DOING BUSINESS IN COSTA RICA
CONTENTS
FOREWORD
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GENERAL INFORMATION
LOCATION AND
CLIMATEE
Costa Rica is located in Central America, between Panama (to The South) and
Nicaragua (to the North). Its West coast is on the Caribbean Sea and its East
coast is on the Pacific Ocean.
The climate varies with altitude, from tropical dry to rain forest.
AREA AND POPULATION
51.200 sq. Kms. - Population: 3.500.000 million (1996).
OFFICIAL LANGUAGE
Spanish.
GOVERNMENT
There is a Democratic system with a division of power: an Executive Branch,
headed by the President assisted by 17 Cabinet Ministers; Legislative Branch,
formed by 52 Deputies; and a Judicial Branch, formed by various justice courts
under the Supreme Court of Justice. Members of the Executive and of Legislative
Branches are elected for four-year terms. Re-election of the President is not
allowed.
POLITICAL DIVISION
Costa Rica is divided into seven Provinces. San Jose City, within the Province
of San Jose, is the Capital of the Republic.
RELIGION
The major religion is Catholicism. In accordance with the National Constitution,
there is freedom to practice any faith privately or publicly and to worship
freely.
CURRENCY
The monetary unit is the Colon, designated by the symbol 'c". The sub-unit
is cents (c 1 = 100 cents).
WORKING CONDITIONS
Normally, commercial offices open at 8:00 a.m. for an eight-hour shift, with a
one-hour or two-hour break for lunch. State-owned banks are open to the public
from 9:00 a.m. to 3:00 p.m. Private banks open from 8:30 a.m. to 5:00 a.m. or
6:00 p.m. Government office hours are staggered, opening between 7:30 and 9:30
a.m. and closing between 3:30 p.m. and 5:30 p.m., with no lunch time closing.
Working days are from Monday to Friday, but a large number of commercial
establishments also open on Saturday and Sunday. Usually, factories open
between 6:00 and 7:00 a.m. and close between 2:00 and 5:00 p.m. Some factories
work 24 hours a day with 3 worker shifts per day (individual labor day not
exceeding 8 hours).
National statutory holiday are as follows:
New Year's Day January 1
Easter (Holy Thursday and Good Friday) March / April
National Heroe's day April 11
Labor Day May 1
Annexation of Nicoya July 25
Mother's day August 15
Independence day September 15
Christmas day December 25
Weights and measures
Costa Rica uses the metric system of weights and measures.
Dates and numbers
The system for writing dates follows the day-month-year pattern; for example,
in full, 7 June 1997; abbreviated 7/6/97.
The numerical system uses point for denoting thousands and commas
denoting decimals or cents, for example: c 1.000,50.
BOOKS AND RECORDS
All businesses, whether corporations, partnerships or proprietorships, domestic
or foreign, are required to maintain the accounting records described below:
1 Diario (general journal) - The diario must record all the transactions either
on a daily basis or by means of monthly summary entries, provided there is
sufficient supporting documentation to enable each individual transaction to be
identified.
2. Inventarios y Balances - At the commencement of operations and at the end of
each year, a list of assets, liabilities and equity accounts, as well as a statement
of profit and loss (income) for the period must be recorded into this book.
3. Mayor (general ledger) - It contains the outstanding balance, as well as
summarized debit and credit movements for each general ledger account. There
are no specific requirements regarding this ledger; any form may be used.
These accounting books must be bound, pre-numbered, and prior to use, each page
must be stamped by the Tax Authorities. All entries must be made in Spanish and
in Costa Rican currency, colones.
In addition to the accounting records above mentioned, corporations must keep,
in Spanish, the following books:
Register of Shareholders
Minutes of the board of directors
Minutes of shareholders' meetings.
