Setting Up Your Own Business In Costa Rica? Here's What You Need To Know
Posted Tuesday February 14, 2017 (15:43:47)
Costa Rica in Central America is ranked as one of the most visited international destinations in the world. A democratic country, it has always enjoyed peace and has not had an army since 1949. Costa Rica is a small country, spanning just 0.03 percent of the earth’s surface. But it is home to 5 percent of the world’s biodiversity, and 25.58 percent of the country’s area is made up of conservation and natural protected territory.
Costa Rica is an appealing destination because it also offers excellent potential for setting up of multinational companies, and it is a great investment location. The local population is highly qualified with good academic levels and the country’s modern services adhere to high standards. Costa Rica is also a place of social and political stability.
With sandy beaches, tranquil lakeside living, tropical lush jungles, cool highlands and modern cities, Costa Rica has something for everyone. It’s no wonder that over the years expats have flocked to its shores, making it one of the most popular countries for good living overseas. Costa Rica’s climate ranges from sunny and tropical, to temperate and lush. The country also has an affordable cost of living, a strong economy and a stable government. The local population is welcoming and friendly. All of these reasons, along with the spectacular natural beauty and tropical lifestyle, have made Costa Rica a place where living is convenient, and one where it is easy to make new friends. Since expats have long been living here, new expats will find it easier to integrate.
Expats arriving in Costa Rica will be treated to a small destination with a year-round pleasant tropical climate, rich natural scenery consisting of rainforests, canyons and volcanoes, and a high quality of life. Research by the World Bank has found Costa Rica to be among the countries with the highest life expectancy. In 2016, the World Economic Forum ranked Costa Rica as the greenest country in the world. The country has ambitions plans of becoming carbon neutral by 2021. Most visitors to the nation prefer its natural surroundings to its urban areas. Costa Rica has a number of quiet, scenic villages and many vibrant resort towns. San José is the country’s capital, and with a population of over 300,000, it is filled with places that offer great shopping, restaurants and nightlife. Due to its central location, the city is popular with expats who use it as a base to explore the rest of the beautiful country.
Costa Rica also attracts retirees, especially of American and British descent, on account of its efficient healthcare, affordable cost of living and low-cost properties.
On the downside, unless expats have exceptional skills, they will find it hard to obtain a work permit. However, pensioners are eligible to own businesses. Costa Rica ranked 58th out of 189 countries in the World Bank’s Ease of Doing Business survey, and thus is not considered an ideal destination for investment. The country is, however, a popular country for medical tourism. Its healthcare system is of a high quality and medical care is free for visitors. Another point expats should know about is that Costa Rica witnesses a great deal of seismic activity and there is always a risk of volcanic eruptions and earthquakes. During the monsoon season from May to November, flooding and hurricanes are known to occur.
Doing business in Costa Rica
Costa Rica is an ideal place for innovative overseas nationals who are willing to take a risk and start brand new businesses in the country. Small businesses are faced with a lower startup cost than countries like the United States and Canada. According to statistics from the local Social Security System or Caja Costarricense del Seguro Social, the number of self-employed individuals has doubled over the past five years. Costa Rican nationals own a large number of businesses in Costa Rica, but there is also scope for foreigners to start their businesses here. When it comes to offering the most commercial freedom and protection for private businesses, Costa Rica ranked number one among Latin American countries and ninth in the world.
Foreigners are permitted to start their own businesses in Costa Rica with just a few restrictions. It is important to do adequate research about the local consumer market. The Central Valley is home to most of the country’s purchasing power. Almost 75 percent of the nation’s population lives in the central locations of San José, Alajuela, Heredia and Cartago. Costa Rica also has a young population, with 60 percent under 30 years. Businesspersons will need to adjust to the changing needs of the local market and also the differences in purchasing power. Businesses ideally will also need to cater to the small population, of which a quarter of the people are below the poverty line. It is also important to note that only two out of three expats who start businesses in Costa Rica succeed. If you’re an expat who is sold on the idea of starting your own business in Costa Rica, here’s what you need to know.
