There are some significant changes in the real estate tax procedures in the air that you should know about. In my first blog about Costa Rica Fiscal Transparency, I explained about Costa Rica’s legislation being on the verge of passing two new laws. This will bring about significant changes to the tax structure currently in effect.
This second part will explain the Law Strengthening the Tax Administration Procedures (Fortalecimiento de la Gestion Tributaria) law project number 18.041. This law project is intended to give the Tax Administration more teeth in order to take a bigger bite into the taxpayer for violations of the tax law.
Law Strengthening the Tax Administration Procedures
This new real estate tax law will do this by creating larger penalties and sanctions. It will make it easier for the Tax Administration to serve taxpayers with administrative procedures related to tax violations. It also modifies other tax laws to broaden their scope and bring more transactions into compliance.
A significant change that will affect Costa Rica real estate transactions is the modification of the current real estate tax law on the transfer taxes of real property. Under the current system, the transfer of real estate triggers a 1.5% transfer tax on the value of the transaction.
Costa Rica real estate title transfer
Real Estate developers in Costa Rica began avoiding the real estate transfer tax by telling the Costa Rica real estate in the name of a Costa Rican corporation. Under the corporation ownership, they can then sell the shares of the corporation to the prospective buyer instead of transferring the underlying real estate. This avoids the real estate tax.
The new law will abolish that practice by creating the concept of “indirect transfer” in determining a taxable event.
Under the indirect transfer method, any business transaction that results in the transfer of the dominion and control of the corporate entity that owns the Costa Rica real estate will be subject to the transfer tax. The transfer tax will be due and payable no later than 15 days after the taxable event is triggered. After that penalties and interest will begin to accrue.
Costa Rica real estate values
Another modification is that the basis of the transfer tax may not be less than the highest value registered for that Costa Rica property under the Property Tax Law. The reason for this is that it became customary in Costa Rica to pay the real estate tax based upon the recorded “fiscal” value of the property. In most cases, this is well below the actual market value of the property.
Under this criterion, the taxpayer will have to determine the local municipal property tax valuation and no longer rely on the “fiscal” value that appears on the title report.
These changes are directly related to Costa Rica real estate, the reason we are publishing these interesting articles by attorney Roger Petersen.
You can read the first and third part of this article in another Easy Times blog. This article can be found in its original form on Costa Rica Law under blog title Costa Rica New Tax Changes for 2013. Also, read the latest on the Costa Rica corporation tax now.
Attorney Roger Petersen specializes in Costa Rica real estate and is a partner of Petersen & Philps, law offices in Escazu. The firm practices in Costa Rica in different areas such as
- Real Estate Purchase and Development,
- Commercial Transactions,
- Corporate Incorporation,
- Intellectual Property,
- Employment Law,
- Estate Planning,
- and Business Transactions.
Mr. Petersen is also the author of the well-known book “The Legal Guide to Costa Rica”. His website Costa Rica Law has a lot of useful legal information.
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