Want to save some money? Expats usingsociedad anónimas and S.R.L.s. to hold assets in Costa Rica can save tax dollars by converting them into a sociedad civil that pays no tax. A sociedad civil means a “civil society” in English. Yes, this is a secret to beat Law 9024 and the annual corporate tax.
Articles in A.M. Costa Rica on Oct. 28, Nov. 11, Feb. 17, March 3 and March 17 covered the ins and outs of Law 9024 in depth. Sociedades civiles are not new. Actually, the structure has been buried for decades in Costa Rica’s civil code.
The Code of Commerce, Law 3284 in effect since 1964, is the law that rules most types of company structures in Costa Rica. These companies are considered mercantile organizations. This means they make a profit from doing business or out of trade.
Sociedades civiles on the other hand, are considered contracts between two or more people where they put in money, assets or work for profit. The financial rewards are divided up among those involved. There is no minimum or maximum number of parties needed for a sociedad civil, but most legal experts interpret the civil code to infer at least two individuals are required for this kind of legal structure.
Six months of deep research by A.M. Costa Rica staff and legal expert Allan Garro of Garro Law, unearthed the many uses of a sociedad civil. This kind of legal body may qualify under United States tax code as a partnership instead of a corporation for tax savings too.
Garro said in an interview that a sociedad civil is much like a sociedad de responsabilidad limitada or “society of limited responsibility” known to most as an S.R.L. It is similar to a limited liability company in other parts of the world known as a L.L.C. One or more administrators can represent the company, and it can own all kinds of assets and enter into any kind of contract or do business.
Expats and Ticos alike have been avoiding using companies since 2012 because of the substantial tax imposed by Law 9024. This is not a good thing because holding assets in one’s personal name is dangerous. Gavilanes or vultures monitor obituaries and cross-reference the information with the Registro Nacional and Registro Civil looking to steal property of deceased people. Using a company to hold assets is usually done because it protects liability.
The key elements to a sociedad civil are as follows:
1. Capital is constituted by contributions by members in the form of money, assets and/or work. There is no minimum or maximum;
2. The organization is indicated by the wordssociedad civil or S.C.;
3. The company can be formed by public filing;
4. Profits and losses are divided according to what is agreed, if there is no agreement, then according to amounts contributed. No party to a sociedad civil can be excluded from profits;
5. Members owe what they promise to contribute to the society;
6. A member not able to pay his or her promised share must pay interest on same or be responsible for damages;
7. Administration can be mandated to one or more members.
Now expats and foreigners have an alternative when buying assets in Costa Rica so they do not have to pay a yearly company assessment tax. Partnerships can now hold investments in a simple company structure for the benefits of all involved without worrying about the nitty gritty rules of the commercial code.
What is the down side? These kinds of companies sound great.
Garro said that sociedad civiles can be used for business ventures but are not convenient to be used for same. If a company gets into financial problems, a third party can petition the court to dissolve the company to cover it debts. This differs from the normal company structure where the firm must go through bankruptcy, a messy affair in Costa Rica like probate.
Sociedades civiles are the perfect structure for holding property and other assets where no third party debt is involved. They are designed for one or more persons to get involved in an investment for profit working as a partnership. One person can own this kind of company structure, too, as long as he or she forms it with another who later relinquishes their portion. A clearly defined constitution or contract is necessary so everyone involved know where he or she stands concerning contributions and dividing profits.
Great news for expats is the fact that an already existing sociedad anónima or S.R.L can be converted to an S.C. to avoid future Law 9024 taxes. A whopping tax saving over time.
This begs the question: Will the Costa Rican government close this loophole? Legal experts agree it is doubtful because this kind of company structure is part of the civil code and not the commerce code. The structure is civil in nature like a marriage, not trade as in selling things to others.
Garland M. Baker is a 44-year resident and naturalized citizen of Costa Rica who provides multidisciplinary professional services to the international community. Reach him at firstname.lastname@example.org. Baker has undertaken the research leading to these series of articles in conjunction with A.M. Costa Rica. Find the collection at http://crexpertise.info. A complimentary reprint is available at the end of each article. Copyright 2014, use without permission prohibited.