COSTA RICA: COUNTRY AND FOREIGN INVESTMENT REGIMES

Costa Rica Geography

Costa Rica Population, Language and Culture

Costa Rica became independent from Spain in 1821 and has been relatively stable. Following a short civil war in 1948 the country abolished its army and passed a new, quite liberal constitution, which remains in force.

The population stands at about 4,195,000 (July 2008 est.) and is overwhelmingly white or mestizo. As in all former Spanish colonies the official language is Spanish, the population is largely Roman Catholic and the culture is Hispanic. English is widely spoken within the business community.

Costa Rica Government

Costa Rica is a democratic Republic. The 1949 Constitution establishes a strict separation of powers between the legislature, the executive and the judiciary. The Executive is headed by a President who is elected every 4 years and who cannot serve a second term. He is assisted by a cabinet which consists of elected members of the legislature chosen by him. The cabinet advises the President and participates in decision making processes related to their office.

The legislature consists of a congress of 57 deputies who are elected every 4 years and who can be re-elected but who cannot serve consecutive terms.

Elections held in February, 2006, were very close, but eventually Nobel Peace Prize winner Oscar Arias Sanchez assumed power for the second time, after he previously served as Costa Rican President between 1986 and 1990. Mr Arias vowed to push through the Central American Free Trade Agreement and important fiscal reforms.

In practice the judiciary is the most powerful of the three branches of Government. Judges are appointed for renewable periods of 8 years by the legislature. There is no jury system in Costa Rica . As a former Spanish colony Costa Rica is a civil law jurisdiction with its laws based on the Spanish legal system. In recent years the legal system has also been influenced by the laws of Argentina and Mexico .The supreme law of Costa Rica is the 1948 Constitution.

For the purposes of offshore investors the Commercial Code 1964 is the most important body of law since it governs corporate law, trust law, loans and securities. The Civil Code governs all other matters not covered by the Commercial Code 1964.

Major challenges facing the Government involve the ability to control inflation and unemployment whilst at the same time maintaining social policies, developing the private sector and overcoming stiff political resistance to fiscal reform and the privatization of state monopolies.

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Costa Rica Economy and Currency

With a mild annual average temperature of 21°C the Costa Rican economy has traditionally been based on tourism and the export of agricultural products such as bananas and coffee; low prices for these two commodities have caused problems for the country since 1999. Its Pacific and Caribbean coastlands are lined with luxury hotel resorts. National parkland which covers 10.3% of the country includes coral reefs, virgin rainforests and volcanic craters.

The introduction of a free trade zone fiscal regime resulted in a major national economic transformation, with non-traditional goods now accounting for 68% of exports and agriculture representing only 17% of GDP.

Although Costa Rica's favorable taxation regime meant that it has for decades had all the characteristics of an offshore tax haven it was not until relatively recently that the Government became aware of the financial services potential and began to actively legislate and promote this sector of the economy.

Real GDP grew by 8.8% in 2006, and economic activity remained strong in 2007, driven by both domestic and external demand, with growth estimated at 7% Unemployment declined to 4.6%, the lowest level since 1994.

Inflation steadily declined between late 2006 and mid-2007, thanks in part to the October 2006 switch to a crawling band regime, and the subsequent widening of the exchange rate band, but was rising rapidly in 2008.

The current account deficit widened to 6.0% in 2007, driven by a surge in non-resident income on foreign direct investment. Both exports and imports grew strongly during the year. GDP per head is $12,500 (2006 figures) at purchasing power parity. Costa Rican labour costs are relatively high for the area, but it attracts inward investment due to its skilled labour force, absence of labour problems, political and economic stability, and the attractive fiscal regime.

According to the Ministry of Finance, tax revenue increased 26% over the first seven months of 2008 compared with the same period in 2007.

The currency is the colon, divided into 100 cents. Costa Rica is not a member of any monetary union; in recent times the colon has tended to depreciate against the dollar by about 10% annually.

In 2004 Costa Rica concluded negotiations to participate in the US-Central American Free Trade Agreement CAFTA). The agreement was ratified in a popular referendum in October, 2007, but problems over the legal basis of the agreement, which had been accepted by all other parties, delayed final implementation until December, 2008.

