Capital stock assignment vs. title transfer

August 13, 2015
3 Comments

Prior to September 2012, it was common practice for developers of a real estate project to record the title of each of its subdivided units under different pre-established corporations. The entities most commonly used for these purposes were Sociedades Anónimas, “S.A.”, or Sociedades de Responsabilidad Limitada, “S.R.L”.

At that time, recording the titles of the units in such way served a practical purpose: at the closing, their capital stock was entirely transferred to the buyer, causing an indirect transfer of the unit’s title to the buyer through the acquisition of his/her new corporation. The transfer was immediate, “pre-packaged” so to speak, and came with the corporation as a bonus. It also then offered some tax advantages when compared to a full title transfer.

However, in late September 2012, something changed. With the enactment of the “Tax Management Strengthening Law,” (Act No. 9069, an amendment to the “Real Estate Transfer Tax Law”) Act No. 6999 was introduced. With it, the assignment of a controlling participation of the capital stock of companies that hold title to real estate assets became bound by the same tax obligations as those straight title transfer transactions.

The practical consequences of this amendment have considerably reduced the attractiveness of acquiring such companies, which was mainly to take advantage of the transfer tax exemption. Informed real estate buyers will now better bear in mind that acquiring a company that has existed for years could entail the dragging along of liabilities related to said company. For example, if the company has been involved in any commercial activities such as renting the unit, and has not filed the corresponding tax returns, nor paid taxes to the tax authorities, the penalties and liabilities associated with that behavior could be carried forward to the new buyer/shareholder. Likewise, other issues related to labor, accounting and corporate matters could potentially arise and affect the buyer.

We are under a transition period and properties can still be offered to buyers through a sales structure that was once designed to be cost-efficient and expeditious, but that today could negatively affect a buyer if the corporate, tax and real estate due diligence study of such property and title-holding company is not performed by an experimented attorney prior to venturing into such a significant investment.

The capital stock assignment of a corporation is a predominantly corporate and private procedure, carried out by the recording of entries and meetings in the company’s book, and the endorsement of share certificates (in the case of the S.A.). On the other hand, the simple title transfer of the property or unit is done by the execution of a public deed before a notary public, which, if done correctly, can be quickly recorded before the National Registry (in about one week), and it severs the relationship of the property and the seller corporation and therefore nullifies any liabilities related to the seller’s company.

Therefore, due to the very small cost and practical differences between one figure and the other, it is recommended that one avoids undisclosed or hidden liabilities and directly purchase the title of the land through the execution of a simple title transfer deed.  

Steffano Ferraro is an attorney with BLP.  He advises clients in Real Estate, Corporate and Financial Law, both from the BLP Headquarters in San José and from the Marina Los Sueños office.  He may be reached at sferraro@blplegal.com, Tel: 2205-3939.  For more information, please visit www.blplegal.com.

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