Legal Issues Related to
Real Estate in Costa Rica
I. Property Ownership in Costa Rica
Just as in the United States, Canada, and Europe, there are different types of property available to buyers. Understanding the various types that are available for purchase is critical in the evaluation process. This section highlights the property types that can be purchased in Costa Rica and the implications of each type of ownership for the buyer.
A. Fee Simple
The most comprehensive form of property ownership in Costa Rica is fee
simple ownership. In this respect, the conditions for this type of
ownership are the same for Costa Rican nationals as they are for foreigners.
The concept of fee simple ownership is the same in Costa Rica as in the
United States, Canada and Europe; namely, fee simple ownership gives the
owner of the property the absolute right to materially own the property, use
it, enjoy it, sell it, lease it, improve it, among other, subject only to
conditions outlined in the Costa Rican Laws.
B. Concessions in the Shoreline Zone
Beachfront property is more commonly know as “concession property.” In
Costa Rica, 95% of beachfront property is concession property and is
governed by the Shoreline Zone Law (Law No. 6043) and other specific
regulations including but not limited to special dispositions ensuing from
local governments (i.e. municipalities) and Costa Rican Board of Tourism
(ICT). The said legal dispositions set forth the conditions under which
foreigners and local residents can lease concession property.
In Costa Rica, a concession is defined as the right to use and enjoy a
specific portion of land located on the shoreline zone for a pre-determined
period of time and based on a predetermined use of soil (zoning or master
plan, known as “Plan Regulador”). The Government, through its corresponding
municipality, grants this right by means of a private agreement between
concessionaire and municipality that is further recorded in a Public
Registry. This agreement also establishes a yearly concession fee that is
paid based on an appraisal performed by government financial authorities.
Costa Rica’s shoreline zone is comprised of 200 meters starting at the mean
hightide mark and heading inland. The 200 meter zone is government owned.
No individual or company can own the 200 meter zone. The shoreline zone is
is divided into two strips of land:
i) The first strip is 50 meters (approximately 150 feet) wide is known as
the “public zone” and is absolutely public. This zone is not available for
ownership of any kind. No development is allowed, except for constructions
approved by government entities (i.e. marinas). Furthermore, this area is
deemed public, therefore, it is available or use of any individual.
ii) The following 150 meters can be subject to occupation or
lease by individuals or companies, either through a concession with the
respective municipality (in case of residential and commercially exploitable
portions or land) or a management Plan with the Ministry of Environment and
Energy (MINAE), in the case of environmentally sensitive, low density,
portions of land. In both cases, the property can be used, although not
owned (same as with a lease). Both concession agreements and managements plans are entered into between
private parties and the Government for a limited period of time that ranges
between 5 and 20 years, at Government’s discretion; however, most
concessions and management plans are granted for 20 years. During such
period, the concessionaire pays a fee to for the use and occupation of such
Government land. Renewal for equal and consecutive periods is negotiated
between private parties and the corresponding government authority and, such
renewal is usually based on the concessionaire’s ability to comply with its
commitments and obligations during the previous agreement. Such obligations
include having assumed the compromise to build on that concession land,
subdivide it or perform other acts of development or improvement on the
land, in which case, the concessionaire will require to obtain with all
appropriate permits from the local municipality.
Unlike fee simple property, foreigners do not have the same rights as
citizens when it comes to leasing shoreline zone concession land. The law
establishes that foreigners cannot be majority owners of concession land. A
foreigner can, however, enter into a partnership with a Costa Rican citizen
where the the Costa Rican national appears as the majority holder of the
concession land. An exception to this prohibition applies to foreigners who
have resided in Costa Rica for at least five years, who can also appear as
majority holders of a concession.
Traditionally, the concept of “Condominium” is associated with apartment
buildings and townhouses. In Costa Rica, however, there is a specific law
called “Condominium Property Law” that provides a framework for development
of different types of properties, including single family residence
projects, finished lot projects, vertical and horizontal property condos,
This law allows a developer to restrict and regulate certain aspects of the
development. Each Condominium developments has its own by-laws containing
all applicable conditions, restrictions and regulations applicable to owners
in such development.
Condominiun property ownership is fee simple ownership, but usually carries
with it a few additional restrictions set forth by the developer, such as
architectural guidelines, land use restrictions, and other limitations that
may be placed on each branch property. For the most part, condominium laws
are designed to protect the integrity of a development and maintain the“look and feel” of the project.
The criteria for entering into either a concession or a management plan is based on the use of soil or zoning, which is determined by the corresponding government authority. Such authorities will divide real estate into several segments based on the optimum use that each portion of the land is best suited for. Notwithstanding this, individuals and companies can request a change of use of a determined portion of land, which must be approved by the Goverment.
Some of the steps that need to be taking in complying with zoning
regulations and engaging in future development of such property include the
A. Preparation of Master Plan. If land is located in the
shoreline zone, the master plan must be in accordance with the use of soil
standards set forth by the Municipality, and its approval will require the
existence of a concession agreement on the shoreline zone land.
B. Preparation and recording of surveys for subdivision of land,
both from mother farm and into branch properties.
C. Approval of Master Plan before Board of Architects and
Engineers, Health Ministry and National Urban Development Institute. This
approval may require the preparation of an Environmental Impact Study.
D. Entering into Construction Agreement with builder. This will
include negotiation of agreement and guarantees, inspection of works and
other related matters.
E. Preparation and recording of Condominium Declaration and CC &
R’s. Management, Homeowners’ Association, Rental Pool, Fractional Ownership
and other related agreements may be applicable during this stage.