ACCOUNTING PRINCIPLES AND PRACTICES
Under the Public Accounting Law, the Costa Rican Institute of Certified Public
Accountants is responsible for establishing accounting and auditing standards
for local use. Local technical publications contain certain accounting
principles of general application in Costa Rica. Moreover, they state that if
particular accounting principles have not been promulgated by the Costa Rican
profession, accounting principles issued by the Mexican Institute of Public
Accountants (IMCP) will prevail. In the event that the IMCP has not pronounced
on a subject, international accounting standards issued by the International Federation
of Accountants (IFAC) will be applicable. Furthermore, accounting standards
released by the US Financial Accounting Standards Board (FASB) are also
consulted.
LEGALSYSTEM
The Legal System used in Costa Rica is the Roman System, applicable at all countries
of Latin origin; the System is based on a constitutional regime and its'
specific laws and codes that regulate the different aspects; civil, merchant,
administrative, etc.
SOURCE OF FINANCE
In C R. the sources of finance are classified as internal and external. The
internal sources of investment are presented by means of bonds, common stock,
preferred stock and investment certificates as a mean to obtain resources from
the market. The external financement sources are constituted by Private and Public
Banks, Cooperatives, financial entities, savings & loans cooperative, etc.
INVESTMENT FACTORS
FOREIGN INVESTMENT
OPPORTUNITITES IN COSTA RICA
A number of advantages make Costa Rica one of the most solid and attractive
investment alternatives today. The following are some of the most important
conditions:
THE INVESTMENT CLIMATE
The Costa Rican business environment is one of the most attractive in Latin
America.
The country offers investors low tariffs and competitive tax rates. Investment
opportunities have steadily grown with new legislation designed to attract
foreign investment and promote increased private sector activity in general.
ABUNDANT NATURAL RESOURCES
Costa Rica diverse geography contains a wealth of natural resources which
offers many opportunities for investment. In addition, the country holds vast
areas of forest reserves and agricultural lands and has an extensive river
system that provides low-cost hydroelectric power.
POLITICAL STABILITY
Costa Rica has had 108 years of uninterrupted democratic government. During the
last 50 years, two main political parties have shared the Presidential seat.
Workers enjoy a fair system of benefits and the overall labor climate is peaceful.
PRIVILEGED GEOGRAPHICAL
LOCATION
Costa Rica is a gateway for Central America with daily connections to both
Americas, the Caribbean as well as to most European nations.
EXCHANGE CONTROL SYSTEMS
Foreign currency may be freely exchanged in the local market. The exchange rate
of local currency (colon) with respect to the US dollar grows steadily at a
pace of approximately 12% per annum.
GOVERNMENT INVESTMENT FACTORS
ATTITUDE TOWARDS FOREIGN
INVESTMENT
Costa Rica has long been recognized as a regional leader in social and economic
development. It guarantees economic stability, with the highest standard of
living in the Caribbean Basin and political stability, with the longest
standing democracy in Latin America. As a result, the business environment in
Costa Rica, in general, is stable.
The Costa Rican government welcomes foreign investment. This positive attitude
is backed-up by all major political parties active in government. Since 1982,
Costa Rica has consistently improved investment conditions. The Center for
Export and Investment Promotion (CENPRO) supplies information and assists in
the formal organization of investments. The Costa Rican Coalition for
Development Initiatives (CINDE), actively promotes investment through offices
located in several countries.
The last successive governments have been moving away from state controls and
towards an open economy in anticipation of free trade agreements with nations
like the United States, Mexico (already signed), Chile, Venezuela and Colombia.
Foreign investment in Costa Rica is actively encouraged by means of the wide
range of incentives available.
TOURISM INCENTIVE
To apply for a tourism contract, the activity must be officially declared
tourism oriented. The criteria used to qualify, among others, are as follows:
contribution to the balance of payment of the country, generating employment,
and satisfying the demand for tourist services.
The major incentives offered are:
• 100% duty free import of equipment and furniture. Vehicles with a minimum
capacity of 15 passengers also qualify;
• 100% income tax exemption on retained earnings for a 12-year period. Tourism
contracts subscribed after April 3, 1992 do not include this incentive;
• 100% property tax exemption for a 6-year period, provided the facilities are
located outside the San Jose area.
