One of the few constants in life is taxes and fees. No matter where in the world you may live, there is a price to pay. Thankfully, it’s a small price to pay in Costa Rica. If you’re considering moving to Costa Rica, then be sure to check our guides to buying property and how ownership works before getting into the nitty-gritty of how property taxes work.
How Property Taxes Work in Costa Rica
All property in Costa Rica is subject to property taxes, including condos, houses, vacant lots, cars and boats. Below is a breakdown of how these taxes work.
The Property Owner’s Tax
Each year, all property owners in Costa Rica must pay their property tax (“impuesto de propiedad” in Spanish), which is 0.25% of the assessed value. The property’s value is then registered with the local municipality and the national registry. For example, if you have a property valued at $100,000 US dollars, the property tax will only be $250.00 per year, plus garbage and parks tax. Depending on the municipality, it could be another $100.00 per year. The end of the first quarter is March 31.
The law requires the property owners to reassess the value of their property every 5 years. If not done by the property owner, it will be up to the local municipality – and we know we don’t want the tax man involved. Keep in mind that it is possible to lower the values, but it’s a tough fight with lots of documentation and presentations to the local municipality.
The Luxury Home Tax
Costa Rica also has a luxury home tax (“Impuesto de Solidaridad” in Spanish), which went into effect on October 1, 2009. The tax was set to end on October 1, 2019, but have you ever really known a tax to go away? As of this writing, the tax is still in effect several years later.
The Tax Office (Direccion de Tributacion) developed the guidelines for the appraisal of buildings and land. The purpose of the Law is to tax “luxury homes” in Costa Rica so the Costa Rican government can provide homes to families in extreme poverty. The tax is based on calculating the construction values, such as the finishes, type of windows, type of flooring, granite top versus tile counters, etc., along with electrical wiring and plumbing systems.
The luxury property tax applies to houses, condominiums, and apartments with a construction value beyond ¢133,000,000.00 (approximately US$ 214,500). The tax rate ranges between 0.25% and 0.55%, depending on the declared value of your property’s construction. This tax is in addition to the annual property tax of 0.25% and equates to roughly $250 to $500 per $100,000 of your declared property value.
Property Transfer Taxes & Stamps
When purchasing property in Costa Rica, or real assets such as land, homes, cars, boats, and so on, there are also transfer taxes and stamps. This fee, which is 2.86% of the sale price or the registered value and based on the asset value purchased, is payable by the purchaser. For the transfer tax, “value” means the higher of either the purchase price recorded by the parties or the value registered to the assets being transferred. The percentage can be lower based on the dollar value of the asset being transferred. I utilized the 2.86% as a higher-end percentage, as it’s better to expect more and pay less than the other way around.
The Corporation Owner’s Tax
For those who own corporations, the government charges an annual fee that must be paid to keep the corporation in good standing. This tax is approximately $120 for non-active corporations that are used only as holding companies for real estate.
The annual fee for active corporations is based on income and typically ranges between $200 and $380. According to law 9428, the tax must be paid by January 31 each year. The company’s legal representative is responsible for declaring and paying the tax. If you don’t know if the taxes on a property are current or overdue, you can consult the National Registry database.
Active vs. Inactive Corporation Tax Explained
Once upon a time in Costa Rica, forming a corporation was relatively simple – and even easier to maintain. The government imposed no annual fees, and the requirement for corporate officers to meet once each year presented no problem to fulfill.
Two factors worked together to change that. First, the previous low-maintenance system was prone to corruption. Unsavory types used a corporation to hide their identity and their ill-gotten gains. They could anonymously own a Costa Rican corporation and use it to launder money from the illegal drug trade or other illicit activities. This meant that money and property could change hands without anyone knowing who the participants were.
The second factor was taxes, of course. The government realized it was missing out on an important source of tax revenue: Tens of thousands of corporations were being used to hold assets, but the government wasn’t collecting a dime in taxes or fees because they didn’t have income to report.
A New Legal Requirement for the Corporation Property Tax is Born
A new law enacted in September 2019 requires that a Costa Rican corporation disclose the identity of their shareholders or owners. That adjustment addresses the first factor mentioned in the section above – it prevents corporations from anonymously engaging in illegal activities. Other new requirements address the second factor, so all Costa Rican corporations must pay annual fees and file yearly reports to the government about their income, assets, and property ownership.
Costa Rican corporations must hold a shareholders meeting each year, either in person or by proxy. The meeting date, time, location, and attendee list are recorded in the corporation’s legal registry. Any modifications that are made to the corporation’s structure are also recorded. All corporations in Costa Rica must also maintain three legal record books.
