by ZEWSThe transfer of real estate property in Costa Rica is specifically regulated. If you are planning to acquire a property or transfer ownership of one you already own, it is very important to understand the full implications of the law on indirect transfers of property in this country.
What are indirect transfers?
In the past, buyers and sellers often avoided the real estate transfer tax by selling shares of the existing real estate holding corporation that owned the property in question, rather than directly transferring title to the new buyer, that is, a transfer of the property itself from A to B by a transfer deed to be registered at the Public Registry.
This modality was known as indirect transfer and made it possible to avoid the costs associated with the official transfer of said property.
However, to try to stop tax evasion, the Law to Strengthen Tax Management (Law No. 9069) modified these statutes, defining indirect transfers as follows:
- In any legal transaction by which real estate is transferred directly or indirectly.
- Furthermore, it will be assumed that there is an indirect real estate transfer when the transfer of ownership and control of a real estate holding corporation takes place.
To sell the shares of a corporation that owns property, it is considered that there is legally a transfer of real estate in Costa Rica, in the same way as a direct transfer of property. With this modality, the aim is to close a legal loophole that allowed evasion of the corresponding taxes.
Legal implications
Under the new law, clear guidelines are established for indirect transfers of any property:
- A payment term: The transfer tax of 1.5% of purchase price must be paid within 15 business days after the date on which the transaction of said property was made. When that happens? That’s is still a question we are asking ourselves because technically, there is no transfer deed signed. At LandCo we understand that the date initiates at closing date when the shares of the corporation are endorsed to the new owner and the Stock Purchase and Sale Agreement is signed. One can also think that such date will start the day the new owner(s) become the legal representatives of the corporation (control of the corporation) at the Mercantile Section of the Public Registry. Interesting debate worth of further discussion.
- The Value of the Transaction: The value of the transaction must be based on the actual purchase price and cannot be less than the registered value established or shown in the property title, also known as the “Valor Fiscal” -tax valuation-. This seeks to avoid undervaluation of transactions to reduce the amount of the corresponding taxes to be paid.
- There are penalties for non-compliance: Failure to comply with these provisions may result in additional fines and penalties for such non-compliance.
- Capital Gain tax (for the purchaser in the future): when you are acquiring the shares of an existing real estate holding corporation, you are acquiring by definition, therefore, the assets and in this case a property. However, that property, when bought by the corporation, has a purchase price already registered in the title called by the Tax Authority as the “VALOR HISTORICO” which is the last known purchase price of the property. This value won’t change, so be sure to ask your closing attorney to update the value because otherwise you will end up paying 15% of capital gain tax based on the difference of that old value and the value in the future when you sell the property, which can be quite high.
Benefits of Complying with the Law
There is no doubt that although the new regulations may seem strict, their compliance brings several benefits for both parties:
- Absolute legal security: By following the established processes, you obtain the guarantee that your transaction is legal and valid, avoiding future problems with the transfer of properties in Costa Rica.
- Total transparency: By properly reporting the real value of the transaction, transparency is promoted in the real estate market and any type of distortions are avoided.
- Fair taxes: By paying the corresponding taxes, you contribute to the State’s income, which is used to finance public services and economic development of the country.
LandCo firm services
At LandCo Firm, we fully understand the complexity of real estate laws in Costa Rica and the implications of indirect transfers of properties for sale.
There is a team of expert attorneys ready to guide you through the process and ensure that your transaction meets all legal requirements in the transfer of real estate in Costa Rica.
You can contact us today for reliable advice on property transfers in Costa Rica. We will be happy to answer your questions and guide you through every step of the right and safe path.