In general terms, the above mentioned incentives are granted to the following
tourism activities: hotel services, air transportation for local and
international tourists, vehicle rental for local and international tourists,
water transportation for tourists and the receptive tourism business of travel
agencies that are exclusively dedicated to this activity
EXPORT ORIENTED INVESTMENTS
Export oriented investments in Costa Rica are normally structured under either
of the following three systems:
• Export Contract
• Free Trade Zones (Free Zones)
• Temporary Admission
EXPORT CONTRACT INCENTIVES
This system is available to entities engaged in exports of non-traditional
products to third markets, and not covered by bilateral agreements. The
benefits are:
• Exemption of import duties on raw materials, components, machinery and
equipment, proportional to export sales to third markets;
• Tax Credit Certificates (CATs) which are bearer securities issued by the
Central Bank of Costa Rica, for up to 10.5% of the export FOB value. These
certificates (which represent a direct subsidy) may be used 18 months after the
date of issue and shall be valid for 24 months after maturity. Matured CATs are
used to pay any type of tax or may be traded at a discount at the local stock
exchange before or after maturity. CATs are no longer granted to new export
contracts;
• Total exemption from export taxes;
• No restrictions on sales to local market;
• Income tax exemption in proportion to export sales to third markets;
• Exemption on local sales and excise taxes, in proportion to export sales to
third markets;
• Offers a streamlined procedure through the central Customs office to expedite
customs services;
• Taxpayers who acquire shares of stock of a qualifying export company may take
a 50% tax deduction thereon. The shares have to be purchased through a stock
exchange, and the deduction cannot exceed 25% of the investor's net taxable
income. The shares must be kept in an escrow account, either at state-owned
banks or at a local stock exchange, for a minimum period of three years;
FREE TRADE ZONE INCENTIVE SYSTEM
Consist of regulated, non-residential areas, denominated free trade zone parks,
where companies that process or manufacture goods to be exported to third
markets, Service Industries or Science and Technological Development companies
can be located, with significant tax incentives. Under certain restricted
circumstances, same benefits can be obtained by companies operating outside the
Free Trade Zone parks.
Six types of companies can be established in a Free Trade Zone:
• Export processing industries which produce and process for export.
• Trading companies which distribute non-traditional products.
• Service companies which provide services to export producing or export
marketing companies.
• Management firms to which concessions have been granted for the
administration of the Free Zones.
• Individuals or corporations dedicated to scientific research contributing to
the improvement of the technological level of Costa Rica.
• Vessel construction, repair and maintenance industries which intend to
provide and operate dry-docking facilities, shipwright services and similar
services.
Companies operating under the Free Trade Zone System, are entitled to the
following:
TAX INCENTIVES
The firms established in the free zone will enjoy the following tax incentives:
a) Exemption of payment of all taxes and consular fees corresponding to the
importation of raw materials, processed or semi-processed products, components
and parts, packing materials, and all other merchandise and goods required for
operation.
b) Exemption of all types of import taxes and consular duties which affect the
importation of equipment, machinery and vehicles necessary for operation, production,
administration and transportation. The vehicles and vehicle parts eligible for
exoneration are:
• Chasis with one or two-ton cargo capacity, single cabin.
• Trucks or chasis for trucks.
• One or two-ton cargo capacity pick-up trucks.
• Vehicles with a minimum passenger capacity of fifteen.
c) Exemption from all taxes and consular fees levied against the importation of
lubricants required for operation.
d) Exemption from all taxes associated with the export or re-export of
products.
e) A ten year exemption, effective upon initiating operations, from taxes on
net capital and assets, property, and real estate transfers.
f) Exemption from sales and consumption tax on the purchase of goods and
services.
g) Exemption of all taxes for remittances abroad.
h) Exemption from all taxes on profits or other items considered to be taxable
income in relation to gross or net profits, with the following
differentiations:
• For companies located in "greater relative growth" zones, the
income tax exemption will be one hundred percent (100%) for the first eight
years and fifty percent (50%) for the following years.
• Post office and banking facilities.
• Sewage disposal plant.
