Tax loopholes and fraud
There are two loopholes often exploited in property transactions to avoid different taxes. One is legal but might someday be risky. The other is pretty much illegal. The legal one is a method of property transfer in which you are not actually buying a property, but rather the shares of a corporation that owns a property. By transferring the shares rather than the property itself, you avoid the 1.5% property transfer tax, since that tax does not apply to the transfer of shares.
This loophole is legitimate, though risky on a due diligence level, since buying a sociedad anónima (or S.A., as corporations are known in Spanish) means you’re buying not only the company’s assets but also its debts. We’ll get into this more in the chapter on due diligence. The other problem is that since the loophole is legitimate, developers have gone too far in taking advantage of it. Imagine a 160-unit condominium project in which each condo is registered under a different S.A. and you can see it’s gotten a little absurd. Still, if developers don’t do it, they’re at a price disadvantage to their competitors, to the tune of thousands of dollars. Inevitably, the situation is drawing the government’s attention, and there are signs that regulators might start going after such abuse under a legal principle known as the “principle of economic reality.” So while for a variety of reasons it’s a good idea to own your property through an S.A., acquiring it through an S.A. with the end of dodging taxes might become legally risky in the coming years.
The second loophole that has been exploited in years past could really get you in trouble – it’s less like a loophole and more like fraud. It involves you and the seller colluding to register the property with a value lower than its sale price. The annual 0.25% property tax is levied based on this record, so a $1 million property reported by you and the seller to be worth $100,000 would provide you with a significant savings over the years.
This is a bad idea for three reasons. First of all, it’s tax fraud, and while it’s true that the wheels of justice turn very slowly in Costa Rica, they do turn, and would put you in a very awkward position should they come upon you skirting the law. The second reason is that compensation paid for the expropriation of property is, in theory, based on the value in the National Registry. So, for example, if you under-registered a piece of property you bought next to a national park, and one day the government decided it wanted to expand the park by expropriating your property, it would pay you the $50,000 you reported the property’s value to be, not the $500,000 you paid for it. It’s a remote possibility, but something to keep in mind. Third, should there be a dispute between you and the seller after the transaction is complete, the figure in the National Registry is the amount you legally paid and the only number you have claim too, regardless of what went on under the table.
Finally, and on a slightly more prosaic note, remember that without taxes, you don’t get services. While tax dodging can save you a lot of money, in the long run it contributes a whole slew of problems, from bad roads to higher crime to poor administration. You as a foreigner are bringing investment to this country, but you’re also bringing rapid change that causes growing pains. More tax revenue isn’t the only solution to these problems, but it’s a good start.
Now that you’ve got an overview of how to buy property in Costa Rica, in the next chapters we’ll look at the process in detail, starting with Chapter 9, Due Diligence.
