costa rica

DOING BUSINESS IN COSTA RICA

This section provides basic guidance to people or companies that are contemplating establishing business operations in or exporting to Costa Rica. It covers briefly the most important aspects of doing business in Costa Rica, whether the operations will serve the national market, serve the region from Costa Rica as a base or use Costa Rica as a manufacturing base.

General Aspects

 

Costa Rica is a democratic Republic located in Central America that has had a stable constitutional system form more than five decades. Costa Rica is known worldwide for its long term political social and economical, stability, formerly known as coffee and banana exporting country, Costa Rica has embraced high-tech exports, and shared services as a new way of doing business, all this combined with the fact of  being an outstanding touristic destination. The standard of living is relatively high and the land ownership is widespread. In January 2008, Costa Rica assumed a nonpermanent seat on the United Nations´ Security Council for the 2008-09 term.

Country Overview:

Population:	4.2 million.
Capital City :	San Jose.
Area:	51,100 sq km.
Age Structure:	0-14 years: 26.7% (male 581,916/female 555,216) 15-64 years: 67.1% (male 1,443,606/female 1,411,168) 65 years and over: 6.2% (male 120,969/female 141,002) (2009 est.)
Major languages:	Spanish (official), English (second language) is frequently is spoken in business meetings.
Major religion:	Roman Catholic.
Life expectancy:	78.5 years.
Human development index value:	0.846 (High Human Development).
Human development index rank:	48th, out of 177 countries.
Currency:	Costa Rican Colon.
Main exports:	Integrated circuits, computer parts, bananas and pineapples.
Per-capita GDP (2007):	US$5,837.
Sources:	United Nations Human Development, CIA: The World Factbook

Costa Rica decided to abolish its army 6 decades ago, allowing the redirection of the resources that were used for military purposes towards education and health. This initiative has granted Costa Rica the best health indicators in Latin America and has created a stable middle class through increased educational opportunities. Costa Rica has achieved a relatively high standard of living among developing nations, with a US$5,837 per-capita GDP and an unemployment rate that currently stands at 4.6% (July, 2007). Our country currently enjoys a 94.9% literacy rate.

Technical training and professional education, in addition to innovation and transfer of technology, are crucial factors for achieving higher levels of country productivity, and the latter Costa Rican governments had understood that, emphasizing on having a world-class education that brings competitive advantages within the global economy we live in.

15% of the Costa Ricans over 18 years old hold either a technical or a university degree, and nearly 30,000 diplomas are granted by universities throughout the nation. By focusing on developing technologically advanced and highly skilled labor force, Costa Rica remains adding value to the international marketplace for many years to come. Technological and medical companies as well as financial shared service centers, and call centers have chosen Costa Rica as their off-shore operations country because they rely in their people´s education, versatility and productivity.

Costa Rica is also well known by its health indicators, the life expectancy stands at 78.5 years – the highest in Latin America- which is close to Germany’s (79.1) and has one of the highest United Nations’ Human Development Indexes among developing nations.

With the DR-CAFTA Trade agreement, Costa Rica has become even more attractive as a country, as the export duties between the country and the United States have either been eliminated or significantly reduced for some merchandises.

Among the many advantages of operating in Costa Rica we can mention:

 

• Highly educated and productive workforce
• Strategic location and preferential market Access
• Lower costs
• Export-oriented infrastructure
• Strategic location and preferential market Access
• Political, social and economic stability
• Several Multi-National Companies operate in the country

 

Last but not least, Costa Rica´s government entities are also a great plus, as they offer continual counseling to those company that have already invested in the country as well as guidance to those which want to start operations, both CINDE and PROCOMER, provide great support anytime you need it.

 

LEGAL ASPECTS

1- Foreign Investment And Exchange Controls

 

Costa Rica has no general foreign investment law, and its exchange controls were lifted in 1992. Costa Rican law permits national and foreign companies to operate bank accounts in colones or in dollars, both in Costa Rican banks and abroad.  There are no technology transfer requirements.  Foreign remittances are taxed and some tax incentives include export performance requirements.  For many years, Costa Rican law currently established some industries such as telecommunications, electricity generation and distribution, and insurance services as state monopolies, and prohibits private investment there.  Under the Central American Free Trade Agreement with the US (CAFTA), these monopolies will be phased out in the near future.

