Collaborative Alliance | Doing Business between Singapore & Latin America | Duane Morris & Selvam
COSTA RICA by TACTIC ESTUDIO LEGAL
1. What are the key regulatory requirements and procedures for establishing and operating a business in Costa Rica?
The Costa Rican legal framework provides several options for the establishment of a business in the country, whether through the incorporation of a new legal entity or directly through a foreign corporation without a Costa Rican branch.
The two most common options for the establishment of a new legal entity in the country are (1) a corporation (Sociedad Anónima) or (2) a limited liability company (Sociedad de Responsabilidad Limitada), regulated in the Code of Commerce, Law N°3284.
Corporations are legal entities that can be owned either by locals or by foreign nationals or companies, without any type of restriction or limitation on the number of foreign nationals involved. They are operated through a Board of Directors, and must have nominative capital stock represented by shares. The highest decision-making body of a corporation is its Shareholders Assembly, comprised by all persons or companies that own the capital shares.
Limited liability companies (LLC) are very similar to corporations in their functionality and regulation, allowing them to be owned by local or foreign nationals. However, limited liability companies have a simpler governing structure, and the transfer of shares (called “quotas”) has more limitations than in a corporation, since each transfer needs to be approved by the General Assembly.
Even though each type of legal entity has specific requirements for its incorporation, the process for registering the entity follows the same basic steps: (1) a Notary Public prepares a draft deed of incorporation, containing the statutes of the company and the appointment of the board of directors or representatives, (2) the shares or quotas are issued in accordance with contributions from shareholders, (3) registration taxes are paid, (4) the deed of incorporation is filed before the National Registry for its official registration. This process can be completed within one day, with the final confirmation of incorporation from the National Registry notified within a week.
Another option for the establishment of a business in the country is the registration of a subsidiary or branch of a foreign legal entity. In this case, the governing body of the foreign company must issue a formal order for the registration of a branch in Costa Rica, which needs to be legalized and filed before the National Registry of Costa Rica, in order to process the registration. A local representative that will hold the legal power to act on behalf of the foreign company also needs to be registered in the same act. Once the legal entity is incorporated, the company must be registered before the Tax Authority of the Ministry of Finance (Dirección General de Tributación Directa del Ministerio de Hacienda), as a tax contributor, and also before the Costa Rican Bureau of Social Security (Caja Costarricense de Seguro Social) for the registration of future employees and compliance with labour and social security obligations.
Finally, there are other compliance requirements in order to open a physical working space, such as offices, industrial plants, or commercial spaces. These obligations will depend on the type of facility that will be established, but the ones that are applicable to all are: (1) the environmental viability license, issued by the National Environmental Technical Secretariat (SETENA), (2) the sanitary operation license, issued by the Ministry of Health, and (3) the commercial operation license issued by the local municipality.
2. What are the legal frameworks and regulations governing foreign direct investment (FDI) in Costa Rica? Are there any restrictions or limitations on FDI in specific sectors?
Costa Rica is one of the leading destinations for FDI in the world, and its legal framework has been modelled towards the achievement of its FDI goals. Conversely, in Costa Rica, foreign nationals enjoy the same rights and duties as Costa Ricans. This principle is codified in the National Constitution and it informs the rest of the national legal framework. There are no restrictions for foreign nationals to buy or own land in the country, and it is not necessary to have citizenship, resident status, or permanence to become a property owner. Additionally, there are no limitations for opening businesses in the country by foreign nationals, and no restrictions on the number of foreign nationals that a company can hire, provided they have valid work permits in the country. For this, the General Directorate of Immigration has a fast- track system that facilitates procedures for companies to hire foreign nationals. There are only a few limitations on participation of foreign nationals in certain specific sectors. For example, companies looking to obtain a concession on beachfront properties (which are all government-owned) need to have at least a 50% participation of nationals, in accordance with Law N°6043, on the Maritime-Terrestrial Zone. Other industries have restrictions on FDI, but only because they function as government owned monopolies. Amongst those sectors are electricity distribution and transmission, water distribution, alcohol production and sale of fossil fuels. In those cases, the national private sector is also barred to participate.
3. What are the tax implications and incentives for businesses investing in Costa Rica? Are there any tax treaties or tax agreements in place that facilitate cross-border investments?
