By: Guardia Montes Abogados
Costa Rica has positioned itself as a leading hub for software development and IT services in Latin America. According to CINDE (Coalición Costarricense de Iniciativas de Desarrollo), Costa Rica’s IT and software development services sector generated over $2.3 billion in exports in 2023, employing more than 30,000 professionals directly. The World Bank’s 2024 Doing Business report consistently ranks Costa Rica among the top three countries in Latin America for ease of doing business. PROCOMER (Promotora del Comercio Exterior de Costa Rica) data shows that over 300 multinational technology companies operate under the free zone regime, including major players like Amazon Web Services, IBM, Oracle, and Accenture. The Inter-American Development Bank’s 2023 study on nearshoring trends identified Costa Rica as the leading destination for U.S. companies seeking software development services in Central America, citing factors including a 94% literacy rate (the highest in Latin America according to UNESCO), strong intellectual property protections ranked 35th globally in the World Economic Forum’s Global Competitiveness Index, and membership in the Madrid Protocol for trademark protection. Additionally, the Ministry of Science, Technology and Telecommunications (MICITT) reports that Costa Rican universities produce approximately 7,000 STEM graduates annually, with technical institutions like Instituto Tecnológico de Costa Rica (TEC) specifically emphasizing software engineering and computer science programs aligned with industry needs.
Thus, country’s robust tech ecosystem has attracted significant foreign investment, making the software development sector one of the most dynamic areas for M&A activity.
As a Costa Rican law firm specializing in corporate law, we have observed increasing interest from international buyers seeking to acquire local software development companies, as well as strategic consolidations among domestic players. This guide examines the key legal considerations when structuring M&A transactions in Costa Rica’s software development sector.
Why Software Development Companies in Costa Rica?
Costa Rica’s software development industry offers several competitive advantages. The country produces approximately 4,000 IT graduates annually from respected universities, many with strong English proficiency. Additionally, Costa Rica’s time zone alignment with North American markets, political stability, and existing free trade agreements (including CAFTA-DR) make it an attractive nearshoring destination.
The sector has matured significantly, with companies ranging from boutique development shops to large-scale BPO operations serving Fortune 500 clients. This maturity has created natural consolidation opportunities as founders seek exit strategies and larger players pursue growth through acquisition.
Due Diligence Considerations Specific to Software Companies
1. Intellectual Property Rights
Logically, the most critical aspect of acquiring a software development company involves verifying IP ownership. Under Costa Rican law (Ley de Derecho de Autor), copyright automatically vests in the creator unless there’s a written agreement transferring rights to the employer. This makes proper employment contracts key.
Buyers must verify that all developers have signed contracts explicitly assigning work-for-hire rights to the company. I recommend reviewing employment agreements for all current and former developers who contributed to the company’s codebase. Any gaps in IP assignment can significantly impact valuation or even derail transactions.
For companies working with international clients, review all master services agreements and statements of work to confirm that IP created for clients was properly transferred and that the company retained no conflicting obligations.
2. Client Contracts and Revenue Concentration
Software development companies often depend heavily on a limited number of major clients. During due diligence, examine client contracts for change-of-control provisions that might trigger termination rights upon acquisition. Many U.S. and European clients include such clauses, requiring consent before the transaction closes.
Additionally, verify whether contracts are with the target company or if revenues flow through personal services arrangements, which occasionally occurs with smaller development shops. This structure can complicate asset transfers and tax planning.
3. Labor and Employment Matters
Costa Rica’s labor laws strongly favor employees. The Código de Trabajo provides significant protections, including mandatory profit-sharing (auxilio de cesantía), Christmas bonuses (aguinaldo), and strict termination procedures.
In software M&A transactions, key considerations include reviewing any stock option plans or profit-sharing arrangements with developers, verifying compliance with Caja Costarricense de Seguro Social (social security) contributions, reviewing labor contracts and confidentiality agreements, and assessing the risk of labor claims. Employee retention is particularly crucial given the specialized skills involved and competitive talent market.
4. Data Privacy and Cross-Border Data Transfers
Costa Rica’s data protection framework, primarily governed by Law 8968 (Protection of Personal Data), resembles European GDPR principles. Software companies processing personal data must register with the PRODHAB (Agencia de Protección de Datos de los Habitantes) and maintain appropriate technical and organizational measures.