TEMPORARY ADMISSION-DRAWBACK
INCENTIVES
Is defined as the importation of piece goods and components for assembly in
Costa Rica and the subsequent re-exportation of the finished goods. Benefits
include:
• Total exemption from sales and excise taxes;
• Total exemption from export taxes;
• Finished goods must be re-exported, except for a wastage factor that is
negotiated with Customs. Benefits are granted for a period of 5 years, renewable
for equal periods of time.
FORESTRY INCENTIVES
In order to stop deforestation, the Government has made available investment
possibilities in forest products. Under Law 7174, there are several general
incentives in this area:
• Companies operating under a Reforestation Contract may obtain Forestry Tax
Credit Certificates (CAF). Forestry Tax Credit Certificates are registered
(nominative) securities issued by the Government that can be negotiated or used
to taxes;
• Companies operating under a Reforestation Contract, but not benefiting from
the CAF incentive, have the following tax incentives:
• 100% land tax exemption.
• 100% uncultivated land tax exemption.
• 100% income tax exemption on the income produced from the harvest of the
plantation (except for a 10% general forestry tax per cubic meter of standing
timber harvested).
• 100% exemption on import duties on equipment, machinery, and vehicles used in
forestry.
MINING INCENTIVES
Costa Rica is attempting to attract investment to the mining sector. A new
mining code more favorable to investment has been proposed to Congress.
The Ministry of Natural Resources, Energy and Mines grants two kinds of permits
to individuals or companies interested in mining: An exploration permit or an
exploration concession. Investors may also invest in a functioning concession,
through lease or purchase.
Beneficiaries of exploration permits and exploitation concessions are granted
import duty exemption on imported mining equipment. Exploration taxes are
approximately $12 per square kilometer and exploitation taxes are approximately
$120 per square kilometer.
AGRICULTURE INCENTIVES
The law establishes exemption of all duties and surcharges on imports of
machinery equipment and materials to be used for agriculture, or goods required
for the fishing activities (except for sport fishing).
Furthermore.agricultural entities are exempt from all tax surcharges, except
for custom rights on raw materials needed for manufacturing of components for
agricultural activities and for banana packaging. Benefits also include fuel
required for fishing activities.
SECURITITES MARKETS (C.N.V.)
GENERAL REGULATIONS
The National Securities Commission (C.N.V.) is incharged of developing and
controlling provisions contained in the Securities Market Law and its
regulations.
C.N.V..regulates operations of the two local stock exchanges, as well as
corporations with variable capital stock, mutual funds and their management
companies and advisory companies, stockbrokerage companies, transfer agents and
other intermediaries and advisors, associations and natural persons or legal
entities that take part in any way in public offering of securities.
Financial companies and banks are under the control of the Central Bank and the
General Supervisory Agency for Financial Entities (banking supervisors).
TYPES OF BUSINESS ORGANIZATIONS
BUSINESS ENTITIES
A variety of business organizations may be formed:
a. Stock Companies (Sociedad Anonima, commonly known as S.A.s" which is
equivalent to Incorporated").
b. Limited Liability Companies (Sociedad de Responsabilidad Limitada). Share
capital is divided in "quotas as opposed to shares which apply to S.A.s
c. Limited Partnerships (Sociedad en Comandita Simple), and
d. General Partnerships (Sociedad en Nombre Colectivo).
REGISTRATION OF FOREIGN
COMPANIES
Almost all Costa Rican business activities are open to foreign investors. At
incorporation, all new companies must register at the National Registry. In
addition, registration with Tax Authorities as well as the Social Security
Institute are required. Other registrations at supervisory bodies are required
depending on the nature of business activities (for example, National
Securities Commission, Supervisory Agency of Financial Entities, Ministry of
Health, Ministry of Agriculture, Costa Rican Export Office, etc.).
CAPITAL STRUCTURE
A company must be formed with a minimum of two shareholders. A single
shareholder may subsequently own all the shares of a company.
COMPANY FORMATION PROCEDURES
The most common types of corporations formed in Costa Rica are the S.A.s. and
the limited liability corporations. Limited liability companies are usually
small non-public businesses.