United States Trade Representative (USTR) Susan C. Schwab made a statement on December 23 regarding the entry into force of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) for Costa Rica, saying: "With the President’s issuance of a proclamation to implement the CAFTA-DR for Costa Rica as of January 1, 2009, I am very pleased to be able to celebrate the entry into force of this important multi-country agreement."

“We have worked closely with Costa Rica, as we have with our other CAFTA-DR partners, to ensure they meet their obligations and responsibilities under the agreement. Costa Rica is now ready to join the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua in putting the agreement into force, ensuring that the benefits of this agreement continue to spread. US trade with CAFTA-DR partners, and among CAFTA-DR partners, has increased as the countries have put the agreement into force," she continued, adding:

“I greatly appreciate the diligent effort by [Costa Rican] President Arias and his government to adopt legislation and regulations to implement Costa Rica’s commitments under the CAFTA-DR. This step marks an important milestone in our relationship with Costa Rica, building on our strong economic and political partnership. With the addition of Costa Rica, this important regional free trade agreement will be in effect, as of January 1, 2009, for all of the countries that signed the agreement.”

The government of President Oscar Arias also faces an uphill battle in its quest to pass a package of 13 laws required as part of the CAFTA agreement, especially the more controversial parts that will open the state telecommunications and insurance monopolies, with opposition lawmakers likely to demand concessions such as increased farm subsidies.

Under CAFTA, 80% of US exports of consumer and industrial goods will become duty-free in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, immediately, with remaining tariffs phased out over 10 years.

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Costa Rica Entry and Residence

All travelers must have a valid passport to enter the country for either business or tourism. 90 day entry visas are granted at the airport. At departure there is an airport tax of USD$17, increased to USD26 in 2009; an arrival tax of USD15 is also planned.

Residence has traditionally been obtained in one of 2 ways:

• Under Law No 6982 of 1984 (known as "the Retirement Law") a foreigner may acquire residence in Costa Rica if he can show a sufficient income (USD600 per month) whether from investments or from a pension and irrespective of whether the income is sourced locally or abroad. Residence obtained under this law allows an individual to work in Costa Rica but does not allow him to work in areas which would have the effect of displacing indigenous workers. A resident under this law is expected to reside in Costa Rica for at least 4 months in each calendar year.
• Residence permits obtained under Law 1155 of 1950 (known as "the Residence Law 1950") carry no restrictions on the sorts of economic activity that a resident permit holder can engage in. However permits under this law are granted on a very selective basis and only to businessmen and professionals.

In March, 2004, the immigration agency (Migracion) said that the migratory situation in Costa Rica was “out of control” and that they would in future be restricting residency approvals to the minimum. Migracion has begun to apply an economic criterion, stating in some cases that an applicant 'would not add any input to the economy of Costa Rica or create employment for Costa Ricans'.

In August, 2006, a new immigration law (the General Law of Immigration) had been passed by Costa Rican lawmakers aiming to crack down on illegal immigration from neighbouring countries, particularly Nicaragua, by, among other measures, imposing tough penalties on businesses that employ, or individuals that harbour, illegal immigrants.

The law also set out new income and investment limits for rentistas, but was ambiguous. Previously, rentistas were obliged to show a minimum monthly income of US$1,000 per month, or a lump sum of US$60,000 in a foreign bank account. Under the updated law, it seemed that both the primary applicant and the spouse must pass the US$60,000 test, while an extra $30,000 would be required for each dependent. However, it seemed that two separate sections of the legislation contradict each other and confusion reigned.

The law went through various stages of amendment, and as of early 2009 was till being discussed in the legislature. The latest draft of the law would increase the required income for 'pensionados' to USD2,000 per month, and that for 'rentistas' to USD5,000 per month.

Pending approval of the new law, the government of Oscar Arias has authorized successive extensions of existing permits.

No one can work in Costa Rica without first obtaining a work permit, may take between 30 days and 60 days to be approved. A work permit cannot be applied for until a residence permit has been granted. Work permits are valid for one year and require annual renewal.

A company which has more than 30 employees can apply for a general work permit enabling it to bring foreign technicians and executives to work in the jurisdiction without the need to make an individual application for each person it wishes to engage .Such a permit is valid for one year and must also be renewed annually.

