In the process of buying a piece of land in Costa Rica, we get to a point where the client has to make a rather strange decision. Should they declare the full value of the property on the Purchase and Sale agreement? Or should they under declare so that they can avoid paying taxes on the full amount? This may sound like a “shady” decision. One would think it to be illegal to not declare the actual amount paid for the property on their contract. It’s not. In fact, the common practice here for years has been to declare a lesser value and the practice has been embraced by virtually everybody in the country. So, the consideration of “how much to declare” is a feature in nearly all land transactions in Costa Rica.
It is normal to purchase a piece of land using a Costa Rican corporation. In Costa Rica, these are called “Sociedad Anónima” or “Anonymous Society”, or “S. A.” for short. The options for getting one of these is to simply purchase a pre-existing S. A., or corporation, from the attorney who is handling the deal, or to go ahead and have one formed when you first start the process of looking for a property. These take about 3 weeks to form.
Most of the professional law firms in Costa Rica will have a number of “shelf corporations” ready for purchase by a land buyer. What this term means is that the corporation was formed and paid for by the law firm and they have it there for this purpose, ready to be used by such a client.
The concern when purchasing an existing corporation is its history. It is impossible to determine what, if any, obligations may have been made in the name of a corporation. If a buyer were to purchase a corporation from a land owner, they could conceivably have someone show up on their doorstep a few days, months, or years later with a contract signed by the previous “president” of the corporation, in the name of that corporation (now yours), and guess what? If you don’t pay the obligation, this fellow can go after your land, which your corporation owns. This concern is essentially nil when buying a shelf corporation from a reputable law firm.
On the other side of the coin, there are some compelling reasons to purchase the corporation that owns the property. This reduces the closing costs since the sale of a corporation does not involve any transfer of title. The title is owned by the corporation, and continues on as such after the sale. The sale is merely the sale of a corporation with its assets, whatever they may be. The property remains in the possession of the corporation, and the national registry remains unchanged. This is a simple and inexpensive transaction, not unlike buying a pair of shoes, well not quite, but you get the idea. There is, of course, still due diligence required with respect to the basics of a land transaction. A title study, the survey checked for accuracy, disclosure regarding road care, water system, and electrical service, but again, there is no transfer of title.
So it’s good to be informed. I would consider doing such a transaction with a developer that has a number of lots, and he/she has put each of the lots in its own corporation for the purpose of making the purchase of those lots easier and cheaper for the buyer. But in the case of finding a stand alone property where the current owner offers to sell their corporation, I would likely advise against it. The Purchase and Sale contract should include a declaration on the part of the seller that he hereby does swear on all that is good and holy that there is no history to this corporation, and that if there turns out to be… well I think you get the general idea.
In Costa Rica right now, a shelf corporation will run you between $500 and $700 US. This is the most common scenario in my real estate business. I have a long standing relationship with Randall Sanchez in San Isidro de Perez Zeledon. His firm is called “Bufete Sanchez” and I’m not sure why. I keep meaning to ask him why law firms in Costa Rica call themselves “bufetes” (boo-feh-teh) and perhaps one of these days I’ll remember to ask him. Anyway, at any given time Mr. Sanchez has 40 or so shelf corporations ready to go. These corporations are sitting there with no history and ready to use.
So “additional expense” number one of two is the corporation for somewhere between $400 and $600.
The second “additional expense” is that the roughly 4% of sale’s price transaction fee that is normally split 50/50 between buyer and seller. So the buyer would pay a 2%-ish closing fee. This figure includes the transfer of title fee, and various taxes and so on that add up to the 4% amount.
Obviously, if it is legal, and common to under declare the value of a land deal, both the buyer and the seller of a piece of land will benefit from a lower closing cost amount. The vast majority of the sales that I have brokered have been for full amount. But what I gather from the “street” is that a normal “declared value” on a land transaction is $20,000. Compare 4% of that figure to 4% of $250,000 and you’ll see why some sellers of land, who customarily pay ½ of the closing fees, will push a buyer to under declare.
Here is the crux of the biscuit.
There is no capital gains tax in Costa Rica. There should be. There is no logical reason why not. As I have mentioned in a previous “tax” related article, there are a lot of subsistence, coffee, and various crop type farmers in Costa Rica. Farmers own a lot of land. This land is zoned “agrícola” or agricultural, which also happens to be the zoning on nearly all of our single family lots and large parcels. I can’t imagine that the Costa Rican government will ever touch the existing arrangement with regards to such land since it has worked well for years and the declared value on a gazillion farms all over Costa Rica is probably somewhere around $5.00 US (just guessing), making the annual tax bill affordable for such farmers. If this were to change, it could have a seriously negative affect on many hard working farmer families and subsequently on the Costa Rican economy. However, there is no reason for there not to be a capital gains tax. If one of these subsistence farmers were to sell a property at today’s prices, he/she would have the funds from that sale with which to pay the capital gains tax.
Capital gains tax is coming, we just don’t know when. The government body that will likely enact such a tax is a little distracted at the moment with CAFTA (Central America Free Trade Agreement) which is an extremely thorny endeavor considering that the electric, phone, and Telecommunications of Costa Rica is handled by government controlled monopolies which have to change per the terms of CAFTA.
I’m sorry that we’re running a bit long with this one, but in order to tie all this together there remains just a bit more, and this part is key.
The question that a land owner now has is, “why can’t I just under declare on my purchase value, and then re-assess the property when I get close to selling that property?”
The declared purchase price is registered in the National Registry (www.registronacional.go.cr). This doesn’t change when there is a reassessment of the property value. The only thing that changes with the new assessment is the amount of tax that the land owner pays annually. When that property seller goes to sell, his capital gain will be calculated, not on the amount of the new “tax” assessment, but on the price that he/she is registered as having paid for the land.
So, the decision is yours/ours. To under declare or not. My thought is that the best financial decision is to declare full value and thus pay less capital gains tax when there is one in Costa Rica.