Buying Property in Costa Rica

Taxes in Costa Rica

Taxation in Costa Rica is much more simplified than that of many other countries. There are different limits of taxation depending on your income: the more you earn, the more you pay; if you earn less than the minimum amount established by Costa Rican law, you pay no taxes. The following basic information discusses some of the tax system, but you should always check current figures with your accountant.

Municipal Taxes.
The local community government charges municipal taxes to clean the streets, for public lighting and to finance the local bureaucracy. The amount charged is based on the number of meters of street frontage of your property its location, and on your Municipal Government. The amounts vary, but they are never over US$10 per month per residence.

Municipal Government Property Tax was recently moved from the central government to the Municipality, to which you pay directly 0.25% of the price of your property per year. If your house is rated at less than the ¢6,000,000.00 (six million colones) you are exempt from that tax. If you think this exemption applies to your property, your Municipality will tell you the procedure for applying.

Sales Tax
Sales tax is 13% on the amount paid for goods and for some services. The services of Lawyers, Doctors, Dentists and other independent professionals are exempt from sales tax; anything else you buy, from a candy bar to a computer or furniture is taxed. (Houses and cars require payment of a ‘transfer tax’, and that is covered elsewhere.) In some cases the sale is subject to the Simplified Regimen, used for very small businesses like your local ‘Pulperia’ or ‘Soda’. (corner store)

Transfer Taxes
You do not pay sales taxes, as such, for your house or car. Because they have to be inscribed in the National Registry, you pay a Transfer tax. In the case of real estate there is a 1.5% tax over the price registered in Hacienda (the Treasury Department) or in the National Registry. Cars are taxed at 2.5% over the retail price that is established by the Ministry of Treasury in an annual publication for that purpose.

Income Tax
All individuals who work - and any Corporations that are involved in commerce in Costa Rica- have to pay Income Tax. There is a tax scale and an amount due from the amount you earn from your employment, your professional services, and from whatever activity your Corporation performs. (There are individual exceptions depending on circumstances.)

In Costa Rica the fiscal year runs from October 1st to September 30th of each year, and each worker is required to at least file his/her tax declaration: if no income or business occurred, they have to declare that.

There is an exempt amount for the regular worker who earns less than or the exact amount that is established by law. For this year, the amounts are as follows.

Individuals:
a. Income up to ¢215,600.00 per month is exempt.

b. 10% tax is due on income in excess of ¢215,600.00 up to ¢324,100.00.

c. 15% tax is due on incomes in excess of ¢324,100.00.

Corporations:
There is no exempt amount for corporations, but they may deduct some expenses from their earnings. The tax percentage is taken from gross earnings, but that percentage is applied to net earnings. They are regulated the following way:

Corporations pay 30% tax over the annual earnings for 1 October to 30 September.

Small enterprises are Corporations whose gross earnings are under ¢28,860,000.00 (US$93,090.00) per year.

a. 10% tax on amounts up to ¢13,200,000.00 (US$42,580.00) in gross income.

b. 20% tax on amounts above ¢13,200,000.00 up to ¢28,860,000.00 (US$93,090.00) in gross income.

Individuals with lucrative activities (Liberal Professionals)
If you are self-employed because you have a professional degree, like a Doctor or a Lawyer, you will be subject to the following taxation:

a. Incomes up to ¢958,000.00 are exempt from tax.

b. 10% tax on incomes over ¢958,000.00 up to ¢1,431,000.00

c. 15% tax on incomes over ¢1,431,000.00 up to ¢2,388,000.00

d. 20% tax on incomes over ¢2,388,000.00 up to ¢4,785,000.00

e. 25% tax on all amounts above ¢4,785,00000.

Costa Rica Properties, protect your Investments

It is not always easy for foreigners investing or living in Costa Rica to find the right information to protect their investments.

There are a handful of simple rules you should follow, which might save you trouble and money later.

Many come to Costa Rica to buy property and the first thing you should do is make a title search on the lot you are considering. This means that you have to go to the Public Register in order to get a certificate in which all the main details of the property will appear. Use a good lawyer to help you with the research and the to advise on the transaction process.

After you are sure about purchasing the property, you will have to appear before a Notary Public or attorney to get the property transferred and registered in your name. This is necessary, and if a seller ignores this process there is something wrong.

When you have signed the transfer document, you will need to pay the transfer taxes. Usually the notary will ask you for a specific amount of money, which should include the notary’s fees and those taxes. It is the notary who will be in charge of paying all the necessary taxes and tax stamps, so always ask for a detailed receipt of what you are paying for. If these taxes are not paid, the property will not be registered in your name and you can be defrauded. Another thing to keep in mind is that transferring a property is relatively simple. No unreasonable delays should take place, and if they do, something could be wrong.

Another issue that could put your property at risk is land taxes. If you come from a country such as

Canada, Holland, Germany, the United States or any other countries which boast advanced tax collection systems, you may be surprised at that which you find in Costa Rica. A landowner here must pay land taxes every quarter, but the difference between our system and the one that you are used to, is that here you do not receive a notice from the collecting authority when taxes are due.

