|
The Closing Process
Closing on real estate transactions in
Costa Rica entails a very
specific streamlined process that if approached the right way
and with the advice of the adequate professionals may be very
simple, efficient and safe. It is important to identify and
consider the different key elements, figures and governmental
institutions that are involved in the Closing Process to
understand the importance of the different steps of the process
that will ultimately safeguard your investment.
Who
are the Key Players in the Closing Process?
·
Immoveable Property Section of
the Public Registry.
·
Cadastre Registry.
·
Public Notary.
·
Title Company.
Costa Rica has system that is characterized
by notice through recordation, meaning that in order to validate
a particular interest in a Property against third parties, the
interested party will have to record it´s interest in the
Immoveable Property Section of the Public Registry in order for
the interested party to obtain priority over other third parties
with similar or equal interests.
Property that is recorded at the Immoveable
Property Section of the Public Registry is identified through a
number called Folio Real.
The Folio Real is a number that identifies a specific and
particular piece of property. By pulling up the Folio Real you
are able to determine if the Property has any recorded liens,
easements, judgments, covenants, encumbrances, leases, if the
Property is under option, or any other situation that gives rise
to third party interests over that particular piece of Property.
Recordation of any of these, will give that beneficiary or
creditor, a vested interest over the property and the time of
recordation shall give that beneficiary or creditor, priority
over other third parties that have similar interests over the
property. The Folio Real also references a recorded survey
called Cadastre which is recorded at the Cadastre Registry. The
Cadastre Registry is an independent Registry from the Public
Registry, even though physically, they are at the same place.
The main purpose of the Cadastre is to show where the property
is located, its size as well as the physical condition that the
property may have, including third party rights that are not
necessarily recorded at the Public Registry. Since both
Registries are autonomous from one another, the information that
is found on both registries is not always the same and may
differ in several elements. In any event, the information that
is recorded at the Immoveable Property Section of the Public
Registry is the official information and has priority over any
information that may be found at the Cadastre Registry should
the information differ.
Due to the importance the legal
framework gives the Public Registry in providing notice of
vested interests anyone person may have over a particular piece
of Property, the submittal process is very delicate and often
time consuming. It is up to the Public Notaries exclusively to
submit for recordation any interest that is created in favor of
any given person in order to assure that person priority over
other similar interests third parties may have over Property.
All Public Notaries must be enlisted at the National Notary
Division and must comply with the Division´s rules and
regulations. The activity itself is heavily regulated and the
responsibility that any one attorney has over a particular
transaction is great due to the fact that they have Public Faith
being able to certify and authenticate all types of acts and
contracts. Notaries must have a notary book which is a public
instrument used to subscribe any and all types of contracts
creating or transferring interests that may be recorded. Once
the document has been signed by the parties, the Notary submits
that document to the Public Registry for recordation. Once the
document is recorded, the clerk drops off the document for the
Notary to pick up. Once the information is recorded any person
can request a certification at the Public Registry directly or
from a Notary of the
particular interest that has been recorded.
Although title insurance is not mandatory in
Costa Rica, it is important to
consider. The law that regulates the Public Notary activity, has
the National Notary Division create a fund that is to be used in
case of mal practice liability. The practical effect of the mal
practice fund is of no real consequence and the protection that
was originally intended does not adjust to the reality which we
live in, leaving an important legal gap should liability derive
from lack of due diligence or vices in the way the title to the
Property has been conveyed or created. This is where Title
Insurance becomes of great importance, since it assures the
owner of the Property (or beneficiary to the policy), that the
Property has been or is recorded at the Public Registry and that
any liability that may arise due to vices in the chain of title
shall be indemnified by the Title Company. Before the actual
closing, the Title Company issues a Title Commitment which
states the terms and conditions through which it will assure
title to the Property. This document is essential to any due
diligence process.
Another important role played by the Title
Company is escrow. Escrow is an essential component to any
transaction in order to maintain security and impartiality when
releasing funds according to pre established instructions or a
contract signed and agreed to by the parties. Through escrow,
the parties guarantee that the original intent is carried out
until the moment the deed is conveyed.
Ownership Structure. What is the importance of owning property
through a legal entity?
A Sociedad or Business Association is a contract between a
minimum of two individuals or legal entities whereby the parties
to the agreement define the terms and conditions that will
regulate their business relationship[1].
In order for the Sociedad to obtain legally independent status[2],
separate from its constituents, the articles that create and
regulate the relationship between the parties in the Sociedad
must be drafted in an Oficial Notary Book and filed with the
Public Registry for recordation[3].
Once the Sociedad has been recorded, then the entity
acquires independent status from its constituents being able to
legally act and contract with individuals or other legal
entities.
Through a Sociedad, the investor may limit
the possible civil contractual or tort liability that may arise
from the use, enjoyment or ownership of the Property to the
Sociedad itself and its assets. Additionally, depending on the
Sociedad being used, there are certain tax benefits that may
help decrease the investor´s tax liability.
There are two forms of Sociedad which are the
most popular due to their limited liability nature which are the
Sociedad Anónima and the Sociedad de Responsabilidad Limitada.
Both of these entities are completely anonymous meaning that
there is no public record showing who the stock holders are.
Proof of ownership or stock holders are evidenced in the legal
books of the entity that is usually held by the President of the
Board or the Resident Agent and through the stock certificates
that have been issued and authorized by the board of directors.
Differences and Similarities between Sociedad Anonima and Sociedad de
Responsabilidad Limitada.
