Back Taxes in Costa Rica and Other Deal Killers

July 5, 2024

Back Taxes in Costa Rica and Other Deal Killers

Selling your property in Costa Rica can be a rewarding experience when you’re well-prepared. To ensure a smooth and successful sale, it’s crucial to address potential pitfalls like back taxes and other legal issues before listing your property. In our 20 years of operations as a real estate office in Costa Ballena, we have seen a number of deals fall apart when property sellers did not keep up to date with the obligations of owning a property in Costa Rica. To prevent this from happening with our office, we have implemented a system of pre-due diligence that we take with the exclusive listings on our roster. However, for those readers who are not one of our clients, we have enlisted the expert advice of Andres Rodriguez and the team at Invicta Legal, to help us create this guide will help you stay on top of your obligations and make your property for sale in Costa Rica more attractive to buyers.

The Benefits of Staying Current With Taxes

Owning property in Costa Rica comes with many advantages—stunning landscapes, a vibrant community, and excellent investment opportunities. By staying current with your property and corporation taxes, you can fully enjoy these benefits and ensure a hassle-free sale when the time comes.

Property and Municipal Taxes

In Costa Rica, property taxes are relatively low compared to many other countries, but they must be paid annually. The property tax rate is 0.25% of the declared value of the property, which is typically equal to the acquisition price. These taxes can be paid yearly in January, often with a discount, or quarterly as each bill is due. 

According to Andres Rodriguez from Invicta Legal, it is crucial to stay current with these payments to avoid penalties and interest that can add up quickly. Failing to pay these taxes can result in the government placing a lien on your property, which can complicate or even prevent a sale.

In addition to property taxes, there are other minor municipal taxes, such as those for garbage collection, security, and public roads. These additional taxes do not significantly increase the amount owed but are important to stay on top of to avoid any potential issues.

Annual Luxury Homes Tax (If Applicable)

Since 2009, Costa Rica has imposed a "Luxury Homes" tax on residential properties with buildings valued at more than ₡145,000,000.00 (approximately US$270,000). This tax is calculated based on the construction value according to the Building Characteristics manual issued by Costa Rica’s Tax Authorities. An engineer's assessment is necessary to determine if your property qualifies for this tax.

It is important to note that the market value of a property does not necessarily determine whether it qualifies for the luxury tax. The tax is calculated using a specific rule book for construction value, which may differ from the market value. Most residences currently on the market do not pay the luxury tax despite being listed at high prices.

If the luxury home tax applies to your property, it is essential to pay it promptly to avoid a 1% monthly interest on late payments.

Corporation Taxes

Many properties in Costa Rica are owned through corporations, which offers several benefits, such as asset protection and ease of transfer. However, owning property through a corporation also comes with additional responsibilities, including the annual payment of corporation taxes.

The annual corporate tax is due in January each year. Inactive companies pay around $150 annually, while active companies pay around $200. It is vital to stay current with these payments to avoid significant fines and complications. For late payment of the corporate tax, there is a 1% interest for each month or fraction of a month, calculated from the due date until the actual payment date.

If a company is dissolved due to non-payment of the corporate tax, a liquidator must be appointed to handle the process. The liquidator is responsible for distributing any remaining assets and addressing existing obligations to complete the company's closure. In Costa Rica, a liquidator is usually appointed by the shareholders, typically a trusted individual such as a lawyer, accountant, or another professional with experience in managing and distributing company assets and handling obligations. If the shareholders do not appoint a liquidator, the court may designate one to oversee the dissolution process.

Common Issues Uncovered During Due Diligence

The due diligence phase of a real estate transaction is when potential deal killers often come to light. Here are some of the most common issues we encounter:

Property Boundaries

Property boundaries in Costa Rica can be ambiguous, especially in rural areas. It is essential to have a professional survey conducted to ensure that the property boundaries are clearly defined and match the registered plans. Discrepancies can lead to disputes with neighbors and legal challenges, both of which can delay or derail a sale.

Title Issues

Clear title is crucial for any property sale. Title issues can arise from various sources, including unresolved inheritance claims, previous sales that were not correctly registered, or liens against the property. Ensuring that the title is clear and transferable is a critical part of the due diligence process.

Lack of Utilities

Access to essential utilities such as water, electricity, and internet can be a significant concern for buyers. If a property lacks these utilities, it can make it less attractive and harder to sell. Ensuring that all necessary connections are in place and functioning correctly is essential before listing a property for sale.

Other Due Diligence Items

Other issues that can arise during due diligence include environmental concerns, zoning restrictions, and compliance with local building codes. Each of these issues can require time and money to resolve, potentially causing delays and frustrating buyers.

The Impact of Unresolved Issues on Sales

Unresolved issues can significantly impact the likelihood of closing a sale. Buyers are often wary of properties with unresolved legal or practical issues. Delays in resolving these problems can lead to buyer fatigue, causing them to lose interest in the property and look elsewhere. In some cases, buyers may even reconsider their decision to purchase property in Costa Rica altogether, viewing the process as too complicated and risky.

Final Beneficiaries Filing

This requirement obliges companies to disclose their final beneficiaries, i.e., the individuals who ultimately own or control the company. Andres from Invicta Legal says that missing this deadline incurs a fine of 2% of your gross income from the previous income tax period. For inactive companies (those that hold properties), the fine is about $2,500, adjusted yearly. Additionally, the National Registry won't issue official documents or register transactions for companies not in compliance, meaning that property titles cannot be transferred and other official company transactions cannot be processed.

The Final Beneficiaries Filing must be submitted to the Costa Rican Government (Central Bank) in April each year unless extended by Tax Authorities. The legal representative of the company or a POA holder must detail who the final beneficiaries are through a confidential form. If the company lacks a legal representative residing in Costa Rica, a Resident Agent must be appointed. This agent must be a Costa Rican attorney with open offices and typically charges a yearly fee for this service.

Inactive Companies Filing

Inactive companies must file a balance sheet annually. According to Invicta, the penalty for not filing the inactive company's balance sheet is approximately $2,500, adjusted yearly.

Accounting Obligations

If a company is inactive, a Costa Rican accountant must file a yearly declaration in March with the inactive company’s balance sheet. If active, normal corporate accounting needs to be handled and filed, including VAT and income tax.

The Positive Side of Compliance

While these responsibilities might seem daunting, they are manageable with the right support. Working with experienced real estate professionals and legal advisors, like Andres Rodriguez and the team at Invicta Legal, ensures you meet all requirements and keep your property in top condition for sale. This proactive approach not only prevents deal killers but also highlights your property’s value to potential buyers.

Sellers with our office who have successfully navigated these requirements as they arise have enjoyed smoother, more profitable sales. Our clients who work to stay current with their obligations find that when it comes time to sell their property, the process feels seamless. Those who do not stay on top of obligations tend to feel the opposite: like there is a snag at every junction.

Selling property in Costa Rica can be a seamless and rewarding experience when you stay current with your obligations and address potential issues proactively. By partnering with experts like Andres Rodriguez and Invicta Legal as well as our real estate team at Osa Tropical Properties, you ensure a smooth transaction and maximize your investment’s value. Embrace the beauty and opportunity of Costa Rica’s real estate market with confidence and clarity.

Bonus Tip for Buyers

While this guide focuses on sellers, buyers can also benefit from understanding the importance of due diligence. Look for properties with clear titles, defined boundaries, and up-to-date taxes to ensure a secure investment.

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