The system assumes you will remember every quarter to appear before the local government or Municipality and pay such taxes. If not, you could face foreclosure procedures and lose your investment.

In order to duly pay the taxes, you will have to make sure the property is correctly registered and appraised by the local municipality.

Keep in mind it is possible to become the victim of fraud or natural disaster and you can guard against both. Natural disasters are constant risk. Property insurance is a good idea, especially if you are investing in Costa Rica but not planning to be a permanent resident. Property insurance, known in Costa Rica as title insurance, can protect your investment not only from possible fraud, but also from natural disasters. For that reason it is important to have an insurance agent analyze your case.

Another good idea is to constantly “keep an eye” on your title’s status. This can be easily done by accessing the Public Register’s web site, or you can have your attorney do that for you.

Costa Rican tax authorities require all taxpayers to file income statements every year, and that includes local corporations. It is possible your corporation will be excused from paying taxes because of a so-called “lack of commercial activity.” For example, a corporation may not have to file a tax state or pay any taxes if it has been created simply to maintain your property title.

Even if you own one of these corporations --- which by law are not required to pay income taxes --- it is important that you are aware of the Educación y Cultura tax stamp. This tax has to be paid every year in March and the amount will not exceed 9000 colones (about $18). While this may appear a small sum, it must be paid in order to comply with the law.
Of course, there is a lot of other paperwork which must be filled out and considered, but those above are among those most commonly neglected. Deal with them and you can save a lot of time, money and trouble later.

Donations

You can legally, in Costa Rica, transfer your assets via donation.

The donation is in general terms as any contract, an agreement among two or more people in which they declare their will to originate, modify or to extinguish a legal relationship of an economic nature. Nevertheless, there is no payment in a donation, and only one of the parties benefit financially from this type of contract.

This contract gratuitously transfers a property belonging to the donating part to a receiving party, which only needs to accept. According to our legislation, the acceptance must be done within one year from the date of the deed of donation, and the donating party must be alive at the moment of the acceptance. The donor can indeed withdraw the donation before the acceptance of the person receiving the asset, as interpreted by our case law.

The object of the contract of donation, namely the control over the asset which the donor wants to transfer to the other party, should be individualized and be clearly specified in such a way that there is no confusion regarding the asset or assets the donor wishes to give away. Deeds of donation that do not comply with this requirement are not valid. For example, one cannot donate “one’s lands”, “one’s patrimony” or “one’s future assets”.

The donation must meet the formalities set forth in our Civil Code. As a general rule, the donation must be done by means of a public deed through a Notary Public. This formality is required as the party donating the asset, is suffering a deterioration in its patrimony, and the law needs to make sure that there is a thorough understanding of the consequences of the donation by all parties involved. If the asset to be donated is not a property but a movable asset, the simple delivery of such asset suffices.

In order to be qualified to donate, the donor must be mental and legally able (have the capacity to act); the asset must be, of course, his legal property, and he must expressly state his intention to donate. If the donation is to be done through a third party, this person must be appointed with a special power of attorney (poder especialísimo), which must specifically state the asset to be donated and the person to receive the asset.

In order to be able to receive an asset through donation, the person must be at least conceived at the time of the deed of donation; the right of the receiving person remains pending as article 31 of the Civil Code sets forth that a person exists when he or she is born alive, but they are deemed alive for all that favors them including 300 days before its birth. This means that donations to unborn children can be done within those 300 days before birth. The acceptance would come from the parent or custodian of the child.

Legal entities can donate according to their nature if their articles of incorporation allow for this to happen, but it must be expressly allowed. Commercial entities such as S.A.s or SRLs cannot transfer assets via donation, as this is an obvious detriment to their holdings.

A donation does have the effect of transferring the property, but it is not exactly the same; for example, a sales-purchase agreement may be contested.

A bankrupt person is not legally able to donate assets, as fraud against creditors will always be presumed. A donation may also be revoked (as opposed to a sales-purchase) if the person receiving the donated asset seriously offends the donor, or his close relatives, for a criminal accusation from the donor against the person receiving the donation. This is of course, based on the lack of gratitude of the person receiving the donation regarding the person freely delivering the asset to them. The offended party must act quickly, within one year of receiving the offense, in order to be able to revoke it. Even if the property has been transferred to a third party or mortgaged, the receiving party must indemnify.

Special donations are for example the mortis causa donation, which is set forth in the event of death, which is to be accepted before such death occurs, as opposed to wills which require no acceptance; the donation as payment, in which a person donates in order to repay debts or services not payable otherwise; the donación a carga, in which the donation is made with a specific purpose which becomes the obligation of the person receiving it; and the conditional donation, where the donation depends on future or pending facts.

A donation, even though a contract without a value (no price is paid) and a valid form of transferring assets especially through family members, must pay the same fees and taxes as a regular sales-purchase transfer.