The corporation’s legal representative must file annually in April with the Registry of Transparency and Final Beneficiaries of the Central Bank. The filing includes details about the corporation, including the name, address, identification number, and contact information of each shareholder or owner and their percentage of ownership.
As for filing the corporation property tax, the representative must first obtain a digital signature card from an authorized bank. Such cards are only issued to Costa Rican citizens and residents. A non-resident who owns a corporation can comply with the reporting requirements by granting a power of attorney to a third party who will obtain the digital signature and file the disclosure. This is usually your legal team, which serves as your resident agent.
What Happens if the Tax isn’t paid?
According to the Costa Rican code of taxation rules and procedures, sanctions and penalties will apply. For example, a short-term consequence of non-payment is the National Registry will not issue, certify, or register any documents for the corporation – neither the government nor any public institution will do business with an overdue corporation. The long-term consequences are even more severe, as the corporation will be dissolved if the tax goes unpaid for three consecutive years. Even if you dissolve the corporation voluntarily, any outstanding debts must be paid first.
Maintaining a corporation in Costa Rica is not as simple as it used to be – especially if your sole purpose of forming the corporation is to hold a property. It’s a bit more simplified to just purchase a property and put it in your name. The key to success is hiring a knowledgeable notary to keep you up-to-date and help you stay legal.
The Education & Cultural Stamp Tax
Corporations must also pay The Education and Culture Stamp Tax (Timbre de Educacion y Cultura). This tax is based on the amount of the capital stock of your corporation. Most corporations in Costa Rica have a capital stock of less than 250,000 colones which means those corporations will only pay a tax of 750 Colones or about $1.50 in U.S. dollars. The payments are due by March 31st of each year.
The Marchamo Tax
In Costa Rica, “marchamo” refers to the annual road circulation and mandatory liability tax. Anyone who owns a vehicle in Costa Rica is required to pay this tax. The tax can be paid starting Nov. 15th, with a deadline of Dec. 31st. To find out how much you owe, send a message to 1467 with the word “marchamo” followed by the license plate number. You cannot renew or pay the marchamo unless you provide proof the vehicle has an up-to-date inspection slip showing it passed its yearly emissions testing.
The Rental Property Tax
If you own property in Costa Rica and rent it out when not using it, you’re still responsible for paying the property tax. This seems like it would be a given, but it wasn’t until fairly recently.
The Crackdown on Rental Properties
Let’s begin with some background. For years, those who bought vacation properties in Costa Rica quickly realized how strong the rental market is for condos and homes, especially from December to April, which is the high season. With proper marketing and maintenance, an owner can easily cover all expenses and earn a significant profit – a win-win situation!
However, the tax authority, the “Ministerio de Hacienda” (akin to the U.S. Internal Revenue Service or Canada’s Revenue Agency), has stepped in. Many expatriates and local Ticos are historically known for not reporting rental income. While existing Costa Rica taxes covered these earnings, evasion was common. Avoiding taxes is prevalent, almost like a national sport, but realistically, what country doesn’t want a share of your profits or salary?
You might think, “I don’t run a business in Costa Rica, so why should I care?” But, if you own property in Costa Rica, then consider these questions:
- Is the property held in a Costa Rican corporation or your name?
- Is the corporation active (doing business and receiving income), or inactive?
These questions are crucial for avoiding trouble with the Costa Rican tax authority. If unable to answer these questions, we recommend consulting the attorney who set up your Costa Rican corporation.
Don’t Even Try to Cheat the System!
As of the beginning of the new fiscal year on October 1st, 2018, most Costa Rican corporations are legally required to issue a “factura electrónica” (a registered electronic receipt) for all business transactions or services. For instance, if your pool service is a legal company paying taxes, they must issue an electronic invoice for payment. This process also applies to renting your property – each renter must receive a “factura electrónica” for payment – even I have to issue an electronic factura to every seller I earn a commission from the selling of their property.
Also, be warned that the Tax Authority will know if you try to fake it! The system ensures that when a service provider issues a “factura electrónica,” the tax authority receives the information for cross-checking tax liabilities. Rental properties are also considered businesses in Costa Rica, so they must comply with the law. I’m not a tax officer, CPA, or legal advisor, but as an owner of a profitable Costa Rican corporation, I’ve ensured compliance with local tax laws.
Responsible property management firms adhere to these laws to avoid liability for clients’ tax responsibilities. I know of a firm that terminated a client who refused to comply, yet continued renting. This enforcement might phase out low-priced property managers, which is unfortunate for non-compliant owners. We recommend contacting your rental assistant in Costa Rica before the tax authorities intervene. Please feel free to contact us if you need a recommendation.
Got More Tax Questions? We’ve Got Answers!
If you’re wondering how income, sales, property and other taxes work in Costa Rica, check out our blog article for a full breakdown.
