The top 10 challenges of doing business in Costa Rica
Costa Rica is a promising country to do business in with high economic growth but it is not without its challenges.
Costa Rica continues to be one of the most attractive Latin American countries in which to do business, with a relatively stable economy and political situation. It is ranked 45th out of 77 jurisdictions assessed in TMF Group’s 2022 ‘Global Business Complexity Index’, making it one of the lower complexity Latin American markets in which to do business.
Three world rankings, led by experts in attracting foreign direct investment (FDI), have identified the Coyol Free Zone as the leading free zone in the region and a pioneer in issues of sustainability, environment and innovation. The renowned international magazine, fDi Intelligence, which for the fifth consecutive year highlights the business park’s work by placing it in the ‘Top 10 Free Zones in the World’ and recognising it as the best free zone in the Americas.
Eight cities in Costa Rica appear in the most recent ranking and in the sixth edition of ‘Cities of the Future of the Americas 2021/22’. According to fDi Intelligence, the creator of the study, the country has key geographical areas for FDI, human capital and profitability, among other categories.
Multinational companies are encouraged to start up operations under the ‘Free Zone Regime’ (FZR). This regime is the mainstay of Costa Rica's export and investment promotion strategy. The FZR is a set of incentives and benefits granted by the Costa Rican government to companies making new investments in the country, for example, exemption from taxes on exports. These feature under laws and particular regulations coordinated by PROCROMER and other entities.
Ranked by the World Economic Forum (WEF) in the Social Mobility Index 2020 edition as in 44th place out of the 82 economies assessed, Costa Rica is bettered only by Uruguay in Latin America; it is also recognised by the WEF as having the best educational system in the region.
According to the OECD’s economic forecast for Costa Rica, issued in June 2022, GDP will grow by 3.2% in 2022 and 2.6% in 2023. Domestic demand will strengthen moderately in 2022 and exports will benefit from the reactivation of the tourism sector in the last quarter of 2022 and early 2023.
Costa Rica’s investment climate has been generally favourable for many years. Consequently, FDI is high and has been a significant contributor to Costa Rica's economic growth. FDI into Costa Rica is expected to be US$490 million by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long term, FDI into Costa Rica is projected to trend around US$650 million in 2023 and US$950 million in 2024, according to our econometric models.
Challenges of doing business in Costa Rica
With all this being said, there are still hurdles to overcome and pitfalls to be aware of when setting up or conducting business in Costa Rica.
Based on our extensive experience of assisting both local and international clients in this market, we’ve identified ten potential pinch points to be aware of, so that you can expand into Costa Rica with your eyes open. We take a look at each in more detail here.
1. Starting a business
Starting a business in Costa Rica involves around nine procedures and can take up to 25 days. This is actually favourable in comparison with elsewhere in the Latin American/Caribbean region, where the average length of time is 31.7 days. The most common form of entity established is a corporation – Sociedad Anónima (SA). A company can be registered by name or number via the National Registry (Registro de Personas Juridicas). A public notary is required to draft, authorise and submit a company registration.
Costa Rica has strengthened minority investor protection by allowing greater access to corporate information before and during trial and enhancing disclosure requirements but weakened shareholder rights in certain major transactions.
2. Construction permits, property registration and electricity supply
Obtaining a construction permit is a lengthy, cumbersome process, involving 17 procedures and taking up to 138 days. Registering a property takes five procedures and 11 days, compared with a regional average of 7.2 procedures taking 63.2 days. Costa Rica has decreased the time needed to transfer a property through several measures, including the introduction of effective time limits.
Getting electricity connected involves five procedures taking up to 39 days. Costa Rica has made getting electricity easier by reducing the time required for preparing the design of the external connection works and for installing the meter and initiating the electricity supply. In addition, Costa Rica has introduced a new law aimed at curbing power outages through the introduction of a compensation scheme for customers impacted by blackouts.