Buying & Building in Costa Rica

Buying & Building in Costa Rica

Buying property and constructing buildings or a home can be an intimidating process, even when you are at home in the culture and know what to expect and plan for. In a foreign country, the same processes can be downright frightening. In a new setting, you need to learn what the usual way to go about things is and also who is legally and ethically responsible for what-in other words you should invest some time in learning how things work and how to protect your investment.

Fortunately, in Costa Rica there is a defined process through which an intelligent buyer and builder should proceed. In addition, there is a licensing body for architects and engineers, which also sets standards for fees should you decide to build. But let's start at the beginning.

I want to purchase property in Costa Rica. What is required?

So you've found, either through a real estate agent or your own searches, a piece of property that is perfect for you. Once you have negotiated a sales price and the seller has accepted your offer, then the legal procedures for transferring ownership of title begin.

How is title transferred?

In Costa Rica, property is transferred from seller to buyer by executing a transfer deed (escritura) before a Notary Public. Unlike common law countries, such as the United States and Canada, where the role of the notary is limited to authenticating signatures, in Costa Rica the notary public has extensive powers to act on behalf of the state. The notary public must be an attorney and she or he may draft and interpret legal documents, as well as authenticate and certify the authenticity of documents.

In order to close on the property, the buyer and seller must select a notary/attorney who will draft the transfer deed and register the sale in the Public Registry (Registro Nacional). The local custom is that the buyer may select his or her notary/attorney to draft the transfer deed if paying cash for the property. If the purchase price is financed, there are generally three alternatives for selecting the notary/attorney.

1. If a large percentage of the purchase price is being financed by the seller and a mortgage needs to be drafted to guarantee payment, then the seller may request that her or his notary/attorney draft the transfer deed.

2. If a property is purchased 50 percent cash and 50 percent financed, it is common for the buyer's attorney and seller's attorney to jointly draft the transfer deed and mortgage in a single document. This is known as co-notariado.

3. Finally, the buyer nay insist that his or her notary/attorney draft the transfer deed and let the seller's notary/attorney draft a separate mortgage instrument. In this case, because the mortgage is being drafted separately, it carries a higher registration fee. The registration fees are discussed below in the section on closing costs.

At your option, the property can be purchased in an individual's name, jointly with other persons, or in the name of a corporation. the decision as to ownership should be based upon your particular situation and after consultation with your attorney.

How can I ensure that I have clear title to the property?

Costa Rican law requires that all documents relating to an interest and/or title to real property be registered in the property section of the Public Registry (Article 460 of the Civil Code). Most properties have a titled registration number known as the folio real, and the records database can be searched with this number or by name index. The Public Registry report (informe registral) provides detailed information on the property, including the name of the title holder, boundary lines, tax appraisal, liens, mortgages, recorded easements, and other recorded instruments that would affect title.

Since Costa Rica follows the doctrine of first in time, first in right, recorded instruments presented to the Public Registry are given priority according to the date and time in which they are recorded. Obviously, every situation differs and in some cases a review of the Public Registry record will not be enough to uncover all encumbrances. That is why it is important that the buyer have her or his own attorney conduct an independent title search and investigation rather than rely on the seller's attorney.

How about closing costs?

The general custom is for the buyer and seller to share equally in the closing costs. this can be modified by agreement and usually depends upon the particular transaction. Closing costs involve three things: government taxes and fees, notary fee, and mortgage costs, if any.

A] Government Transfer Tax and Registration Fees

(1) Real Estate Transfer Tax. - The government collects a property transfer tax (Impuesto de Traspaso ) which is equal to 1.5% of the registered value of the property. The Public Registry will not record a transfer deed unless the transfer taxes and documentary stamps have been paid. (The transfer tax was reduced from 3% to 1.5% by Law No. 7764 effective May 22, 1998)

(2) Documentary Stamps - The government also requires that documentary stamps be affixed to the deed. These stamps include the following: Municipal Stamp: (Timbre Municipal) ;Legal Bar Association Stamp (Timbre del Colegio de Abogados); Agricultural Stamp (Timbre Agrario); National Archives Stamp (Timbre del Archivo Nacional); Fiscal Stamp:(Especie Fiscal). The Public Registry also imposes its own tax of .05% on documents presented for recordation to the Public Registry. (Derechos de Registro)

[B] Notary Fees

The Notary that drafted the contract for sale and carried out the closing is entitled by law (Decree 2307-J) to a fee equal to 1.5% of the first one million Colones of the actual sales price and 1.25% on the balance. The Attorney and Notary fee schedule which was established by Executive Decree No. 2307-J on April 4, 1991 was repealed on February 9, 1999 (Decree No. 27624-J). However, in October of 1999, the Supreme Court of Costa Rica ruled that the Decree which repealed the Fee schedule was unconstitutional and reinstated the original fee schedule.