2- Real Property: Ownership And Leasing

The general rule in Costa Rica is that foreign persons have the same property rights as Costa Rican nationals.  Thus, there are no legal restrictions that would specifically affect a foreign entity or a Costa Rican entity owned by foreign capital that desires to rent or purchase real estate.  Costa Rica’s Civil Code generally regulates all types of leases in the national territory.  In addition to the basic provisions of the Civil Code, urban leases are also subject to a separate Law for Urban Leases.

3- Companies Law

 

Costa Rican law recognizes a wide variety of organizations, including corporations (sociedad anónima, or SA), limited liability companies (sociedad de responsabilidad limitada, SRL or LLC), general (sociedad en nombre colectivo) and limited partnerships (sociedad en comandita), limited liability individual enterprises, trusts, foundations, civil associations and cooperatives.  Foreign companies may operate legally in Costa Rica through local branches, joint-ventures, wholly-owned subsidiaries and other variations of the standard organizations.

Regardless of the method of operation, an enterprise doing business requiring a legal representative in Costa Rica must register with the Commercial Section of the National Registry (Registro Nacional), thus becoming a national enterprise and taxpayer for Costa Rican purposes, regardless of the nationality of its owners or officers.  Foreigners may (i) act as officers, directors, partners or trustees in local companies, (ii) make use of negotiable commercial documents and (iii) execute any kind of legal contract.

The corporation is by far the most common form of business entity in Costa Rica.  In recent years, however, US and European tax advantages have made the limited liability company more desirable for some businesses.  Corporations and LLC’s are relatively easy to manage, especially with respect to powers of representation, decision-making issues and other day-to-day business administration activities.  They both limit the financial exposure and liabilities of shareholders vis-à-vis third parties.

Foreign companies may register branch offices, which are only liable for income tax on Costa Rican source income.  Although branch offices are not separate legal entities and therefore do not limit the potential liabilities of the foreign company in Costa Rica, foreign companies may in effect achieve limitation of liability by forming a special purpose subsidiary in their own or a third jurisdiction and registering a branch office of the special purpose company in Costa Rica, thus limiting liability in Costa Rica to the capital of the special purpose company.

4- Labor Law

 

Employment and labor laws are an important part of Costa Rica’s legal structure.  Basic labor rights include minimum conditions of liberty and dignity for all workers; minimum wages and equal pay for equal work; an 8-hour workday and 48-hour workweek; time-and-a-half pay for overtime; and severance payment (but not the right to reinstatement as contemplated by other Latin American legislations) for “unjust” dismissal.  The 1943 Labor Code follows the principle of minimum standards that can only be negotiated in the direction of improvements for the employee.  The Labor Code also addresses collective bargaining rights, including the right to unionize and the right to strike pursuant to a mandatory conciliation process.

The Labor Code defines an employment relationship as one in which the employee receives money in exchange for services and is subject to direction and control by the employer.  Employment agreements need not be in writing, but oral agreements are typically interpreted in favor of the employee.  Even in the case of written agreements, the minimum standards of employment in the Labor Code cannot be reduced; however they may be improved by agreement among the involved parties.

The Employer may also implement internal work policies which do not need the approval of any government agency and may be considered as part of the conditions of the labor contract.

5- Immigration Law

 

Entry Visas.  The Immigration Authority of Costa Rica (DGME) recently modified some entry visa requirements for non-residents. The new visa requirements primarily affect nationals of Group 3 (consular visa required) and Group 4 (restricted visa or DGME authorization required).

Group 3 nationals with entry visas valid for three months to the U.S., Canada, or an E.U. country will not require the Costa Rican consular visas and may enter Costa Rica for up to 90 days. Group 3 nationals include Colombia, Dominican Republic, Ecuador, Nicaragua, Peru and Taiwan.

Group 4 nationals with entry visas valid for three months to the U.S., Canada, or an E.U. country or with permanent resident visas valid for 6 months will not require the Costa Rican restricted visa or DGME authorization and may enter Costa Rica for up to 30 days. Group 4 nationals include China, Cuba, and Iran.

A copy of Directive 1198-2009 and complete listing of the 4 groups is available at http://migracion.go.cr/visas/Directrices_ingreso/Directrices%20visas%20Mayo%202009.pdf

Corporate Immigration.  On April 1, 2009, the General Immigration Authority of Costa Rica's (“DGME”) Directive 1086-2009 came into effect. This Directive affects the Company Accreditation Process (CAP) for fast-track procedures. The changes introduced by Directive 1086-2009 suspends one of the categories of companies eligible to request accreditation, replaces requirements in one of the other categories, and allows for a wide berth of discretionary authority by the DGME in exercising its right to request additional evidence, which in turn may delay the approval process for accredited corporations. In addition, the Directive makes provisions for the establishment of special service-windows at the DGME which will attend to all new, and qualifying renewal, applications for Temporary Residence made by foreign employees of accredited corporations.

