It has been very common in Costa Rica for years to use companies as holding entities to hold real estate or vehicles. The rationale was to protect those assets from third parties since Costa Rica Law separates the company assets from those of the individual. Costa Rica did not have a practice of piercing the company veil to get at the company assets of the individual. Although this is not the intended purpose of the Costa Rica company which is created under the Commercial Code which is intended for commercial activities. Despite this, the use of companies to hold assets became commonplace and it was inexpensive and there were no further obligations for the owners once the company was formed and operational
New Tax and Compliance Laws
The ease of use of the Costa Rican company has begun to erode as Costa Rica create new regulations and joined the OECD which mandates further regulations for companies. Non compliance with the current regulations can result in your company being frozen from issuing certificates of company standing or being able to record company changes in the recording office. The most drastic consequence is that the company can be administratively dissolve for non-compliance.
According to Law 9248 creating a mandatory annual company tax the company will be dissolved and its registration cancelled as follows:
ARTICLE 7.- Dissolution and cancellation of registration. Non-payment of the tax established in the present law for three consecutive periods shall be cause for dissolution of the mercantile corporation, the individual limited liability company or the branch of a foreign corporation or its representative.
In addition to the creation of the annual company tax to comply with OECD (Organization of Economic Development) regulations when Costa Rica became a member the government approve Law number 9416 known as the “Law to Improve and Battle against Tax Fraud”. The law created a digitalized registry of shareholders and beneficial owners at the Costa Rica Central Bank. The rationale for the creation of this mandatory shareholder and beneficial owner registry was to fight tax evasion, tax fraud, money laundering and financing of terrorism.
Now, the most recent obligation created by the Government is the requirement that all inactive Costa Rican holding companies file an income tax return. But wait – you have no income because it is a holding company ? It does not matter what the government wants is for the company to report and disclose all the assets that those holding companies are holding. The idea behind this is that the company must maintain documentation to support the origin of the funds that were used to purchase the asset and thus maintain account records to establish the Net Worth of that holding company.
Why do I need permission to sell my company assets ?
Another law which affects the Costa Rica holding company is the Minority Investor Protection Law No. 9392 which introduced article 32-ter to the Commercial Code with the purpose that companies, partnerships and other legal entities contemplated in the Commercial Code, adopt corporate governance policies, approved by their respective Boards of Directors or equivalent bodies.
Generally, these types of laws are aimed at large publicly traded companies but the way Costa Rican drafted their law it included ALL companies, including small family holding companies. The law requires:
a) Prior approval by the Board of Directors or equivalent body of those transactions involving the acquisition, sale, mortgage or pledge of assets between the company and the general manager, with any of the members of the Board of Directors or parties related to them, with the persons interested in the transaction having to inhibit themselves from making the decision.
b) Prior approval by the Board of Directors or equivalent body of those transactions involving the acquisition, sale, mortgage or pledge of assets of the issuing company that represent a percentage equal to or greater than ten percent of the total assets reflected in the financial statements at the close of the month prior to the transaction.
In the past a Costa Rican holding company could serve as a way to minimize the impact of probate. Let’s take the example of a holding company, a Costa Rican LLC that owns a couples retirement home in Costa Rica. Generally, each spouse would own 50/50 the company shares. Both spouses would be Managers of the LLC with the ability to act independently of each other to bind the company. In the past if one of the spouses dies then the surviving spouse as Manager had the authority to sell the company asset, the home without opening probate. Currently, under Law 9392 this is not allowed. The Manager must obtain the approval of the “directors or equivalent body” to sell the company asset. Since the other shareholder that owned 50% of the shares is no longer living that consent cannot be given. This forces the surviving spouse to open a probate process with the cost implications involved in order to probate the share ownership of the deceased shareholder.
Should you have a Costa Rican company for holding property ?
These changes in the law and expanded obligations related to owning a company in Costa Rica have led many individuals to ask: Should I have a Costa Rican holding company to own my property ? It depends. If you don’t mind tending to all the new administrative regulations and compliance then it is still a way to shield your property assets from personal liability in Costa Rica. Also, those individuals that do not have residency in Costa Rica will find it easier to be to set up their property utilities with the company since it has a local identification number.
Be sure to discuss and review you personal requirements with your Attorney to ensure that you understand the pros and cons of setting up a company based on your circumstances.
For more detailed information about Costa Rican Companies I have a very detailed course titled “How to Set Up and Manager your Costa Rica Company