[C] Mortgage costs. It is customary for the person who is receiving financing to pay the costs of drafting and registering the mortgage instrument. A mortgage can be created simultaneously at the time of sale by adding a mortgage clause in the transfer deed. Or, a separate mortgage instrument can be drafted. A mortgage document paysregistration fees of 1.00 Colon for every 1,000 Colones. The mortgage document also pays documentary stamps. The Notary Public will also charge for drafting the mortgage instrument and that fee can range from approximately 0.625 percent to 1.25 percent of the amount of the mortgage, depending on the circumstances involved. The buyer should be aware that Costa Rican real estate transactions commonly operate on a two-tiered system. since Costa Rican properties have a low property tax appraisal base in relation to market value, it is a customary practice to run property sales through at the registered value, which may be substantially less than the actual sales price of the property. In such a case, all transfer taxes and fees discussed above would apply to the registered value as opposed to its sales price, with the exception of the notary fee. Buyers should consult their attorney about the potential risks of this practice.

Registration of the transfer deed.

Once all the fees have been paid, it is the obligation of the notary who drafted the transfer deed to ensure that the deed is presented (anotado) and registered (inscrito) in the Property Section of the Public Registry. I have stressed the words presented and registered to highlight the importance of following up with the notary to ensure registration. Although presentation guarantees your priority (i.e., first in time, first in right), it does not automatically guarantee registration. The Public Registry will not register a transfer deed unless all taxes and registration fees are included; a certified copy from the Municipality where the property is located is provided certifying that the seller's property tax (bienes inmuebles) and municipal assesments (impuestos municipales) have been paid through the date of closing. Likewise, any prior instruments that encumber the property(i.e., mortgages, liens, judgments, etc.) must be lifted before your transfer deed will be registered.

Once a transfer deed is accepted for registration, the Public Registry will return the original document with all the documentary stamps affixed to it and properly sealed. Assuming no defects in the transfer deed, it should be registered by the Public Registry with 45 to 60 days after presentation. It is therefore important to follow up with the notary to ensure registration, otherwise you will run into problems in the future when you decide to resell the property and find out that your sale was not registered.

Beach Front Property. In most cases, beach front property is untitled property because in Costa Rica the ownership and possession of the shoreline is governed by the Maritime Zone Law (Ley Sobre la Zona Maritimo Terrestre) which restricts the possession and ownership of beach front property. By law the first 200 meters of beach front starting at the high tide markers is owned by the government. Of the 200 meters, the first 50 are deemed public zones and nobody may posses or control that area. On the remaining 150 meters the government through the local Municipal government will lease by way of concessions the land to private individuals. The Maritime Zone Law provides restrictions as to foreign ownership or possession of beach front property so a more through and careful study is always required when considering beach front property in Costa Rica.

I want to build. What do I do?

In order to build in Costa Rica, you will likely face a bureaucratic maze of governmental regulations. The law requires that any application for a construction permit be presented by a licensed architect or engineer (Article 83, Law of Constructions, Article II.2 Construction Regulations). It is therefore advisable to contact a reputable, licensed architect or civil engineer to guide you through the construction process.

What do architects and engineers charge?

All architects and engineers in Costa Rica must be licensed by the Costa Rican Association of Engineers and Architects (Colegio Federado de Ingenieros y Ingenieros y Arquitectos-CFIA. This governing body establishes the fee schedule that can be charged by its members. Most fees are based upon a percentage of the value of the construction project. According to the regulations of the CFIA (Reglamento para la Contratación de Servicios de Consultoría en Ingeniería y Arquitectura), the involvement of a licensed architect/engineer in a construction project is separated into two phases. Phase 1 is construction plans and permits, and phase 2 is control and execution.

Phase 1. Construction plans and permits. This phase is further subdivided into several distinct professional services that can be provided to the client by the architect/engineer. The percentages cited below are those that the CFIA has established as minimum chargeable fees.

Preliminary studies (estudios preliminaries): 0.5 percent. These studies may or may not be required, depending on the scope of the project.

Preproject design (anteproyecto): 1.0 to 1.5 percent. Generally, during this stage, the architect/engineer will meet with the client in order to discuss the client's construction requirements. With this information, the architect/engineer will prepare drafts of the proposed construction project for review by the client. These drafts should include site planning and preliminary work drawings. When you contract for this service be sure you agree with your architect/engineer beforehand on what he or she is going to provide you.

Construction plans and technical specifications (planos de construcción y especificaciones técnicas): 4.0 percent. This is one of the most important steps in the overall construction project since execution of the project will depend upon the quality and accuracy of your construction plans. Once you and your architect/engineer have agreed on the layout and design of the project, she or he will begin drafting the plans. In Costa Rica, a complete set of plans should include a site plan, distribution plan, elevation and transversal and longitude perspectives, roof design and drainage, design of footings and support beams, structural plans, electrical design, mechanical and sanitary system design, as well as a plan that details all of the interior finishings of the construction. Budgeting (presupuesto): 0.5 percent for global budgeting; 1.0 percent for itemized budgeting. Here the architect/engineer prepares a materials list based upon your construction plans and prepares a construction budget for you.