In 2008, the DGME created a classification system for companies interested in the then new CAP (introduced by Directive 1084-2008). These corporations that are eligible to file for CAP will, once accredited enjoy among other benefits 1) priority processing of Temporary residence applications on behalf of foreign employees, and 2) extended validity of Permits issued. To be apply for accreditation, however, interested companies must fit in one of the following categories:

Class A:	Corporations under Special Export Regimes (i.e. Free Zones), supervised by the Ministry of Commerce.
Class B:	Other Corporations exporting goods or services, not included in Class A.
Class C:	Airlines and Hotels with classification of 5 Stars or more and accredited with an"Official Declaration of Tourism" document.
Class D:	Financial Corporations under supervision of local regulating entities.
Class E:	Non-exporting corporations; (this class is pending is not currently applicable as it is pending regulation requirements).
Class F:	Multinational Corporations; (now suspended per directive 1089-2209).
Class G:	Government contractors.

 

As of April 1, 2009, with the following new requirements apply:

 

Class F:	suspended until further notice from the DGME.
Class G:	the previously required investment plan from the Government Contractor is no longer necessary. However, class G now requires a government contract with validity for at least three years.

A new adjudication office with dedicated CAP windows has been created. Note though, the office will only process new, and qualifying renewal, applications for Temporary Residence for foreign employees. All subsequent processes (i.e. cancellations, change of employer etc.) shall be handled by the traditional offices for the General Public.

Although, as noted above, qualifying renewal applications for Temporary Residence may also use the special windows, these applications will require a Certification of the Corporation’s Payroll.

All incomplete applications lodged by qualifying CAP entities will be sent to the traditional offices of General Public. The file will also be frozen for 10 calendar days, during which period the applicant must complete the application. If completed, the file will be returned to the office dedicated to accredited corporations and will be adjudicated within three months. If not completed, the application will be denied.

Accredited corporations must annually present and justify the need to keep the accredited status to hire foreign nationals. The DGME may request any additional information about the Corporation, the employee or its dependents that it deems fit, in order to process the Temporary Residence.

Individuals. For private individuals seeking to reside in Costa Rica by their own means, there are basically three possibilities for Temporary Residency (must be renewed each year and cannot work or perform any remunerated physical or intellectual task, but live out of their income):

1. Rentist: Applicants need to prove that they have financial access, to at least $1,000 per month, per each adult and U$500 for each minor, for a minimum of 5 years. This will mean that a class A financial institution or Bank will have to certify that it has a direct and irrevocable order to deposit from your accounts U$1,000 per month. So in this particular case, the applicant must have U$60,000 in a bank account in order to comply with this requirement. For renewal purposes, you must exchange the U$1,000 into colones on a monthly or yearly basis and show the bank receipt for it.

2. Pensionado (Retiree): the applicant has to prove that it has a monthly social security pension of U$600 dollars, for life. In this type of residency, the Retiree has the right to bring his immediate family, wife and children fewer than 18 or with any disability, without having to prove a higher monthly income.

3. Investor: There are three type of investor residents:

a. General Investors: Applicants will have to prove an investment in excess of U$200.000 in Costa Rica on any kind of industry or business.

b. Tourist Investors: U$50.000 in tourist investments, which also will have to have the tourism licensed duly issued.

c. Agricultural Investors: U$100.000 in agricultural investments and the investment will have to be acknowledged and accredited before the Agricultural Department of Costa Rica.

In any of these three cases you will need an extent list of requirements for the company holding the business, which will depend on the type of corporation and business you are running.

4.Renewals. The DGME issued Directive 1086-2009 (effective April 1, 2009) whereby it authorized Banco de Costa Rica (“BCR”) to process the renewals of all types of resident visas. BCR started offering this service to the public in June. Therefore, all resident visa holders can visit a BCR office and perform the renewal process personally. This procedure is still under trial; but if successful, it will transfer a significant volume of cases from the DGME to BCR and, thereby, enable DGME to focus its resources on other immigration processes.

 

6- Tax Law

 

Costa Rica only taxes income that is generated within the national territorial boundaries (domestic source or “source income”): it does not tax based on residence or citizenship.

  The Costa Rican Congress is at this time reviewing its tax system to replace the current tax incentives granted to Free Trade Zone manufacturing companies.  The rates under discussion range from 15% to 30%.