The procedures for registering an S.A. company include:
1. Registering the name of the company at the Mercantile Registry.
2. Obtaining the required taxpayer numbers for the incorporating entity.
3. Filing the following documents:
a) A power of attorney granted to a Costa Rican citizen or a transient in the
country permitting him or her to register the company with the Mercantile
Registry and any other required agencies.
b) The articles of incorporation and by-laws of the company.
The articles of incorporation of the company and its by laws must then be
published in a local newspaper or in the official gazette.
AGENTS AND DISTRIBUTORS
Foreign companies may do business in Costa Rica through an agent, commercial
representative or a distributor.
Unlike some Latin American countries, Costa Rica has no special legislative
protection for distributors or commercial agents. As a result, contracts for
this services may be freely established and the only rights the agent or
distributor will have upon termination are those specified in the contract.
LABOR AND THE WORK FORCE
LABOR COSTS AND MINIMUM
WAGE
As of
June 1996, the minimum monthly salary for workers was c55,860 (approximately
U.S.$230). Such minimum salary is legally enforceable.
LABOR UNIONS AND
EMPLOYEES ASSOCIATIONS
Unions are organized by industries, with the larger ones in the Government
sector (including Central Government, autonomous entities and State-owned banks
and insurance company). Private sector unions are present in certain textile
companies and in banana plantations. Labor unions are legally empowered to
negotiate collective contracts for an entire industry.
The largest and most politically powerful labor group is the Confederation of
Workers of Costa Rica.
For more than 20 year, Employees' Associations have been promoted successfully
within Costa Rica as an alternative to labor unions. Employee Associations
represent savings and loan associations for the exclusive benefit of employees,
but have no legal power to negotiate collective labor contracts. Such Associations
are widely spread throughout the Costa Rica private sector. The employer would
deposit monthly into the Association and amount equivalent to certain
percentage (usually, from 1% to 8,33%) of total payroll. The employee would
also deposit another percentage from his payroll as savings. Amounts so
deposited by the employer are tax deductible and would be used to cover
severance indemnities when the employees are dismissed.
VACATIONS
Employees are entitled to 15 days of paid vacations after one year of
employment.
Daily salary is defined as 1/30 of monthly salary.
CHRISTMAS BONUS
Employees are entitled by law to a bonus equivalent to one-twelfth of annual
compensation after each year of service, payable on December; commonly, such
payment is known as Christmas bonus or thirteenth salary.
SEVERANCE INDEMNITIES
Under Costa Rican law, employees other than those dismissed for misconduct are
entitled to severance pay equal to one month's salary for each year of
continuous service, up to a maximum of eight-months' salary.
MATERNITY LEAVE
Women employees who become pregnant are entitled to one-month prenatal paid
leave and three months of post natal paid leave.
SOCIAL SECURITY SYSTEM
Companies must register with the Social Security Institute (CCSS) within three
working days after beginning operations. Likewise, each new employee must be
registered with the CCSS within three days after starting work.
CCSS provides benefits for medical care, temporary incapacity, permanent and
partial incapacity, retirement and survivors pensions.
Employer contributions to CCSS are made at the rate of 22% percent of workers'
monthly salary. Workers pay 9% per month.
OCCUPATIONAL RISK INSURANCE
POLICY
All employers must carry one or more insurance policies to cover occupational
risks, with the local government-owned insurance company.
TAXATION
TERRITORIAL PRINCIPLE
The
Costa Rican tax system is based on the territorial principles. Costa Rican
residents and corporations are subject to taxes only on income earned within
Costa Rica. Deductions to taxable income, in general, include all expenses
necessary to produce taxable income.
MAXIMUM CORPORATE RATE
The maximum company income tax rate is 30 percent.
The tax usual year ends on September 30. Multinational companies and financial
banking entities have special tax periods ending on December 30 or other dates.
Taxpayers may use their accounting period as their tax period.