The main similarities and differences
between the Sociedad Anónima and the Sociedad de Responsabilidad
Limitada are:
|
|
Sociedad Anónima
|
Sociedad de Responsabilidad Limitada
|
|
Legal
Denomination
|
S.A.
or Sociedad Anónima
|
SRL,
Limitada or Sociedad de Responsabilidad Limitada
|
|
Stock
|
Stock of a Sociedad Anónima are
called Shares and have the following characteristics:
1)
Represent the Capital
Stock of a Entity.
2)
Share Cerfiticates are
considered securities paper and therefore subject to the
laws regarding securities in
Costa Rica as well as
in the United States.
3)
Shares Certificates
represent the capital stock of the entity.
4)
Shares are transferred
through endorsement of Share Certificates and
recordation of transfer in the Shareholder Registry Book
5)
Share Certificates may be
negotiated according to the Securities Laws of Costa
Rica.
6)
Shareholders may transfer
their interest to third parties freely unless stated
otherwise in the articles of Incorporation or Pacto
Social.
|
Stock of a Limitada are called
Quotas and have the following characteristics:
1)
Represent the Capital
Stock of the Entity.
2)
Quota Certificates are
not considered securities.
3)
Quota Certificates do not
have any real value, only serves informative purposes.
4)
Quota Certificates do not
accurately represent the capital stock of the entity
necessarily.
5)
Quotas are transferred
through an Quota Assignment Agreement and recordation on
the Quota Holder Registry Book.
6)
Quotaholders have by law
a right of first refusal provision for the sale of
quotas, meaning that quotaholders are not free to
transfer their interest without offering their interest
to the rest of the quota holders first. The acceptance
of said transfer by the quota holders must be performed
through a quota holder meeting recorded on the Quota
Holder Assembly Log.
|
|
Governance
|
A Sociedad Anónima is governed by a
board of directors which must have at least three
members, an auditor and an resident agent that are
initially appointed by the constituents. The three
members must be a President, Secretary and Treasurer.
Other positions may be created by the shareholders as
deemed necessary through Share Holder Assemblies
recorded on the Share Holder Assembly Log.
The representation of the entity is
defined by the shareholders and may be as broad or
specific as determined by the shareholdes. The board of
directors may or may not be shareholders of the entity.
All Sociedades Anónimas must have
three administration books and three accounting books.
The administration books are a) Board of Directors Log,
b) Shareholer Assembly Log and c) Shareholder Registry
Book. The accounting books are a) Balances b) Mayor c)
Diario.
|
A Limitada is goverened by at least
one manager who may or may not be a quota holder and
must have an auditor and a resident agnet. The manager
or managers are initially appointed by the constituents
and may be later removed and appointed by the Quota
Holders through a Quota Holder Assembly.
The representation of the entity is
defined by the quota holders and may be as broad or
specific as determined by the quota holders. The
managers managers may or may not be quota holders of the
entity.
All Limitadas must have two
administration books which are a) Assembly Book and b)
Quota Holder Assembly Book. The accounting books are a)
Balances, b) Mayor c) Diario.
|
|
Limited Liability
Status
|
The Sociedad Anónima´s liability is
limited to the entity´s assets and to the totality of
the contributions made by the shareholders.
|
The Limitada´s liability is limited
to the entity´s assets and to the totality of the
contributions made by the quota holders.
|
|
Tax
|
For tax purposes in
Costa Rica, the
Sociedad Anónima is a taxable entity and must register
at the Tax Administration in order to pay taxes.
Sociedad Anónima´s are subject to the following taxes:
1)
Income Tax. The Sociedad
Anónima must file a yearly declaration. If income is
under US$50,000.00, the entity will be considered small
enterprise and will be subject only to a 10% tax of its
taxable income. If the entity´s income is over
US$50,000.00 it is taxed a 30% of its taxable income.
2)
Dividend Tax. On any
dividend declared that constitutes a habitual source of
income, there is a duty to retain a 15% of the total
amount distributed to the share holders.
Disclaimer. These
are the basic forms of taxation. This legal entity may
be subject to additional taxation or the regulations may
vary. BLP Abogados or its attorneys are tax specialists
and any advice given should be corroborated with your
accountant or tax advisor.
|
For tax purposes in
Costa Rica, the
Limitada is a taxable entity and must register at the
Tax Administration in order to pay taxes. Limitadas are
subject to the following taxes.
1)
Income Tax. Same as the
Sociedad Anónima.
2)
Dividend Tax. Same as the
Sociedad Anónima.
The difference with the Sociedad
Anónima is that from the perspective of
US
taxation, the Limitada has been considered a pass
through entity and the taxes paid in
Costa Rica
are deductable in the
United States.
Disclaimer. These
are the basic forms of taxation. This legal entity may
be subject to additional taxation or the regulations may
vary. BLP Abogados or its attorneys are tax specialists
and any advice given should be corroborated with your
accountant or tax advisor.
|
[1]
Although a mínimum of two individuals or legal entities
are required to set up a Sociedad, after the entity is
formed, the totality of the stock may be transferred to
one single person.
[2]
The independent status is generally referred to as “Personalidad
Jurídica” or “Persona Jurídica” which means Juridical
Person that has been created according to the law and
has acquired the status of an independent person able to
act and contract in the legal world.
[3]
These articles are referred to “Pacto Social” or “Pacto
Constitutivo” which would be the equivalent to Articles
of Incorporation and Operating Agreements used in the
US. In order for the
Operating Agreement to be binding against third parties,
the provisions must be validly recorded at the Public
Registry in order to give notice to the world of their
existence.
|