Costa Rica has a solid system of incentives for businesses looking to invest in the country, mainly centered around the Free Trade Zone regime. Regulated by Law N°7210, the Free Trade Zone regime (FTZ) is a set of benefits and incentives provided by the Government of Costa Rica to companies making new investments in the country, with the aim to encourage FDI, commercial exchange and job creation. The companies that opt for this regime, must comply with a set of requirements established by law (like a minimum investment amount, and a minimum of hired employees), as well as being involved in manufacturing, trading, services or scientific research, in one of the strategic sectors designated by the government, including advance manufacturing, light manufacturing, food and agritech, medtech, pharmaceuticals, biotech, software development, IT services, gaming and animation, marketing and advertising, engineering & design, shared services, regional headquarters, back office/BPO, financial, consulting, supply chain & logistics, excellence centers, amongst others. In addition to those sectors, through Law N°10234, which entered into force in 2022, a new set of sectors can apply to the Free Trade Zone regime, provided they established their operations outside the Greater Metropolitan Area of Costa Rica, specifically (1) health clinics and centers, (2) sustainable adventure parks and (3) significant suppliers with more than 40% of their sales to FTZ companies. The companies established in the FTZ regime enjoy the following benefits:
(a) Exemption from all taxes on profits, as well as any other whose tax base is determined in relation to gross or net profits, dividends paid to shareholders, income or sales, for at least the first 8 years of operation.
(b) Exemption in the import of merchandise necessary for the operation and administration of the activity authorized to the company.
(c) Exemption on the import of vehicles.
(d) Exemption on local purchases, goods or services necessary for the operation and administration of the activity authorized to the company.
(e) Export exemption.
(f) Exemption for a period of 10 years from taxes on transfer of real estate and municipal patents.
(g) Tax credits.
(h) Access to training and education programs.
(i) Exemptions on some social security obligations, if established outside the Great Metropolitan Area.
Apart from the Free Trade Zone regime, the Costa Rican government also provides a different set of incentives for companies setting up a new business in the tourism sector, regulated by Law N°6990, and applicable specifically for hotel construction & equipment, air travel, aquatic travel and marinas, tour agencies and rent-a-car companies.
Regarding tax treaties and agreements, Costa Rica has signed, to date, four double taxation agreements with Germany, Spain, Mexico and the United Arab Emirates. These agreements are based on the Model Tax Convention of the OECD and the United Nations Model Convention on Double Taxation. Additionally, Costa Rica has signed a higher number of Tax Information Exchange Agreements, including with countries such as Australia, Canada, France, Italy, South Korea, South Africa, The Netherlands and the United States.
Finally, in 2021 Costa Rica became the latest member of the Organization for Economic Co-operation and Development (OECD), being the fourth country in the Latin American and Caribbean region to join the organization. To become a member, Costa Rica had to comply with the highest global standards on regulation and governance, strengthening the country´s commitment with the continuous improvement of the business climate for foreign direct investment.
4. How does Costa Rica address intellectual property protection and enforcement?
For several years, Costa Rica has reinforced and ensured the protection of intellectual property and the rights of its owners, along with taking action to defend these rights against third parties engaging in infringements. Consequently, various laws have been enacted to safeguard multiple forms of intellectual property.
The Law on Trademarks and Distinctive Signs (Law N°7978) safeguards trademark and distinctive sign owners’ rights, addressing unfair competition. It covers trademark registration, trade names, advertising signs, appellations of origin, and geographical indications. The law outlines nullity and cancellation procedures, sets a ten-year protection term for trademarks (renewable), and indefinite protection for trade names and advertising signs (linked to related trademarks or trade names).
The Copyright and Related Rights Law (Law N°6683), safeguards original intellectual creations in art, literature, and science. It also protects the rights of performers, producers, and broadcasters. It grants authors the exclusive right to use their works, including modification, communication to the public, reproduction, distribution, and the right of prosecution (“droit de suite”). Copyright lasts during the author’s life, plus 70 years and then goes into the public domain. The law outlines the registration process in the National Registry of Copyrights. Additionally, a regulation provides further clarity and definitions.
The Patent, Industrial Designs, and Utility Models Law (Law N°6867) outlines the patent criteria. It defines inventions as creations applicable to industry, setting standards for patentability, including novelty, inventive step, and industrial application. Patents grant exclusivity for 20 years from the application date (under the Paris Convention or PCT). The law also addresses industrial designs with a 10-year protection period from the granting date. Utility models, simpler to register, also have a 10-year protection period from the filing date.