Phase 2. Control and execution. This stage involves the actual construction and project supervision. The regulations authorize three kinds of supervisory tasks, each of which requires a larger time investment from the architect/engineer. Inspection (Inspección): 3 percent of total construction value. Here your architect/engineer will visit the construction site at least once a week and will inspect it to ensure that the plan specifications are being followed by the general contractor. They will also verify the quality of the materials being used and review invoices being presented by the general contractor.

Supervision (Dirección técnica): 5 percent. This requires more direct involvement by the architect/engineer in the day-to-day operation of the project.

Administration (Administración): 12 percent. Here, the architect/engineer takes complete responsibility for the execution and completion of the project.

The option you choose will depend upon the type of project involved, the reliability of your builder/general contractor, and the amount of time you are willing to dedicate to the construction project. All told, phases 1 and 2 can range from 9 percent to 18 percent of the estimated value of the construction project, depending on the amount of services required. As such, it is common practice to negotiate fees with the architect/engineer. Most, of course, will be eager for your business and, depending on the scope of the project will be willing to work out an agreement tailored to your particular needs. Otherwise, have your attorney do the negotiating for you to ensure that you will get the best agreement possible. Before you sign any contract, be sure that you understand the fee structure and know exactly what is and is not included in the fee. Likewise, clearly define the responsibilities that your architect/engineer is going to assume. Do the same thing with your general contractor and any subcontractors.

Construction permits.

Before you purchase a lot with the intent of building on it, you should conduct some preliminary studies on the property to ensure that there won't be a problem obtaining a building permit. First, determine if the lot has basic services such as water, electricity, telephone, and drainage. Second, make sure there are no restrictions placed on the lot that could result in the denial of a construction permit. It will not be enough to check the Public Registry. You should also check the Ministry of Public Works (Ministerio de Obras Públicas y Transporte) for future road construction projects; the Ministry of Health (Ministerio de Salud); the National Institute of Housing and Urban Development (Instituto Nacional de Vivienda y Urbanismo) and the municipality where the property is located (municipalidad). And finally, be aware of any environmental regulation that may effect your construction project, such as national wildlife refuges and areas deemed protected by the forestry Law.

Requests for construction permits are filed with the Permit Reception Office (Oficina Receptora de Permisos de Construcción), which is a centralized office that houses government representatives from MOPT (Ministerio de Obras Públicas y Transportes-roads), INVU (Instituto Nacional de Vivienda y Urbanismo-housing), ICE (Instituto Costarricense de Electricidad-telephone), AYA (Instituto Costarricense de Acueductos y Alcantarillados-water), SNE (Servicio Nacional de Electricidad-electricity), CFIA (Colegio Federado de Ingenieros y Arquitectos), and the Ministry of Health (Ministerio de Salud).

For a single family home that measures more than 70 m2 (735.2 ft.2), the applicant must provide the following documentation: four copies of the construction plans, four copies of the property cadastre plot plan (Plano catastrado), four copies of the permit checklist (hoja de comisión), two copies of your property deed (escritura), one copy of the consulting contract with your architect/engineer (contrato de consultoria), an approval from the water company (AYA) regarding availability of water, and one copy of your electrical design plan approved by SNE. Condominium projects, commercial construction, and urbanization projects all carry additional requirements for obtaining construction permits.

In addition to these requirements, you will need to request a building permit from the municipality in which the property is located. By law it is the municipality that is delegated the responsibility to ensure that all constructions comply with building regulations (Article 1, Construction Law). You can, therefore, expect periodic visits to your construction site by the municipal building inspector, who must certify that the construction is proceeding according to code.

Whether you purchase an existing property or decide to build you dream home, be well informed about the procedures involved so that you ensure your investment will be a profitable one.

Banking in Costa Rica

Whether you’re planning to settle in Costa Rica for the long term or simply looking for a safe place to exchange a few dollars, an important decision you will need to make is "What Bank Should I Use?"

Costa Rica offers a wide range of banking and financial services catering to personal as well as business banking. Recent government reforms and the introduction of private banking have also made Costa Rica an attractive choice for investing.

Costa Rica’s banking system consists of the central bank; three state-owned banks, which account for nearly half of total banking assets; a state-owned mortgage bank; 18 commercial banks; four mutual house-building companies; 12 private finance companies; and 27 savings and loans cooperatives. In addition, there are 30 investment and retirement funds or trusts run by both state and private commercial banks and the state insurance company.

The Central Bank of Costa Rica is in charge of establishing banking policy. It is then up to the SUGEF (the General Supervisory Agency of Finance) to enforce compliance with Central Bank policies. All banks (both public and private) are subject to the policies dictated by the Banco Central de Costa Rica.

When choosing a bank, take into consideration both personal convenience and what fees the bank charges. Get information on the types of accounts available and their associated fees from several banks. Internet services offered by both state run and private banks have improved in leaps and bounds over the past couple of years.