The labor code limits the percentage of foreigners working in each corporation, specifying that at least 90% must be indigenous and that 85% of salaries paid by a company must go to Costa Rican nationals. Moreover foreigners cannot occupy jobs for which Costa Rica nationals are available unless special permission is granted.

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Costa Rica Business Environment

Costa Rica offers an attractive and stable environment in which to establish a business. Although Costa Rica telecommunications and transportation infrastructure are state controlled and in need of investment they are nonetheless the best in the region.

A branch of a foreign company operating in Costa Rica must appoint a Costa Rican resident as its legal representative with full power of attorney on matters concerning the business of the branch.

Apart from establishing an appropriate corporate form (see Forms of Company), setting up and running a business in Costa Rica will require application for a business license (patente comercial) from the local Municipality (Departamento de Patentes) where the business is to operate, registration with the Costa Rican Revenue Administration (Direccion General de Tributacion Directa), and if there are to be staff, registration of the company as an employer under the Costa Rican Social Security System (Registro Patronal bajo la Caja Costarricense del Seguro Social).

The 1995 General Customs Law introduced reforms aimed at streamlining what up until then had been complex and bureaucratic customs procedures and much of the necessary processing is now accomplished electronically or through a one stop system. Import tariffs have also been substantially reduced.

The free trade zone areas offer a range of fiscal incentives which have had the effect of transforming the direction of the national economy (see Free Trade Zone Industry). However, many of these tax advantages are due to be phased out by 2015, under Costa Rica's WTO commitments.

There is a relatively sophisticated legal infrastructure in place with businesses having a wide choice of structures under which to operate (see Forms of Company), including limited partnerships, limited liability companies and sole proprietorships. Although Costa Rica is a civil code jurisdiction trusts can be created under its Commercial Code.

Costa Rica has traditionally not been party to double taxation treaties. However it has signed an exchange of information treaty with the United States, and DTAs are now under negotiation with several other countries. The banks do not share information with the tax department or with any Government departments other than the central bank. Civil and criminal implications attach to the disclosure of any information received by a lawyer and disclosed without proper authority.

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Costa Rica Import of Foreign Capital

There are no significant barriers to foreign investment and there are no restrictions on the repatriation of profits other than the deduction of withholding taxes which Costa Rica is in any event considering abolishing.

Restrictions are placed on foreign investment in the state owned monopolies of telecommunications, alcohol distilleries, insurance, newspapers, radio, television broadcasting, electricity and petroleum refining in all of which industries foreign participation is either forbidden or alternatively required to be part of a joint venture with a Costa Rican majority shareholding partner .

Beachfront development concessions also require local participation with the requirement that 50% of the capital must come from nationals and that foreigners wishing to be joint partners must have resided in Costa Rica for at least 5 years.

Although there are no exchange controls as such in Costa Rica, currency received by resident corporations or individuals has to be sold through a Costa Rican bank; and capital imported for investment purposes needs to be 'registered' in order to ensure eventual problem-free repatriation. Enterprises taking advantage of one or other of the investment incentive regimes described below are free of these restrictions to a greater or lesser extent.

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Costa Rica Foreign Investment Incentives

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

• The 'Drawback' law no 5162 of 1972 encouraged the siting in Costa Rica of "screw driver" assembly plants. Enterprises which wish to assemble products in Costa Rica and re-export the finished products to other markets can import all their capital machinery and raw materials including the parts to be re-assembled free of all import duties. The final product which is re-exported is not assessed to any business income tax on profits.
• Free Zones, known as Export Processing Zones - see below.
• (Now withdrawn) Export Contracts, under laws 7092 and 6955, are signed by the Government with individual enterprises, usually for a period of 10 years. See Law of Offshore for further details of the underlying legislation and application procedures. Export Contracts bring together incentives available under various laws, and typically include
  • exemption from import duties;
  • simplified procedures;
  • special port tariffs;
  • accelerated depreciation;
  • tax credit certificates.
• (Now withdrawn) The Temporary Admission Regime, also under laws 7092 and 6955, allows goods or equipment to be imported for use in or during processing for subsequent export or re-export.

These brief details are given for purposes of general information only; deciding which regime best suits the particular circumstances of an investor is a complex matter requiring professional advice.