The Intellectual Property Rights Enforcement Procedures Law (Law N°8039) covers enforcement actions for intellectual property rights. It includes administrative activities before the Industrial Property Registry, the National Registry of Copyrights and Related Rights, and judicial actions. The law outlines preventive measures, including border measures, with a requirement for providing guarantees. It designates the Administrative Registry Court for reviewing administrative appeals, addresses civil and criminal proceedings, and defines intellectual property-related offenses.
Costa Rica also has laws concerning intellectual property protection, including the Law on Undisclosed Information (Law N°7975), the Law on the Protection of Integrated Circuits Tracing Systems (Law N°7961), and the Law on the Protection of Plant Varieties (Law N°8631). Finally, Costa Rica is a signatory to multiple international agreements, including the Paris Convention, TRIPS Agreement, Trademark Law Treaty, Patent Cooperation Treaty, and the Berne Convention for the Protection of Literary and Artistic Works.
5. What are the key regulatory frameworks that need to be considered for mergers, acquisitions, or joint ventures? Are there any antitrust or competition regulations that must be considered?
In Costa Rica, mercantile companies are regulated by the Code of Commerce, which contemplates mergers and acquisitions in what refers to corporate law. Chapters 3, 6, and 7 of the First Book of the Code of Commerce cover the two most popular corporate forms in Costa Rica, corporations and limited liability companies, and include company acquisition related regulations that refer mainly to the transfer of shares or equity participations and related requirements.
The purchase of ongoing businesses is different from a company acquisition, but it is also regulated expressly in the Code of Commerce. If the formalities established therein for these transactions are not met in full, the transaction will be absolutely void (for any eventual rights of third parties or creditors of the acquired ongoing business) and payments made to the creditor will not be considered valid.
Regarding mergers, the Code of Commerce includes a very basic set of regulations regarding the legal nature of a merger and the formal requirements to complete it. Merging entities may either form a new company or be merged via absorption (acquisition), in which only one of the entities survives.
On its part, the Law for the Promotion of Competition and Effective Consumer Protection N°7472 is the main framework for competition law. One of the main aspects to keep in mind is that a preliminary merger control for transactions of a certain value (over a threshold of US$15 million) or of special relevance to the national market is mandatory.
Article 16 of the Law for the Promotion of Competition and Effective Consumer Protection defines which transactions may be considered a concentration, and when a merger or acquisition falls within this definition it must file a notification or previous communication to COPROCOM (the Commission for the Promotion of Competition) before going through with the transaction. In the specific case of mergers and acquisitions, the authorization procedure is short; however, if the preliminary merger control notice is not sent, COPROCOM may challenge a merger proven to qualify as a concentration by opening a penalising procedure. Additional to the communication to COPROCOM, mergers or acquisitions involving regulated entities (banks, public companies, financial entities, pension funds, companies managing funds of third parties and insurance companies) must obtain the applicable approvals from the Securities Supervisory Agency (Sugeval), the Private Pension Funds Supervisory Agency (Supen), the General Insurance Supervisory Agency (Sugese), the General Telecommunications Supervisory Agency (Sutel) or the Financial Entities Supervisory Agency (Sugef), as appropriate.
6. How does Costa Rica approach dispute resolution and arbitration in cross-border business transactions? What has been the practice with Southeast Asian counterparts? Are there any alternative dispute resolution mechanisms available?
Costa Rica has a strong legal framework for dispute resolution and arbitration in cross-border business transactions, allowing for disputes to be resolved through a judicial proceeding, in the Costa Rican Judicial System, or through other mechanisms such as arbitration, mediation, negotiation or conciliation. Just like in numerous other nations, the primary channel for conflict resolution in Costa Rica is the judicial system. This approach is favoured due to its cost-effectiveness and its administration by the government itself. In the context of Costa Rica, the judicial system holds a fundamental role in the country’s enduring democratic structure.
It is also important to note, that, as foreign nationals enjoy the same legal rights and protections as Costa Rican citizens, they have, as their right, unrestricted access to the Costa Rican court system for the resolution of legal disputes. This ensures that individuals from other countries, residing or conducting business in Costa Rica, have a levelled playing field when it comes to seeking justice. Regarding arbitration as a dispute resolution method, Costa Rica operates a dual-track arbitration system: (i) one that originates from the Alternative Dispute Resolution Law N°7727, effective since 1998, governing arbitration within the country, and (ii) a separate law overseeing international arbitration, the International Commercial Arbitration Law, based on the Model Law of the United Nations Commission on International Trade Law (UNCITRAL) N°8937, effective since 2011. Both systems produce res judicata and in the event of non-compliance with an arbitration award, the decision may be enforced in the National Courts of Justice. Costa Rica is also part of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is a significant international treaty in the realm of international commercial arbitration. This means that an arbitral award granted in a member country can be recognized and enforced in Costa Rica, and vice versa, facilitating investment, international trade, cross-border commercial disputes and legal certainty.
