Nearshore Americas

Costa Rica: Navigating the Capital Gains Tax

For some time, a number of international rankings list Costa Rica as one of the best countries to retire.  This does not come as a surprise for many.  

Costa Rica boasts world prestige as an environmentally-friendly country with more than a quarter of its territory made up of national parks and protected areas.  Albeit small in territory, its strategic location between the Pacific Ocean and the Caribbean Sea is crowned with a wide array of micro-climates and offers pristine beaches, bountiful coastline, volcanoes and cloud-forest mountain ranges where a large variety of animals roam and exotic plants and trees flourish.

In addition to these natural wonders, the country has a strong democratic government and a rule-of-law system, abolished the army more than 60 years ago and decided to invest an important part of the national budget in education. Thus, Costa Rica has some of the highest literacy levels in the region and its well educated people are culturally welcoming towards foreigners. With a robust public health care system, life expectancy is one of the highest in the world, even surpassing that of some industrialized countries.

All these factors have given place with alacrity to a vigorous tourism industry. People from all around the world are curious to explore the virgin beaches, to rove the luxuriant tropical forests, to watch endemic bird species in the dossel and dip into hot springs in the volcanoes’ slopes.

A direct consequence of this tourist inflow is that, during the past decades, the number of expatriates that decide to move to Costa Rica, on a permanent or seasonal basis has increased exponentially. A vast majority of them are from the United States and Canada, and Europeans follow closely. 

Expats and real estate

Although there are no official statistics, a large portion of expatriates live in coastal areas, especially in the Pacific coast, where the variety of beaches offers a one-of-a-kind experience for everybody.  This influx of direct foreign investment has reshaped the real estate market in Costa Rica, particularly in the coastline. As demand expands, prices soar in certain regions.

This hot real estate market has called the authorities’ attention to address taxation on capital gains.  Costa Rica did not have a specific real estate tax until mid-2019.  In 2018, after several prior unsuccessful tax bills by other administrations, the government promoted a comprehensive tax reform. Amongst other changes, a capital gains tax was finally introduced.  

Although this tax was not enacted purportedly for the stepping coastal real estate transactions, the authorities certainly drafted the new tax thinking of capital gains that expatriates accrue from this market. The wording shows that.

In general, the capital gains tax rate is 15%. This tax rate is applicable on the difference between the acquisition value and the selling price. However, sellers may elect to pay the capital gains tax differently in connection with properties acquired prior to July 1st, 2019, when the tax reform became current. They can choose to pay the tax of 2.25% of the selling price.

The capital gains derived from the sale of one’s primary home are tax exempt, including when the residential property is owned by a company for whose shareholders serve as home.  Registering real estate property in the name of local companies is a very common practice in the country.  Vacation homes, however, do not qualify for the tax exemption for the capital gains tax. Properties bequeathed are also capital gains tax exempt. Hence, expatriates that live primarily in Costa Rica do enjoy these conveniences.

Complicated rules

The rules become a little complicated when real estate property is owned directly by expatriates that do not live permanently in Costa Rica.  In these cases, the buyer is bound to withhold 2.5% of the selling price on behalf of the non-resident sellers as a tax credit for the presumptive capital gains tax generated.  

This same withholding is mandatory with regards to other types of properties owned by non-resident individuals but only when the buyer is a corporate income taxpayer.  

In either case, the seller is still bound to declare and pay the capital gains tax as only he or she can choose the fashion in which the tax should be declared and paid, either by the general rule or the 2.25% special rule, if applicable.  The seller is entitled to claim as a tax credit the withholding that the buyer made.

Ironically, authorities have not designed a practical way for expatriates to declare and pay the capital gains tax. The tax has to be assessed and paid in colones –the local currency–, although the transaction may have been agreed and closed in US dollars, as the vast majority of these transactions are. The tax has to be declared via the digital platform of the tax authorities, but the tax has to be paid through a local bank account transfer. 

Thus, expatriates that are not legal residents in Costa Rica have to obtain from the tax administration a special identification number to enable them to access this platform. On the other hand, local banks seldom open bank accounts to expatriates that are not legal residents in the country and so, these expatriates usually do not have a bank account in colones to pay the tax directly.

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The authorities have allowed other taxes to be paid in US dollars. It is unclear, however, why they have not expanded this alternative to the capital gains tax. This would ease the payment of the capital gains tax for expatriates that are not legal residents in the country.   

The authorities should take a closer look at all these problems that expatriates face when they have to comply with local tax regulations.  All taxpayers –expatriates and locals– should have easier ways to pay their taxes.  With simpler ways to pay taxes, the authorities would more efficiently collect the revenues that the appreciated real estate market generates, triggered specially by expatriates’ investment.   

Mariela Hernandez

Mariela is a Partner at ECIJA Costa Rica’s fiscal, dispute resolution practice.

She began her career as a legal counsel at Costa Rica’s Ministry of Economy, Industry and Commerce, where she participated in numerous local and international forums on regional economic integration, industry regulation and consumer rights.

Mariel has provided her services as a legal counsel to businesses in the hotel, construction, electric, agroindustrial, chemical and food industries.

She has a masters in law from Georgetown University and graduated with honors from law school in the University of Costa Rica. She’s also a member of Costa Rica’s School for Attorneys, of the Worldwide Association of Notable Alumni and the International Fiscal Association.

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