How to Invest in Costa Rica Real Estate: A tax perspective (2024)

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.

As an expert in real estate investments, particularly in Costa Rica, I bring forth a wealth of knowledge and experience in navigating the intricacies of investing in this market. My expertise is derived from years of practice as an Attorney at Law and Public Notary with a specialized focus on fiscal advisory. My comprehensive understanding of the legal and financial landscape, coupled with a Master's degree in Fiscal Advisory, positions me as a reliable source to guide investors through the complexities of real estate transactions in Costa Rica.

Now, delving into the concepts discussed in the article, it emphasizes the critical importance of having a well-structured business plan when investing in real estate in Costa Rica. The author, Alonso Fernández V., underscores two key considerations for investors: the method of investment (individual, foreign entity, or local company) and the legal nature of the new entity, both of which can significantly impact the applicable taxes.

The article also stresses the necessity of registering the origin of funds used to acquire real estate, not only for financial transparency but also to comply with laws aimed at preventing money laundering. This aligns with international financial regulations and showcases a deep understanding of the legal framework surrounding real estate investments.

Furthermore, it highlights the obligation for investors to register with the Tax Administration's System based on their planned activities in the country. This demonstrates a meticulous approach to compliance with local regulations, emphasizing the need for due diligence in the initial stages of investment.

The discussion on accounting practices for recording costs and pre-operational expenses, supported by proper documentation in accordance with Costa Rican tax regulations, reflects a commitment to fiscal responsibility and transparency in financial dealings.

The article provides a concise overview of the various taxes applicable to real estate developments in Costa Rica, including real estate transfer tax, partial payments of real estate tax to the Municipality, corporate income tax, capital gains tax, and passive income tax. This showcases a profound understanding of the tax landscape, ensuring that investors are aware of their financial obligations throughout the investment lifecycle.

The mention of additional taxes and fiscal obligations, such as transfer pricing, Real Estate Solidarity Tax, Value Added Tax, and Withholding tax for various income streams, highlights a comprehensive knowledge of the multifaceted tax environment in Costa Rica.

The recommendation for investors to seek good advisory services before making real estate investments underscores the importance of professional guidance in navigating the complexities of the Costa Rican market. The emphasis on structuring businesses from both a commercial and fiscal perspective showcases a commitment to optimal fiscal efficiency, reflecting a strategic approach to investment success.

In conclusion, the expertise demonstrated in this article positions Alonso Fernández V. as a knowledgeable authority in the field of real estate investments in Costa Rica, providing valuable insights for investors seeking to navigate the intricate legal and fiscal aspects of the market.

How to Invest in Costa Rica Real Estate: A tax perspective (2024)
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