3. Labour
The unemployed population rose to 8% in the first quarter of 2021, compared with 9% in the first quarter of 2020, according to World Bank statistics. The employment rate was 60%, with more than 30% of workers hold informal jobs. Unemployment is projected to remain high, reflecting structural mismatches between the supply of and demand for skills as the economy has moved towards more knowledge-intensive activities.
Engineers in different specialties, sales representatives and administrative assistants, who are all fluent in English, are those most in demand. In the last few years, there has been a pronounced change in the Costa Rican economy with more jobs going to bilingual people who are technically skilled or have a specialised profile.
4. Technology
Costa Rica is a member of the European Convention on Cybercrime (CEC), an international agreement which aims to punish computer crimes. Costa Rica has cybersecurity concerns that affect many countries, but there are no identified cybersecurity issues unique to Costa Rica.
In recent years, the country has been transformed from a reliance on agriculture to a diverse, modern, thriving economy where the leading export is medical devices. The country has a world-class R&D landscape, comprising IT software development, electronics manufacturing for the smart tech industry, superfood development and MedTech industry.
Costa Rica enjoys a constant flow of STEM (science, technology, engineering and maths) university graduates at +7% every year and IT graduates at +4% annually. CINDE, the Costa Rican Investment Promotion Agency, works closely with companies investing the county to match their needs with academic initiatives. As a result, it has developed 23 technical or specialised programmes within the last decade, tailored to these specific requirements.
5. Taxation
According to World Bank insights, the ease of paying taxes in Costa Rica is higher than the regional average. And the total tax and contribution rate as a percentage of profits is 58.3%, considerably higher than the regional average of 46.6%.
The corporate income tax rate is 30% and the standard value-added tax rate is 13%. The tax rate for employer provided social security contributions is 26.33%.
Costa Rica has made paying taxes easier for companies by promoting the use of its electronic filing and payment system for corporate income tax and general sales tax.
6. Trading across borders
Cross-border trade to or from Costa Rica compares favourably with other Latin American countries in terms of the time it takes to satisfy compliance procedures. The regional average number of hours needed for border compliance per consignment is 55.3, compared with 20 hours in Costa Rica. It also fares better than the regional average in the cost of border compliance, at $500 on average per consignment compared with $628.4.
It has preferential trade access to two-thirds of world GDP made possible by a strong network of free trade agreements with, among others, the USA, Canada, the EU, China and Singapore.
7. Enforcing contracts
Contract enforcement can be challenging in Costa Rica. It can take an average of 852 days to undertake legal action and enforce judgement, compared with the global best of 120 days, according to World Bank data.
8. Resolving insolvency
In Costa Rica, the process of resolving insolvency can take up to three years, which is slightly longer than the regional average of 2.9 years.
9. Credit
Recent measures have been put in place to make obtaining credit easier in Costa Rica. Access to credit has been facilitated with the adoption of a new secured transactions law that establishes a functional secured transactions system and a modern, centralised, notice-based collateral registry.
The law broadens the range of assets that can be used as collateral, allows a general description of assets granted as collateral and allows out-of-court enforcement of collateral.
10. Culture
Costa Ricans are friendly and welcoming, and personal relationships are important in business. Spanish is the official language, but English is widely spoken. Both English and Spanish versions of business cards and promotional material should be made available.
Business negotiations can be slow as the decision-making is consensual and often involves many different people. There is also a great deal of bureaucracy to be navigated. Delays in settling bills and invoices are commonplace in Costa Rica, so payment arrangements should be established in advance.
Business attire for meetings is conservative. Costa Ricans are more punctual than most Central Americans, but there is still a relaxed attitude to time so expect delays in meeting appointments.
TMF Group
TMF Costa Rica is experienced in supporting all aspects of opening and running a business in the country. An experienced team of professionals is well versed in local laws and regulations, assisting local and international clients, providing financial, legal, HR and payroll services across the country.
To find out more, or if you need assistance, talk to us.
