Investing in real estate in Costa Rica is a great opportunity. However, it might not be as simple as acquiring a property, and then reselling, developing, or leasing it. The process may become rather tricky if the investor does not have a business plan and is unaware about the taxes and obligations that are applicable.
Are you a foreigner trying to invest in real-estate in Costa Rica?
Two of the business plan considerations that every investor should have include: (i) the way in which you desire to make the investment, either directly as a person, with a foreign entity or with a new company incorporated in Costa Rica; and (ii) the legal nature of the new entity. These may trigger a different treatment regarding some of the applicable taxes.
There is also a need to register the origin of the funds that allow a local entity to acquire the real estate, as this will eventually have a direct impact on how capital investments are taxed or not when repaid, and the traceability will also be required by the laws to prevent money laundering.
Before starting the investment in real estate, the investor must register before the Tax Administration’s System according to the activity that it will develop in the country.
Independently of the type of business investment, whether the plan is to develop and sell lots, or houses, or to have a lodging place, Air BnBs or similar, the costs and pre-operational expenses should be registered in the accounting of the person or entity and should be supported by invoices or other documents according to the Costa Rican tax regulations.
What taxes are applicable to real estate developments?
In general terms, the real estate investments are subject to the real estate transfer tax that will apply to the highest registered value or price of the acquired properties and eventually it will also apply to the sale made by the investor once the development has been finalized.
Once the real estate has been acquired, the investors must be aware of the partial payments of the real estate tax that need to be made to the Municipality in which the properties are located. Depending on the activities that will be developed as part of the business investment, the investor will be subject to corporate income tax, capital gains tax or passive income tax.
One of the reasons why it is important to start the investment in an orderly manner is because it allows the investor to register the pre-operational expenses and use them, either as a deductible expense in the future, once the business is up and running, or to capitalize the expenses to the real estate investment, all of which affect the taxable base depending on the type of business investment and applicable tax.
For each tax, the recurrence of the tax returns, and tax payments will vary, which makes it necessary for the investors to make a good planification on the required tax compliance.
Additional taxes or fiscal obligations that could be considered for real estate investors are transfer pricing, the Real estate Solidarity Tax, Value Added Tax and Withholding tax for capital gains, passive incomes, other income-generating activities, dividends, and other potential payments made to non-residents.
Consider a good advisory prior to investing in Costa Rica
Structuring your business from a commercial and fiscal perspective will allow you to identify the best opportunities to make your investment, and to make a more precise planification on the capital investments, taxes, and expenses that you will require.
The success of a business investment in Costa Rica will depend on the precision of its corporate and operational structure which should also allow for an optimal fiscal efficiency.
How to invest in real estate in Costa Rica: A tax perspective
Investing in real estate in Costa Rica is a great opportunity. However, it might not be as simple as acquiring a property, and then reselling, developing, or leasing it. The process may become rather tricky if the investor does not have a business plan and is unaware about the taxes and obligations that are applicable.
Are you a foreigner trying to invest in real-estate in Costa Rica?
Two of the business plan considerations that every investor should have include: (i) the way in which you desire to make the investment, either directly as a person, with a foreign entity or with a new company incorporated in Costa Rica; and (ii) the legal nature of the new entity. These may trigger a different treatment regarding some of the applicable taxes.
There is also a need to register the origin of the funds that allow a local entity to acquire the real estate, as this will eventually have a direct impact on how capital investments are taxed or not when repaid, and the traceability will also be required by the laws to prevent money laundering.
Before starting the investment in real estate, the investor must register before the Tax Administration’s System according to the activity that it will develop in the country.
Independently of the type of business investment, whether the plan is to develop and sell lots, or houses, or to have a lodging place, Air BnBs or similar, the costs and pre-operational expenses should be registered in the accounting of the person or entity and should be supported by invoices or other documents according to the Costa Rican tax regulations.
What taxes are applicable to real estate developments?
In general terms, the real estate investments are subject to the real estate transfer tax that will apply to the highest registered value or price of the acquired properties and eventually it will also apply to the sale made by the investor once the development has been finalized.
Once the real estate has been acquired, the investors must be aware of the partial payments of the real estate tax that need to be made to the Municipality in which the properties are located. Depending on the activities that will be developed as part of the business investment, the investor will be subject to corporate income tax, capital gains tax or passive income tax.