Most banks in Costa Rica now offer savings and checking accounts in Dollars and Colones. Banks do differ, however, on the amount of time it takes to cash foreign checks and the availability of ATMS. It is also very important to note that while interest is much higher on colon accounts, there is a monthly devaluation of the colon to the dollar, so you might not be earning as much as you expect. Many also offer Credit or Debit cards, if you meet the requirements (but not all are internationally accepted). All banks will also have different requirements for opening accounts or obtaining credit cards, possibly including banking or personal references, identification, and most likely minimum deposits. Opening hours for most banks are from 9 am to 3 pm.

State run banks are backed by the Costa Rican government and are therefore usually considered safer. They are also located in practically every town in Costa Rica. On the down side, long lines are frequent and bilingual staff is not always available (especially outside the central valley).

Private banks usually offer quicker and more personalized service, shorter lines and English speaking staff. However, they may have fewer branches available outside of the central valley. The great majority of private banks are connected with banks outside the country so that transfers can be done relatively quickly.

Choosing a corporate Structure to buy real estate in Costa Rica

Many foreign individuals starting a business in Costa Rica or merely purchasing real estate fir investment purposes decide to use a corporate entity as the owner of such. This decision is a very wise one, and it is what we highly recommend to our clients as the first choice to be followed.

Ownership through a corporation allows to have flexibility and more predictability on areas ranging from estate planning (if share ownership is properly structured the investor can avoid his heirs a painful and lengthy long-distance probate procedure), tax management (as an example, rules on corporate expenses are more flexible than ones on personal ones), and representation (shareholders meetings can facilitate granting special powers of attorney or other types of authorizations for many actions thus not requiring physical presence in the country).

The first question often asked by our clients is whether to use (or form) a Costa Rican corporate entity or one already existing and controlled by such individuals abroad. Our advice is, in most cases, the use of local entity. Although foreign corporate entities can own land and engage in business activities in th country, registration procedures (both at the Public Register and with government entities) as well as negotiation of contracts with private parties can get complicated, delayed and/or find obstacles when they are involved.

in any event, if a foreign entity will be used, note should be taken that we normally recommend to register the foreign entity in the Costa Rican Commercial Register as a branch or at least to register specific powers of attorney for such also in th Costa Rican commercial Register. Both cases require a special and formal procedure that may take several weeks.

As mentioned before, in the great majority of cases, the use of a local corporate entity is preferred. Although Costa Rican commercial law contemplates many types of corporate forms, only two of them offer the investor the comfort of having structures similar to the limited liability companies to which he or she may be used to to in their countries of origin.

Such corporate forms are the "Sociedad de Responsabilidad Limitada" and the "Sociedad Anonima". In both cases, shareholders are only responsible for their participation on the company's social capital and their own personal assets are fully protected and out of reach from any potential creditor the company may have.

The "Sociedad de Responsabilidad Limitada", also refereed to as "S.R.L.", "Limitada" or "Ltda", is a simpler form than the "Sociedad Anomina" and in most cases fills-up the blanks on its legal treatment from the much broader regulation of the "Sociedad Anonima". The S.R.L.'s are used only if any of their special features are especially appealing to the investor.

Costa Rica Property

Real estate transfer procedure and closing costs

The initial step in any transfer of property should be a National Public Registry (NPR) title search to determine the status of title and the characteristics of the property to be acquired.  Additionally, a municipality search should be conducted in order to establish if all real estate and other related local taxes have been paid. Real estate tax is assessed on land, buildings and other permanent structures, and is managed by the Municipalities having jurisdiction over the administrative district where the property is located. Municipalities or local governments are the beneficiaries of land tax proceeds. Currently, the real estate tax rate is 0.25%.  in addition minor municipal user charges may apply (i.e. garbage collection, street lighting, street cleaning, among others). These are normally paid on a quarterly basis. Furthermore, the municipality search is relevant to verify if the property is subject to a predetermined use in accordance with the approved regulatory zoning plan. The NPR and Municipal searches are normally conducted by the purchaser’s Notary Public, although these may be completed by any person based on the publicly available information.

The second step necessarily involves a Notary Public since all real estate title transfers must be completed before a licensed Costa Rican Notary. The Notary must transcribe the transfer deed in his protocol book (Protocolo), wherein the original deed is signed by seller, buyer and the Notary.

Once the deed has been executed, the Notary must issue one or more copies of it for recordation (known as a testimonio) and must file it with the NPR. Once recorded, the Notary should also send a copy of the recorded deed to the corresponding Municipality.

Before filing the deed before the NPR, all closing costs must be paid by the parties. Market practice dictates that seller and buyer pay all closing costs  in equal parts, although otherwise can be agreed. Closing costs and fees are currently establishes by statute. A Notary cannot freely increase nor decrease his statutorily established fees without incurring in professional and possibly tax liabilities.

