Doing Business in Costa Rica

Government attitude towards foreign investment Costa Rica’s economic, political and social stability are a characteristic that has distinguished the country throughout its entire contemporary history and is one of the most important strengths that has enabled it to reach great success in alluring foreign investors.

The Government created Free Trade Zones under law. No. 7210 (known as the “Free Trade Zone Law”). Fiscal incentives, including 100% exemption from virtually all taxes and Government finance for the training of employees, are available to companies which comply with the investment and employment requirements stated in the Law.

In addition, there are other specific sectors, such as tourism and forestry that are promoted by the government through tax incentive laws. These sectors are briefly defined in the Tax System epigraph.

Free trade agreement and other agreements Costa Rica is a member of the World Trade Organization and has some preferred treatments. The country has access to United States through the Caribbean Basin Trade Partnership Act (CBTPA), which was an extension of the Caribbean Basin Initiative (CBI) and the Preferred Generalized System GSP.

Costa Rica has bilateral free trade agreements with the following countries and blocs which took effect on (see date): Canada (November 1, 2002), Chile (February 15, 2002), Caribbean Community (CARICOM) (November 15, 2002), the Dominican Republic (March 7, 2002), El Salvador Customs union, (1963, re-launched on October 29, 1993), Guatemala Customs union, (1963, re-launched on October 29, 1993), Honduras Customs union, (1963, re-launched on October 29, 1993), Mexico (January 1, 1995), Nicaragua Customs union, (1963, re-launched on October 29, 1993), Panama (July 31, 1973, renegotiated and expanded for January 1, 2009), United States (January 1, 2009), China, Singapore and European Union (under negotiation).

The main agricultural produce are bananas, pineapples, coffee, melons, ornamental plants, sugar, corn, rice, beans, potatoes; beef, poultry, dairy and timber.

The main industries are: microprocessors, food processing, medical equipment, textiles and clothing, construction materials, fertilizer and plastic products.

Foreign investment Foreign investment, which is welcomed in Costa Rica, is concentrated in manufacturing (45%) and agriculture (25%, mainly banana and coffee interests). Other investments are placed in the railways, tobacco, communications, airlines, government bonds, and real estate. The US, Costa Rica’s major foreign investor (78% in 1998), has interests chiefly in computer chip manufacturing, agriculture, petroleum refining, and distribution, utilities, cement, and fertilizers. The continued high level of trade with the US has been conducive to private foreign investment, especially in export industries. Investment incentives include constitutional equal treatment guarantees and free trade zones. Foreign direct investment in Costa Rica in 1998 was $530 million, or 5% of GDP.

The liberalization of Costa Rica’s trade and investment regimes, the resolution of the internal debt problem, and the passage of legislation to expand private sector investment in energy, telecommunications, roads, ports, and airports have boosted opportunities for foreign and local investors and increased Costa Rica’s prosperity. In 1998, the Public Concessions Law defined the ways in which foreigners could invest in Costa Rica’s public sector.

The Costa Rican government has introduced a wide variety of incentives in an effort to encourage foreign investment. To support this effort the Costa Rican Investment Promotion Agency (CINDE), a private non-profit organization, was set up to assist and quide investors and companies in establishing operations in Costa Rica.

A further step in this effort was the promulgation of legislation providing significant tax and operational incentives to companies in export related activities. These sets of incentives are: the export contract, the free zone and the temporary admission system, all of which include total or partial tax exemptions and expedite customs clearance services among other simplified operational aspects.

Costa Rican laws, regulations and practices foster competition and do not discriminate between locals and foreigners, for the conduction of business. The only exceptions to this are the entities that are constitutionally precluded from total foreign ownership such as telecommunications, energy generation and insurance. Tax, labor, health and safety laws do not inhibit the flow of investment.

The Costa Rican government has introduced a wide variety of incentives to encourage foreign investment. Among the most important are:

1. The ‘Drawback’ law no 5162 of 1972 encouraged the citing in Costa Rica of “screw driver” assembly plants.
Free Zones, known as Export Processing Zones – see above.

Establishing business in Costa Rica Costa Rican corporations are regulated by the Code of Commerce, Law N° 3284, enacted in April 30, 1964 (henceforth “C.C.”).

Commercial Societies

1. General Partnership (Sociedad en Nombre Colectivo)
2. Ordinary Limited Partnership (Sociedad en Comandita Simple)
3. Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.)
4. Corporation (Sociedad Anónima -S.A.)

Formation procedure In general terms, the formation of any type of commercial entity follows the steps described below.
However, it is important to bear in mind that each has specific requirements that must be complied with to duly incorporate the desired entity, and that further consultation must be carried out with the particular legal specialist in each case.

1. The founders require the services of a Public Notary and draft an incorporation deed, containing the new company’s by-laws and the appointment of the administrators.
2. Issue shares in accordance with the shareholder’s contributions.
3. Pay the registrations fees (based on the company’s capital) and submit the incorporation deed to the Public Registry.
4. Upon registration of the incorporation deed, the company is assigned a corporate identification number.

Closing procedure According to the C.C., a corporation is closed by either of the following reasons:

• Shareholder’s agreement.
• Completion of the corporate term.
• Impossibility of achieving the corporate object
• Definitive loss of more than 50% of its capital (unless replenished by the shareholders or proportionally decreased.

If the shareholders agree to close and liquidate the corporation, they have to register such agreement in the National Registry, publish a notice in the Official Ledger, and appoint a liquidator to pay the company debts and distribute the balance to the shareholders in accordance with their contributions.

Branch and/or Permanent establishment Any foreign entity may register a branch in Costa Rica.

Registration procedure The foreign entity must register a Shareholders agreement in the Costa Rican National Registry containing:

1. Appointment of a Legal Representative in the country for the company’s businesses.
2. Object, capital, and complete data of the main company’s directors.
3. An express declaration of submission to the Costa Rican Law.

All documents are validated by the country of origin Consulate and registered in Costa Rica to acquire a local corporate identification.

Joint-Venture (Sociedades de Hecho) Joint Venture is a contract between 2 or more persons who are classified as traders with an interest in one or various specific and transitional business operations, which shall be run by one of them at his sole name and under his personal credit, with the responsibility to account and divide with its stakeholders the gains or losses in the agreed proportion.

Joint Ventures are not expressly contained in the Costa Rican law but are accepted as a valid form of business association.