F. Sale of branch properties to end buyers. Based on the desired ownership and tax structures, incorporation of holding companies and other forms of ownership agreements for transfer of title to buyers.
III. Protection of Real Estate
One of the greatest concerns of foreigners when purchasing real estate in a foreign country is to ensure that the transaction will be executed legally and that the system can ensure a lifetime use and protection of the property. In this respect, the Costa Rican legal system does provide give ample protection to investors; however, some investors prefer to secure their property with a title guaranty or title insurance.
Similar to how in functions in the United States, the title guaranty serves
as a contract by which a third party (Guaranty Company) commits to indemnify
losses due to legal situations that could affect the property, less any
exceptions or exclusions from the coverage. This legal document grants the
buyer the security and peace of mind that the property has free and clear
title to it and is protected in the event of defect, including fraudulent
conveyance of title.
The process of issuing a Title Guaranty includes the issuance of a Title Commitment prior to closing, which allows the buyer time to examine the legal status of the property and evaluate if the property is in proper condition for purchase. The final title guaranty is issued after closing and is based on the title commitment. The Title Guaranty is a new concept in Costa Rica and Latin America in general, but it has already proven to add value to initial real estate purchases, re-sales and has encouraged transparency and increased liquidity in the real estate process.
IV. Sale of Real Estate and Tax Planning
Purchase of real estate in Costa Rica can take place either through a direct purchase by an individual, where the said person acquires the property in its personal name, or by using a company (corporation or other) hold title to such real estate. The latter is a common practice in Costa Rica, whereby individuals will acquire properties through a new company or through an existing one that appears as the recorded owner of such property.
In this respect, setting up a corporation is not complicated, but does
require a knowledgeable attorney who understands the exact protocols and
procedures necessary to properly set up the same. One of the advantage of
this system is that it allows a buyer to protect asset anonymously.
Furthermore, and importantly, if a purchaser acquires a property through an
existing corporation that already owns the property, there are no government
transfer taxes or tax stamps involved in the transfer of title of the stock
in the holding company owning the real estate. This, because transfer taxes
and tax stamps are only due when title to the property is transferred at the
Public Registry, but not when title to the property is transferred as a
consequence of the transfer of title to the stock in a holding company. In
other words, if a buyer acquires the shares of an existing corporation,
technically there is no change in the recorded owner of the property (i.e.
the corporation still owns the property).
However, if a property is acquired through forming a new company that takes title to the property directly from the previous owner, all transfer taxes and taxes stamps must be paid due to a change ownership at the Public Registry. In this respect, Costa Rican law establishes that all costs (Notary Public fees, tax stamps and transfer taxes) shall be borne by buyer and seller equally. The main reason for buying the property directly vis a vis buying the stock in a company is that the latter involves a risk for the buyer of acquiring an existing corporation that may have other liabilities; thus, there is no way to verify 100% that the corporation is clean from any such contingencies and/or liabilities.
V. Costa Rican Tax System and its Relevance in Real Estate Transactions
Costa Rican income tax system is based on the "territoriality principle” whereby only income generated within the physical territory of Costa Rica and from Costa Rican based sources is subject to income tax. Article 1 of the Costa Rica Income Tax Law (ITL) states that the tax is imposed on occasional or continued revenues received by individuals or entities, perceived within the national territory, irrespective of the nationality or domicile of the recipient.
According to the said article 1 ITL, revenues, income, or benefits from a
Costa Rican source are those derived from services rendered, goods located
or capital invested within Costa Rica during a specific tax period.
Therefore, income ensuing from services rendered abroad is not considered a
Costa Rican source of income and is not considered taxable under Costa Rican
law. Hence, since Costa Rican tax legislation is based on a source-based
taxation system, all income generated within Costa Rica is taxable
irrespective of the fact that the individual is a Costa Rican national or an
expatriate. Consequently, income tax is applied on all income earned within
Costa Rica or from Costa Rican sources, regardless of the taxpayer’s
citizenship, domicile or residence.
Notwithstanding the preceding, if the individual is considered to be
domiciled in Costa Rica for tax purposes, a net Income Tax will be applied
on any profits generated by such individual or entity. If the individual or
entity is considered to be a non-resident o non-domiciled taxpayer,
Withholding Tax on Remittances Abroad applies to the gross income remitted
A. Profits from operating a real estate business whose inventory is land
The Costa Rican tax system does not tax capital gains unless these ensue
from the sale of depreciable assets or from the sale of non-depreciable
assets sold in the ordinary course of a trade or business (i.e. the activity
to which a business or individual is primarily dedicated to, performed in a
public and periodic manner).
It is important to emphasize the fact that it is not relevant whether the
income is generated by a domiciled or non-domiciled individual or entity,
for our system is based on the territoriality principle.
B. dividend distributions from real estate company to foreign shareholders
Dividends paid from a Costa Rican entity to a non-domiciled entity are taxed
with a 15% withholding tax on remittances abroad.
C. Deductions companies and individuals can take against gross income
i. Expenses necessary to produce taxable income are deductible
provided they are duly recorded;
ii. Non-collectable debts provided that evidence of legal action
to collect exists;
iii. Payments to residents or nonresidents for rent, royalties,
technical or financial assistance, trademarks, franchises and similar items;
iv. Taxes paid, except income, sales and consumption taxes or
v. Interests payments on business loans, as well as the costs of obtaining
vi. Loss of assets and casualty losses not covered by insurance
vii. Contributions to a recognized cultural or charitable institution;
viii. Local insurance premiums, and;
ix. Foreign exchange losses, except when related to the acquisition of fixed assets.