For many years property owners in Costa Rica never had to worry about capital gains when selling their Costa Rican real estate. The existing law only applied capital gains tax to real estate developers that were in the business of developing and selling real estate. Everybody else was exempt. Recent changes to the Costa Rican tax laws implemented an across the board Capital Gains Tax (Ganancias de Capital) and in this article, we will review the impact of that law on the sale of real estate in Costa Rica.
How much is the capital gain tax?
Law #9635 creates a Capital Gains Tax of 15% which will apply to all investment income and real estate. For real estate transactions, the law provides a one-time exemption for property owners that owned property before the law came into effect on July 1st 2019. For this one-time exemption, the seller will pay 2.25% on the purchase and sale price.
Who has to pay capital gains?
The sale of the primary residence/home is and will remain always exempt from capital gains. For these purposes, according to the law and its regulation, the “primary residence”, is the property whose primary purpose is to serve as the “shelter, protection and home, and in which the owners reside”.
Therefore, when you sell a commercial or investment real estate, you will have to pay the capital gains and submit the proper tax form to comply with the law.
However, if the property is owned by a foreign and/or person that does not have a domicile in Costa Rica, is not a “domiciled person”, the law requires that the BUYER holdback 2.5% of the purchase and sale price of the property to ensure that any capital gains tax is covered and paid. The law refers to a “non-domiciled” property owner.
Who is a non-domiciled property owner?
To find the answer we need to look at Article 5 of the Income Tax Regulations which defines who is considered to be a domiciled person for tax purposes. Section number 5 of the Income Tax Law defines who, for tax purposes, will be considered a domiciled person: “A foreign person will be considered domiciled if spend more than 183 days in Costa Rica.” If the person goes in and out of Costa Rica on sporadic occasions that would not necessarily eliminate the status but will have to be confirmed by the Tax Office to avoid any issue.
Costa Rican corporations (either a SA or an SRL) duly registered at the National Registry are considered “domiciled” in Costa Rica as long as their legal domicile (domicilio social) or place of business (domicilio fiscal) is within Costa Rica.