Posted Jun 2017
We have to engage with Real Estate agents in our regular course of business, and every time we meet a new real estate agent we discuss the nuances of real estate transactions and laws in Costa Rica. Sometimes they are receptive about our opinion, most of the time they are not.
A couple of days ago, we had this real estate agent telling us “I have been doing this for almost twenty years and your opinion (referring to our business) seems to depart from everything that I have known and everything I have been told by other attorneys.” I replied, “If you have a few moments, I will be glad to elaborate”.
There are a number of things to be said about real estate in Costa Rica:
1. Property law in Costa Rica is very similar to property law in the United States and Canada. There is fee simple, and various types of tenancy. There are easements, liens, encumbrances, encroachments, covenants of title, so on and so forth.
2. You do not need to own real estate through a corporation. While it is an option it is not required.
3. The general reasons to own real estate through corporations are not entirely true. Those myths include:
A. Protection from liability. False. Costa Rican courts have been adopting the theory of piercing the corporate veil and have been implementing it in courts. Piercing the corporate veil means that corporations (or LLCs or any other sort of legal structure) will not be able prevent the liability from individuals to be affected by the corporation or vice versa when there is not a legitimate separation from the business and the person. The point is that the “limited liability” element of corporations is only applicable to legitimate businesses, not to people who use the corporations for the sole purpose to “hide” assets. Therefore, the idea of putting your assets in corporation to protect it from liability is not very efficient. I generally tell people: if you want to buy a house then buy a house, if you want to buy a car then buy a car, if you want to buy a business then buy a business. It does not make sense to purchase a corporation if you want to buy a car or a house.
B. Tax Savings. False. Attorneys tell people they will save taxes when purchasing property through corporations. The idea is to acquire the company owning the property, thus, instead of transferring the property, the parties will transfer the shares of the company. Well, this is not call tax savings, this is call tax fraud. Certainly, one of the reasons for attorneys to engage in this practice was to reduce the closing costs when transferring property. Like David Copperfield, they will stage the pantomimic illusion that the transaction taking place was the sale of a corporation when in reality what is being purchased is a property. This is tax fraud.
The Costa Rican courts and government are so archaic (controlled by lawyers) that they did not catch up with this practice and did not engage in prosecuting attorneys and the parties to real estate transactions for the tax fraud, instead, they passed a law in Congress requiring the parties to pay taxes on the transfer of real estate even if it is being transferred indirectly through a corporation. The end of the story is that it is not true that you can save taxes when transferring a corporation instead of a property.
C. It makes it easier to transfer a corporation than to transfer a property. False. Currently, the law requires the shareholders of a corporation to approve by simple majority the sale of assets representing more than 10% of the assets of the corporation. Most people who hold assets in corporations fall in this situation, as the sole purpose of their corporations is to hold those assets. Therefore, if you have a house in one single corporation, and you want to sell it, it is required to do a shareholders meeting and do a vote to approve the sale. This means that you have to pay a notary public to authenticate the shareholder meeting. Otherwise, it will not be possible to sell that property.
D. It makes it easier to transfer assets to heirs. Partly true. When it comes to estate planning, some people decide to make living gifts to their children (or other heirs) prior to death in order to either avoid paying “death taxes” (Costa Rica does not have death tax, but you can find it in the US) or just to avoid probating the assets once the owner of those assets passes away. The key phrase here is making a “living gift”. Generally, for purposes of transferring assets to heirs, people have two major options: either making a gift while still alive, or transferring those assets upon death through a probate proceeding. Same thing applies to corporations.
Wrongfully advised by their attorneys, people believe that if they make their children (or other heirs) officers of the corporation that it will avoid doing probate to transfer that corporation (which is holding the assets, primarily a real estate property) to their heirs. This is incorrect. If you want to avoid probate, you will need to make a living gift, and in case of corporations, this means that you need to transfer the shares of the corporation to the heirs while you are still alive. If you only appoint those heirs as officers of the corporation then you are not transferring ownership of the shares, which means that upon death the heirs will need to probate those shares.
The point is, regardless of whether you have a corporation or not, if you want to avoid probate, you will need to make a living gift to your heirs, whether it is real estate or shares.
These are some of the myths around having assets in corporations. Once again, the suggestion is to use the law for its intended purposes. If you want to purchase real estate property, use the current property laws available to that effect, similarly in the case of vehicles, and the same thing applies to having an operating business.
Another important comment when it comes to real estate and corporations, is that it is not easy to maintain a corporation. It becomes tedious and expensive to deal with corporations; Congress recently passed a law requiring corporations to pay taxes for just existing and regardless of whether they are operating as business. You need to do shareholder meeting, maintaining books, hire attorneys and accountants to keep things in order. Make yourself a favor and keep thing simple, do not own a corporation unless you have a legitimate business.
I hope this information to be helpful. You will be able to find additional information about these subjects in our blog. Feel free to reach us with any comments or questions on these issues.