Closing costs for a land transfer are:

Item	Amount
Notary Public Fee	1.25% of purchase price.
Land Transfer Tax	1.5% of the highest of: a) purchase price or, b) previous recorded value of land.
Registry Stamps	1.3% of the highest of: a) purchase price or, b) previous recorded value of land.

Usually, and provided all taxes are dully paid and no mistakes are made in the deed itself, a transfer deed will be fully recorded within the two or three weeks following date of filling with the NPR.

For more information write to [email protected] and to check properties in Costa Rica visit Better Homes Costa Rica.

Due Diligence

Investing in real estate in Costa Rica, particularly in Guanacaste, can be a good decision. Our northern Pacific coast attracts more and more foreigners every year while luxurious leisure residences, condominiums, flats or villas are being sold even before they are built.

Where not so long ago stood small and isolated fishermen towns, now stand commercial centers, office buildings, modern condominiums and suites, five star hotels and dream houses of the highest standing and architectural styles.

These real estate developments, however, are not exempt from tricky legal obstacles and bureaucratic ambushes, which you have to be conscious of when entering the real estate game in our Rich Coast. Whether you are an investor with a big project in mind, or the average guy wishing to own your little piece of paradise, the following lines are intended to give you a few clues on what “dangers” lay ahead, and how to sort them out.

But a word of advice: leave behind the I-can-do-it-myself attitude. It’s important to be aware just how different things can be in a foreign country, with its own mentality, language and legal system. For instance, foreigners wishing to buy real estate here commonly ask about ownership title in the sense of a transferable certificate, and our system of Public Registry and notarized deeds is completely unknown to many North Americans.

This means you’re going to need some support, someone to guide you through the process of achieving your dream. Contrary to some northern jurisdictions, going to the lawyer is not the last step in the process, but should be one of the very first. A legal expert in particular can be very helpful in deciding even the simplest matters of what exactly you want to buy or build.

Legal advice must be tailor-made since everyone has something different in mind. However, in the early stages what is needed is referred to as performing ‘due diligence’ with respect to a property, or a projected purchase-development transaction.

In general terms, due diligence covers “the process of research and analysis that takes place in advance of an investment”. When used in reference to real estate, the idea is to have a professional check the target land for any legal problems it may have, identifying issues in all possible aspects, and finally allowing you to count on having all the information available to understand the potential risks involved in the investment, through the final recommendation the lawyer will put forward to you.

Due diligence will necessarily include a thorough Registry search (informe registral), which shows the owner of the property, the nature of the land, any legal encumbrances or liens attached to the piece of land, pending claims or ongoing judicial proceedings where the land is disputed, etc. It will also indicate whether the land you are buying has any building limitations. As well, if the property is owned by a company --- which is very frequently the case here in Costa Rica --- it is necessary to perform a search on the company, to make sure the “seller” has sufficient power to do so on behalf of the company.

If the property is registered land, then all the information will be available at the National Public Registry, but it could also be the case that the offered estate is untitled land, in which case the risks of buying are increased.

Another scenario, less advisable, involves acquiring “permission or occupation right” instead of real ownership. This is consistently the case with most beachfront properties. These inaccurately-named “properties” may in fact not be owned by anyone, as they remain Public or State Property if they lay within 200 meters into the land from the high-tide mark, known as the Maritime Zone. In such cases, due diligence studies must include research as to the municipal concession file on such “occupied” land.

Due diligence must also look into the tax records of the competent body to check for any problems of unpaid taxes, etc. And if developing a more complex project, such as condominium units, other municipal permits, authorizations, and applications must be previously obtained before actually building.

Due diligence, when performed by a competent professional, must absolutely also check on possible environmental restrictions which could seriously compromise your project. For instance, you will need special permits to cut down trees, or to alter a water source, and eventually will require a specific environmental permit which is granted by our Environmental Agency, SETENA, upon completion of a series of administrative formalities.

There are still many of other variables and details that would need to be reviewed by the attorney performing due diligence for your specific case. Only through a professionally- conducted due diligence would you be capable of knowing what you are buying and if it is worth going for.

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Costa Rica Properties

Assessing Environmental Impact

The international tendency towards a more environmentally friendly country has been defended by Costa Rican governments for at least two decades. We Ticos like to think of ourselves as an ecological Nation.

It’s what we offer --- the beauty of our natural resources, our various national parks, unaltered rainforests, impressive waterfalls, and exuberant wildlife. Nonetheless, Costa Rica is also a developing country, seeking to attract foreign investment as much as eco-tourists and the problem remains how to balance increased development with environmental preservation.

Almost any human activity impacts the environment. It can be positive, but is more likely to lead to deterioration of the natural environment.

Therefore the first step is to development is to assess the possible impact a project may have upon the environment. This is done through an “Environmental Impact Study” or Environmental Feasibility Study, the scope of which makes the environment as a key factor for determining whether a project can go ahead.

