, change the board of directors (so the buyer can take control of it), several entries to the legal books and endorsement of shares, among others must be performed.
Although the share transfer system may sound attractive at first sight, since it allows to save money in transfer taxes, we do not always recommend to take this path and advise to transfer property through the Registry under the standard procedure of a notarized deed. When you acquire the shares of a corporation in Costa Rica, as in most other countries, you do not only get the company’s assets (in this case, mainly, the property) but also its liabilities, and there is no mechanism to satisfactorily list them or rule out their existence. Such liabilities, if existent, would directly affect the property being acquired.
Property Taxes. Every property owner is obligated to pay its property taxes; otherwise they might be putting in great risk their investment. The Costa Rican Government recently passed a law that expedites all judicial collection procedures (including taxes) and might be subject to a foreclosure.
In Costa Rica, land taxes are collected by local governments corresponding to the county where the land is located, which are denominated “Municipalities” (“Municipalidades”), and these moneys are directly used by them.. These taxes are paid at a rate of 0.25% of the declared value of the property. This tax is due quarterly and a strict record of payment should be held by each owner. The payment of taxes do not require physical presence of the owner in the country, the payments can be made with the help of your lawyer.
We advice that prior to the purchase of the property the buyer makes sure these taxes are paid up to date, if not the new owner must have to cover them for the lack of payment of the previous owner. Furthermore if what you are buying is an apartment or a lot in condominium property you must check if the taxes are included in the monthly condo fees, since they are usually not included in such fees and the buyer must pay the property taxes directly to the Municipality.
Corporate Taxes. The Fiscal Year (“Período Fiscal”) in Costa Rica goes from the 1 of October to September 30 . Local s t t h corporations do not always need to file income tax statements at the end of each fiscal year (September 30), especially if there are only for holding purposes. A case by case study should be performed in order to determine this.
Nevertheless, whether a company declares and pays income tax or not, and applicable to all Costa Rican corporations, a special tax called “Timbre de Educación y Cultura” must be paid each year. This tax is relatively low (20 dollars a year). If payment is not made, penaltiesapply and the corporation will not be in good standing.
In Costa Rica there is not Capital Gain tax as it is in United States. The only cost on selling property is the transfer tax of (2,5% indicated above) that is usually carried out by the buyer. Regarding the income tax if the corporation is for holding purses or estate planning, it won´t be subject to income tax, but if the buyer carries a business such as renting the property and having an income with it, the company might be subject to the payment of this tax. In such case a specific consultation is advisable to determine if other taxes like: sales tax or tourism taxes are also applicable. The corporate rate for income tax goes up to 30% (the highest bracket).
Corporations. The typical limited liability company (“Sociedad Limitada” , “LT DA. ” or “S.R.L”.) must be incorporated by at least two people before a Costa Rican Notary Public. After such incorporation, the shares may be transferred and it is legally feasible to have a corporation in which one person is the sole owner of all shares.
The incorporators must choose a name and a Board of Directors (which, by law, must have a minimum of three members, denominated: President, Treasurer and Secretary) and a Comptroller.
Other crucial issues to be decided are the social capital of the corporation; the number of shares composing such capital, (it is advisable to have a number of shares that would permit future distributions of the participation in the company) and the representation of the newly formed company (there must be at least one representative of the company with powers of attorney to act on its behalf).
The incorporation deeds, as well as all changes to the company’s By-Laws are recorded in the Public Registry, where any person has access to them. However, all transfers of the company's shares are recorded in the Shareholders Registry Book, which is kept by the corporation and is only available to company's shareholders and officials; all other parties can only review it with a Court order.
Residency. Costa Rican Immigration Law allow foreign citizens to become residents in specific cases that range from having a family relationship with a local citizen (marrying a Costa Rican, having Costa Rican children) to demonstrating the government that the applicant will not be a burden for the country, mainly showing sound resources to be established in Costa Rica and, in some cases, to create a business here. Our mainly recommended regimes are the resident pensioner and the resident “rentista” status. The resident pensioner status is used for foreign citizens who have retired from government service or from selected private entities and receive from them a permanent life retirement income of no less than US$600.00 per month (this is in total for all the familiar nucleolus). Such amount must be transferred periodically to Costa Rica, and its reception and conversion into colones at designated institutions has to be demonstrated. The resident “rentista” regime is applicable to all foreigners, regardless of age, receiving a fixed monthly income of no less than USD$1.000,00. per person, this means that if a couple wants to apply they must have in total an income of USD$2.000,00 a year. The funds of the deposit can come locally or from abroad and their conversion into colones at designated institutions has to be demonstrated as well.
Like many others you probably will get in love of Costa Rica and planning properly your investment is one of the best decisions to enjoy this beautiful country.
BVSQ Abogados Team
DISCLAIMER The content of this document is not intended to be a legal advice, they are for informational purposes only and do not constitute any type of advertisement. The accuracy, completeness or adequacy of such contents is not warranted or guaranteed. We recommend to ask for an advice of a specialized professional in the legal area.