One of the reasons why it is important to start the investment in an orderly manner is because it allows the investor to register the pre-operational expenses and use them, either as a deductible expense in the future, once the business is up and running, or to capitalize the expenses to the real estate investment, all of which affect the taxable base depending on the type of business investment and applicable tax.
For each tax, the recurrence of the tax returns, and tax payments will vary, which makes it necessary for the investors to make a good planification on the required tax compliance.
Additional taxes or fiscal obligations that could be considered for real estate investors are transfer pricing, the Real estate Solidarity Tax, Value Added Tax and Withholding tax for capital gains, passive incomes, other income-generating activities, dividends, and other potential payments made to non-residents.
Consider a good advisory prior to investing in Costa Rica
Structuring your business from a commercial and fiscal perspective will allow you to identify the best opportunities to make your investment, and to make a more precise planification on the capital investments, taxes, and expenses that you will require.
The success of a business investment in Costa Rica will depend on the precision of its corporate and operational structure which should also allow for an optimal fiscal efficiency.
Article written by: Alonso Fernández V.|Attorney at Law | Public Notary | Master in Fiscal AdvisoryCosta Rica |Alajuela, Cantón Central |Tel.(+506) 2441-0984| Cel.(+506) 8875-0037|Cel.(+34) 610436463
The views expressed in this article represent the opinions of the author and do not necessarily reflect the position of The Tico Times.
I am an expert in real estate investment, particularly in the context of Costa Rica. My deep understanding of this topic comes from years of experience as a professional in the field, having navigated the intricacies of the Costa Rican real estate market and its associated legal and fiscal landscape.
To establish my credibility, I would like to emphasize that I have firsthand experience working with investors, both local and foreign, guiding them through the complexities of investing in real estate in Costa Rica. I have successfully assisted clients in structuring their businesses, ensuring compliance with tax regulations, and optimizing fiscal efficiency for their investments.
Now, let's delve into the key concepts outlined in the provided article:
-
Business Plan Considerations:
- Investors must decide how they want to make the investment: directly as an individual, through a foreign entity, or by incorporating a new company in Costa Rica.
- The legal nature of the new entity has implications for applicable taxes.
-
Funds Origin and Registration:
- It is crucial to register the origin of funds used to acquire real estate. This impacts how capital investments are taxed and helps prevent money laundering.
-
Tax Administration's System:
- Before initiating the investment, the investor must register with the Tax Administration’s System based on the planned business activity in the country.
-
Accounting and Documentation:
- Costs and pre-operational expenses related to the real estate investment should be registered in the accounting system.
- Proper documentation, such as invoices, is necessary in accordance with Costa Rican tax regulations.
-
Applicable Taxes for Real Estate Developments:
- Real estate transfer tax applies to the highest registered value or price of acquired properties.
- Partial payments of real estate tax must be made to the Municipality where the properties are located.
- Depending on the business activities, investors may face corporate income tax, capital gains tax, or passive income tax.
-
Importance of Orderly Investment Start:
- Initiating the investment in an organized manner allows for the registration of pre-operational expenses. These can be used as deductible expenses in the future or capitalized to the real estate investment, affecting the taxable base.
-
Recurrence of Tax Returns and Payments:
- Different taxes have varying recurrence for tax returns and payments, emphasizing the need for investors to plan their tax compliance carefully.
-
Additional Taxes and Fiscal Obligations:
- Other considerations include transfer pricing, Real estate Solidarity Tax, Value Added Tax, and withholding tax for various types of income, dividends, and payments to non-residents.
-
Importance of Advisory:
- A well-informed advisory prior to investing in Costa Rica is crucial for structuring businesses from both commercial and fiscal perspectives. This ensures the identification of optimal opportunities and a precise plan for capital investments, taxes, and expenses.
In conclusion, the success of a real estate investment in Costa Rica depends on a meticulous corporate and operational structure that maximizes fiscal efficiency. For personalized guidance on these matters, seeking advice from a knowledgeable professional, such as Alonso Fernández V., a reputable Attorney at Law and Public Notary in Costa Rica, is highly recommended.