Modern environmental legislation, and mainly the 1995 Ley Orgánica del Ambiente, does provide for such an environmental evaluation as a prerequisite to any project in Costa Rica. This could be the construction of a processing plant, the building of a hotel, condominiums or a residential development, and even an individual house. In fact any construction of more than 300 square meters or more.

Most important, without such a study, no “viabilidad ambiental” will be granted, unless authorities have duly considered the environmental impact. And by law, any environmental impact is considered to be “any modification to the environment”, and those impacts must be known to the Costa Rican authorities before the project begins.

In charge of this delicate task of assessing the viability of projects is a small, and often very bureaucratic government agency called the Secretaría Técnica Nacional Ambiental, (the National Technical Environmental Secretariat), or SETENA.

SETENA is supposed to be a technical body, not a political one, meaning that the staff is composed of professionals in various technical fields, like biology, geology, hydrology, and engineering. Their role is to evaluate the impact and possible risks to the environment of the projects submitted to them by private parties and even governmental institutions.

They have considerable power to decide what can or cannot be built in the country.
Say for example, you wish to build a house on a recently-purchased ocean-view lot, you begin the process of a feasibility study by contacting an “environmental consultant” registered before SETENA, so he can fill in the D-1 form. That document will have to include all relevant information concerning the project. This form is used by SETENA to decide what it will ask from you in order to allow your project to go ahead. This could simply amount to a formal notarized affidavit, whereby you declare that you will take certain measures not to harm the environment. It may also include certain terms of reference.

These documents then require you to file an environmental management plan or conduct a full environmental impact study on the issues that may be highlighted, such as a groundwater study, social impact study, or noise pollution.

SETENA will give you a deadline to file your completed Plan or Study, together with other documents. A decision by the body could take as little as a few weeks to a year, depending on the importance of the project, its size and the requested items included in the terms of reference.

The ultimate decision, approving or disapproving your project, will come from SETENA´s Board, known as the Comisión Plenaria. If they rule in favour of your project you will have to hire an “environmental manager” to keep track of the relevant developments through the building process. The manage will also have to periodically inform SETENA that all measures are being properly adhered to.

In other words, once approved, SETENA will insist upon keeping an eye on your project, ensuring it continues to comply with the Environmental Management Plan or Study you presented to them. They can sanction you, claim damages or revoke permits if they suspect the project is not been responsibly managed.

There is a suggestion the new administration will make the process of getting permits easier and faster for investors. However, it is unlikely the need for environmental feasibility form SETENA will be abolished, and it remains to be seen how much simpler the process will be made. Consult your lawyer when undertaking any development.

Real Estate Tax in Costa Rica

Real Estate Tax

The real estate tax is established in Law 7509. this tax is assessed on land and permanently affixed structures and buildings, and is paid to the municipality. The municipality in responsible for collection of the tax within its jurisdiction, and for carrying out, determining, and overseeing property appraisals. Likewise, it sends tax bills, collects, and administers its tax revenue. If property owners fail to pay the tax, the municipality proceeds with collection by court action and an auction sale of the respective properties.

Who is subject to this tax?

All property owners holding a title recorded in the Public Registry, and owners of properties that are not recorded in the Public Registry; concession holders, permit buildings or occupants of the border zone or Terrestrial Maritime Zone, but only for permanent buildings or structures, as a special municipal tax are assessed on the land for using a public asset.

Is any property exempt from this tax?

Yes; property owed by the State, municipalities, and autonomous institutions; property in watersheds, forest, indigenous, or biological reserves or national parks; and property that is the sole asset owned by an individual with multiplied by 45 base salaries. The current base salary is “200,200 colones” which multiplied by 45 base salaries results in a deduction from the tax base of 9 million colones. If the property has a values of less then or equal to 9 million colones, no property taxes are due. By way of example, if a property is valued at 50 million colones and the exemption of 45 base salaries is applied, the property owner would only pay the tax on the difference, in this case on 41 million (41M x 0.25% tax rate), for an annual tax of 102,500 colones. The tax is paid to the regional City Hall.  Also exempt is real estate owned by churches and religious organizations, but only when used as place of worship; diplomatic offices and residences of diplomats and consular agents, with the applicable limitation in each casa; and, lastly, international organizations and the Red Cross.

Where do I have to go to pay this tax?

The tax is generally paid at the regional City Hall building, where you will be given a payment receipt. Tax is collected annually, with the tax year coinciding with the calendar year running from January 1 to December 31. real estate taxes are calculated on the value of each property and receipts are issued by the municipalities on a quarterly basis.  However, in most of the country’s municipalities, you will be told which public or private bank has agreement with the municipal government for collection of the tax.  In that case, the bank issues the payment receipt.

Do I have to file a tax return for this tax?

Pursuant to article 16 of Law 7509, property owners are required to declare the value of their real estate to the municipal government where the property is located at least once every five years. The tax Administration, through the Technical Standardization Authority for Property Appraisals, may amend the declared value though an appraisal of the property, at all times respecting the procedure available to the taxpayer to contest the appraisal value