WITHHOLDING TAXES ON
FOREIGN REMITTANCES
Payments made from Costa Rican source income to individuals or companies
residing abroad, are subject to the following withholding taxes:
%
- Transportation and communications 8.5
- Wages, salaries, pensions under a labor relation; (otherwise) 10.0
- Insurance related payments 15.0
- Motion pictures, T V programs, soundtracks, etc. 20.0
- Soap operas and similar items 50.0
- Dividends and similar distributions of earnings; 15.0
(If shares are registered and bought through a local stock exchange) 5.0
- Interest and other financial payments 15.0
(If the recipient is a foreign financial institution recognized by
Central Bank of Costa Rica, the withholding is waived).
- Royalties, trademarks, franchises, formulas, technical and financial services
and similar payments 25.0
- Any other remittance of Costa Rican source income, not included above 30.0
DIVIDENDS
Dividends paid credit by companies to individuals (both local and foreign) or
foreign entities are subject to a 15% withholding tax If shares of the paying
company are registered at local stock exchange the rate lowers to 5% shares
bought to another Costa Rican company are exempt from this withholding. This
withholding does not apply to stock dividends.
In the case of the withholding on dividends, interest, commissions, royalties
and insurance premiums remitted abroad, Tax Authorities may authorize a waiver
of such withholding tax provided that the beneficiary can prove that he or she
is not allowed a foreign tax credit for the withholding assessed in Costa Rica.
SALES (VALUE ADDED) AND
EXCISE TAXES
These taxes are levied on the import or transfer of taxable goods within the
country. With the exception of certain services such as advertising, most
services are not subject to sales taxes. The sales tax is assessed on value
added, and hence the final liability is calculated by subtracting total sales
paid on imports or purchases from total sales taxes derived from taxable sales
during the same period. The sales tax may be levied at the manufacturer,
wholesales, retailer or customs level.
In addition to sales taxes, excise taxes apply to selected goods and the rates
vary according to a table. Excise taxes are assessed either upon import or at
manufacturer level.
RATES
Thirteen percent (13%) sales tax applies to individuals or corporations that
sell goods or provide services on a habitual basis. Sales tax is also levied on
imported goods and is payable as part of import duties.
In the case of excise taxes, the rates vary from 5% up to 50%, according to a
table
MUNICIPAL TAX
This tax is assessed on the gross revenues of companies within the particular
jurisdiction at rates, depending upon the enterprises' line of business
TAX-EXEMPT ACTIVITIES
At present, certain not-for-profit organization, export-oriented companies and
tourism ventures are certified to tax exemptions. Exemption must be provided
expressly by Tax Authorities on case by case basis.
INFLATION ADJUSTMENTS
No inflation adjustments are required to be recorded. Inflation has not risen
to such levels that hiperinflationary conditions would have been determined.
Therefore, recognition of inflation effects in the accounting records has been
deemed unnecessary, except for revaluation of fixed assets which is allowed
(Tax Authorities accept depreciation on revaluation as deductible for tax
purposes). Multinational companies as well as foreign investors solve financial
reporting concerns which might arise from interpreting financial information
expressed in a weak currency by preparing sets of financial statements both in
local currency (colones) and foreign currency (usually US dollars).
INVESTMENT TAX CREDITS
Costa Rica offers investors a special investment tax credit for fresh
investments in industrial activities including tourism, agro-industry, cattle
raising, fishery and fish farming, as well as for new investments in fixed
assets, other than land, to be used in developing or increasing productivity.
PERSONAL INCOME TAX
Rates applicable to individuals with personal business activities.
Amount per year Rates
Up to c 679.000 0%
Over the excess of c 679.000 up to c 1.016.000 10%
Over the excess of c 1 016+000 up to c 1 694 000 15%
Over the excess of c 1 694.000 up to c 3.395.000 20%
Over the excess of c 3.395.000 25%
The rates for dependent personal work are
Amount per month Rates
Up to c 153 000 0%
Over the excess of c 153 000 up to c 230.000 10%
Over the excess of c 230 000 15%
PERSONAL TAX CREDITS
- Per each son under 18 years c 1.800
- Per spouse c 2.400
CORPORATE ASSETS TAX
The Corporate Assets Tax is a 1 percent levy on assets as are defined by the
law and is applied to all individual and corporate businesses, which have
assets over c 30.000.000 (U.S.$130.430, approximately).