For companies serving international clients, verify compliance with cross-border data transfer requirements. Adequacy determinations and standard contractual clauses must be properly documented, particularly when transferring data to or from the European Union or California clients subject to CCPA.
Common Transaction Structures
Asset Purchase vs. Share Purchase
Most software company acquisitions in Costa Rica proceed as share purchases of the sociedad anónima or sociedad de responsabilidad limitada holding the business. This structure allows the buyer to maintain existing client contracts, employment relationships, and intellectual property assignments without requiring individual consents or transfers.
However, asset purchases may be preferable when the target has significant contingent liabilities or when the buyer wishes to cherry-pick specific client relationships or development teams. Asset purchases require more extensive documentation, including assignment agreements for IP, novation or assignment of client contracts, and potential TUPE-style employment transfers.
Tax Considerations
Costa Rica operates a territorial tax system, taxing only Costa Rican-source income. Capital gains from share sales are generally exempt from taxation if the shares represent a Costa Rican company but the buyer and seller are both foreign entities and the transaction occurs offshore. However, this exemption does not apply if the shares are sold domestically or if the transaction is structured as an asset sale.
Buyers should also consider the tax treatment of earnouts, which are common in software M&A to bridge valuation gaps. Properly structuring earnout provisions as purchase price adjustments rather than compensation can significantly impact tax efficiency.
Free Zone Benefits
Many software development companies operate under Costa Rica’s free zone regime (régimen de zonas francas), which provides significant tax incentives including reduced corporate income tax rates and exemptions from import duties in exchange of complying with previously acquired obligations, investment goals and strict inventory regulations.
When acquiring a free zone entity, verify compliance with all PROCOMER requirements, including minimum employment levels, investment commitments, and export percentage thresholds. The change of control itself must be reported to PROCOMER, and in some cases, approval may be required to maintain free zone benefits.
Regulatory Approvals and Notifications
Unlike transactions in heavily regulated sectors, software development M&A generally doesn’t require specific regulatory approvals beyond standard corporate formalities. However, several notifications and registrations are necessary:
The transaction must be reflected in Registro Nacional (National Registry). If the target company holds any special licenses or permits, verify transferability and update registrations as needed. For transactions meeting certain thresholds, antitrust notification to COPROCOM (Competition Commission) may be required, though this is relatively rare in the software sector.
Frequently Asked Questions
Q: How long does a typical M&A transaction take in Costa Rica’s software sector?
A: From letter of intent to closing, expect 60-90 days for a straightforward transaction with clean due diligence. Complex deals involving multiple stakeholders, significant IP issues, or required client consents may extend to 120-180 days.
Q: What are typical representations and warranties in software company acquisitions?
A: Beyond standard corporate representations, software deals typically include specific warranties regarding IP ownership, absence of open-source license violations, non-infringement of third-party rights, data security measures, and client contract status. Representations & Warranties insurance is increasingly common for deals over $5 million.
Q: How are founder retention and earnouts typically structured?
A: Most software acquisitions include founder employment agreements for 12-36 months post-closing. Earnouts commonly run 1-3 years and tie to revenue, EBITDA, or client retention metrics. Costa Rican law treats earnouts as purchase price adjustments if properly documented, which is tax-advantageous compared to structuring them as employment bonuses.
Q: What governs dispute resolution in these transactions?
A: While Costa Rican law will govern the corporate aspects and validity of the transaction, many international buyers prefer arbitration for dispute resolution. The Centro Internacional de Conciliación y Arbitraje (CICA) offers institutional arbitration following UNCITRAL rules, though ICC or AAA arbitration with seat in Miami is also common for cross-border transactions.
Q: Are there restrictions on foreign ownership of software companies in Costa Rica?
A: No. Costa Rica welcomes foreign investment in the technology sector without ownership restrictions. Foreign investors enjoy the same protections as domestic investors, and repatriation of capital and profits is unrestricted.
Conclusion
Costa Rica’s software development sector presents compelling opportunities for strategic and financial buyers. The combination of technical talent, business-friendly environment, and growing sophistication of target companies has created an active M&A market.
Success in these transactions requires careful attention to IP verification, employment matters, client contract analysis, and proper transaction structuring.
Engaging experienced local counsel early in the process helps navigate Costa Rican corporate formalities and labor regulations while maximizing tax efficiency and minimizing post-closing risks.