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Costa Rica Stock Exchange

The Bolsa Nacional de Valores SA (BNV) began operating the first security market in Costa Rica and Central America on August 19 1976. Approximately 97% of the Bolsa Nacional de Valores is owned by the brokerage firms and it is ruled by a Board of Directors which is elected by the General Assembly; however, the General Manager and a group of executives are accountable for the operation, administration and management of the BNV.

Daily trading volume on the BNV of approximately US$50m in 1999 had risen to US$140 m by the end of 2005, and market capitalisation was standing at US$2.1 billion. There are several thousand listings on the exchange, and around 30 brokerages are permitted to trade securities on the BNV. The BNV index reached a high of 9,000 in early 2008, but was standing at less than 6,000 in early 2009.

The General Securities Superintendence (previously known as National Securities Commission) was granted responsibility for regulatory oversight of the BNV. The main piece of legislation is the Security Regulation Law (Ley Reguladora de Valores) 1998, a modern law superseding the one issued in 1990. Likewise, new Internal Rules and Regulations of the Bolsa Nacional de Valores S.A. were made effective in 1999.

Besides equities and public and private sector bonds which are traded on the BNV, there is activity in a number of other instruments, including the Money Market Account, Lien Certificates, Repurchase Agreements (REPOS), securities issued in foreign currency and paid in colons and securities issued in colons and paid in US dollars, Multiple Certificates or macro securities and investment funds.

The trading process is completely automated. The systems used by the Bolsa Nacional de Valores have been created for the needs of the securities market and designed by Costa Rican technicians. The market has been largely de-materialized, and the central custodian holds over 90% of all stocks.

The Bolsa Nacional de Valores operates on a T+3 settlement basis for share purchases. Other types of transaction use different settlement procedures:

• Spot-price transactions - payment must be made 24 hours after the transaction has been made. Within this 24 hour-period, the brokerage firms and the Bolsa Nacional de Valores will have the opportunity to secure the transaction. Furthermore, the investor who is buying will issue his payment 24 hours after the transaction is done and the seller will receive its payment then. This type of transaction may be carried out in primary and secondary market.
• Securities market settlement - the buyer and the seller agree about the transaction date and the settlement date. The settlement date may be 24 hours after the transaction occurs, or it could be as far as 360 days after the negotiation date.

In February 2008, BNV launched a new equities market called MAPA, similar to London’s PLUS. The exchange has also launched new foreign exchange derivatives and fixed income products, including an OTC Contract for Differences (CFD) on the Colon.

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Costa Rica Free Trade Zone

The Government created Free Export Zones under law no 7210 (known as the "Export Processing Law"). Substantial tax incentives including 100% exemption from virtually all taxes and Government finance for the training of employees have traditionally been available to companies which located within one of the 12 free export zones (6 of which are privately managed).

However, many of these exemptions will have to be phased out by 2015 as a result of Costa Rica's WTO commitments.

The Zones are located next to Calderas and Puntarenas (2 Pacific ports), Limon (an Atlantic port near Panama), Alajuela (the airport serving the capital city of Costa Rica) and Turrialba, as well as some other locations.

All the free trade export zones have an infrastructure which facilitates companies engaged in exports; there are simplified customs and trade procedures.

An application for a licence to operate within a free trade zone takes about 2 months to be processed and must be accompanied by a guarantee deposit for US$5,000 (at the time of writing). There are some requirements as to the minimum amount of capital that must be invested by an incoming company: the minimum investment required is currently US$150,000. The minimum investment required to set up a company anywhere in Costa Rica and receive free zone benefits is US$2m at the time of writing.

The types of entities setting up in the zone include ship builders, businesses involved in the packaging, processing and distribution of goods for export or re-export, management companies and businesses involved in environmental research, the creation of forests and the sale of forestry products. The legislation originally applied only to industrial ventures, but has now been extended to encompass service companies and a wide range of processing activities.

There are several hundred companies within the free export zones and the value of exports emanating from these businesses is well over US$2 billion. About 50% of the companies operating there are from the United States and have included such household names as Intel and Hewlett Packard. Costa Rica's FDI in 2008 is estimated to have been in excess of USD2bn, of which a good proportion is due to the free zones.

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