Costa Rica offers a vast number of alternative dispute resolution centers for domestic or international arbitration, such as the Center for International Conciliation and Arbitration (CICA) of the Costa Rican – American Chamber of Commerce (AmCham) and the Center for Conciliation and Arbitration of the Costa Rica Chamber of Commerce (CCA), among others. Besides litigation and arbitration, Costa Rica also encourages the use of alternative dispute resolution mechanisms, including mediation and conciliation. The Costa Rican Judicial System, as well as various private organizations, offer mediation and conciliation services to facilitate dispute resolution outside of the court system. Regarding Southeast Asian counterparts, to this day, there are few precedents of commercial or trade disputes that have been resolved at the international level. However, Costa Rica and Singapore signed a free trade agreement in 2013 (for more on this subject see below), which includes a chapter on commercial dispute resolution and reciprocal protection of investments between the parties, including an incorporation of the International Centre for Settlement of Investment Disputes (ICSID) model, offering a cooperative relationship and legal certainty for the parties.
7. Are there any recent or upcoming regulatory changes or developments in Costa Rica that may impact investments or business relations with Southeast Asia??
The Costa Rica-Singapore Free Trade Agreement aims to enhance trade and investment by creating a free trade zone, reducing customs duties, protecting intellectual property, streamlining customs procedures, and adhering to the World Trade Organization regulations. It seeks to strengthen economic cooperation, promote efficiency and innovation, and benefit the well-being of its citizens through mutual trade and investment, driven by the growing economic ties and friendship between the two nations. On the other hand, the Costa Rica-China Free Trade Agreement, in effect since 2011, is a crucial trade partnership for Costa Rica, with China being its second-largest trading partner after the United States. This agreement has driven substantial growth in trade, particularly in sectors like medical devices, meat, citrus products, and technology. Furthermore, it has facilitated Chinese investments in Costa Rica, contributing to the country’s economic development and reinforcing the bilateral relationship.
7.1 What are the dispositions that benefit the trade in goods?
The Singapore-Costa Rica Free Trade Agreement promotes trade in goods by eliminating duties, simplifying customs procedures, and addressing issues related to intellectual property and sanitary and phytosanitary protection, among other aspects. This creates a more favourable environment for bilateral trade between the two countries.
7.2 What are the dispositions that benefit services, investments and movements of capital?
The Singapore-Costa Rica Free Trade Agreement promotes the liberalization of services in telecommunications, financial services, professional services, and others. This allows companies from both countries to operate in each other’s market with fewer restrictions. The agreement also includes provisions for investment protection, which means that Costa Rican and Singaporean companies have guarantees and protections for their investments in each other’s country. This encourages foreign investment and economic cooperation.
The agreement facilitates the movement of capital between the two countries, which means that restrictions on the transfer of funds and the repatriation of profits are reduced, providing greater security for investors.
7.3 What is established around intellectual property and government procurement?
The agreement includes provisions that focus on safeguarding intellectual property rights, encompassing patents, copyrights, and trademarks. Both nations pledge to adhere to international intellectual property standards, ultimately offering robust protection to intellectual property rights holders.
Furthermore, the agreement deals with public procurement and advocates for transparency and equitable treatment during bidding procedures. This ensures fairness and equality for businesses from Costa Rica and Singapore, as they can compete for government contracts in each other’s nations equitably.
7.4 Are there any key special dispositions to highlight?
The Singapore-Costa Rica Free Trade Agreement mentions an essential highlight on sustainability issues. It includes provisions such as environment and labour. The inclusion of commitments related to sustainability and the balance between economic, social, and environmental components is a clear sign that both countries seek to promote sustainable development at a global level.
8. Are there any particular agreements or partnerships between the two governments that may be relevant to highlight?
The Singapore-Costa Rica Free Trade Agreement signifies a strategic commercial partnership, recognizing Singapore as a key trade partner. This agreement grants Costa Rica preferential access to this vital Asia-Pacific market, potentially boosting trade and investment. For a more detailed analysis of the agreement, see Question 7.
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