There are different categories of residency for those who want to live in Costa Rica. The process of securing a green card (cedula) can be bureaucratic, but the steps are straightforward. Most expats who retire to Costa Rica and live there full time choose the pensionado status, for which they need $1000 coming to them every month from social security or a government guaranteed pension. They also need to stay in Costa Rica for a minimum of four months in a year, and they must not work for anyone or any company, although they can own their own business.
Other types of residency include rentista and inversionista, which are temporary residencies that need to be renewed every three years. Individuals with any of these residencies are not allowed to work. Rentista is for those who have a regular income from investments, while inversionista means that they can invest in a property or business, but must remain in Costa Rica for at least half the year. Most overseas business owners in Costa Rica are ‘perpetual tourists’ who leave every 30 to 90 days to renew their visas. Those who own businesses are not permitted to work in them, as this equates to taking away a job from a local in the eyes of the government. So, business owners need to stay slightly removed from the daily functioning of their business.
There are different types of corporate structures from which expats can choose. They include general partnership, limited partnership, limited liability company, and limited company or corporation. The most commonly used structure for business purposes is the last one, also called Sociedad Anόnima.
- General partnerships (Sociedad en Nombre Colectivo) are owned by partners wherein liabilities and responsibilities of the business are shared, and their liability is not limited.
- Limited partnerships (Sociedad en Comandita) are run by a group that manages the administration and direction of the company, and represents the interests of shareholders. Their liability is limited to the original declared value of the company.
- Limited liability company (Sociedad de Resposibilidad Limitada) is one in which the liability of the owners is limited to their original investment.
- Limited companies or corporations (Sociedad Anόnima) are those that are owned by various shareholders, and as the name implies, they remain anonymous.
Naming your business
Costa Rican law stipulates that Sociedades Anόnimas must have a unique name that cannot be mistaken with any other company’s name. The name should also be followed by the term Sociedad Anόnima or the initials S.A. The name can be in any language, but the Spanish translation must be included in the firm’s charter. The meaning must be specified or the explanation can be given that the name comes from the owners’ imagination. The company name must be approved and registered with the Registro de Marcas de Comercio. This protects it from use by others.
The next step is to open a Costa Rican bank account. This is a very different procedure than it is in other countries like the United States. There is abundant paperwork involved. Costa Rica has a number of private and public banks. International banks offer more amenities to expats and the waiting time is also shorter. But local banks have more ATM machines and also offer deposits that are insured by the state. It can be quite overwhelming to open a bank account in Costa Rica as it requires a good deal of patience.
Once the business structure is formed and the bank account opened, any business activity in Costa Rica needs to apply for a business license (Patente Municipal) from the local government office. This requires a few steps such as:
- Ensuring that the specific zoning rules allow the desired activity before signing any lease or property purchase agreement
- Signing of the lease or property purchase agreement so that the application process is initiated before the authorities
- Obtaining work risk insurance for employees before the local insurance agency
- Registering the enterprise as an employer at the social security institution (CCSS)
- Applying for the health permit at the Ministry of Health once the zoning permit is approved
- After the health permit is issued, finally, applying for the business permit.
Expats who do not speak Spanish may need to hire a local for help in navigating the process.
Hiring an accountant
Most foreign business owners and locals usually hire a professional accountant to handle their taxes and records with the government. The accountant will be responsible for managing and filing the paperwork, and also visiting the tax administration on your behalf. Hiring a good accountant can help save you money during the process. The company must be registered as a contributor before the tax authority (Dirección General de Tributación Directa) as a specific business. Corporate tax varies between 10 to 30 percent on profit, based on the volume of total revenue.
Maintain realistic expectations
One of the reasons why people love to vacation or live in Costa Rica is that the country has a relaxed, laidback atmosphere where no one is in any big rush to get anything done. Expat businesspersons must realize that things work very differently here than in other countries such as the United States or Canada. They should remind themselves why they chose to take this step in the first place, as this could put things in perspective. There is no reason to be in a rush or state of urgency. This should be kept in mind before embarking on the adventure of having your own business, so that you don’t stress too much when your expected deadline of being up and running is pushed back by a few months. Starting a business is a challenging endeavor, especially if you are doing it in a new country with which you have little familiarity.
In Costa Rica, western standards of doing business generally apply. But there are cultural norms that are specific to the country. It is a good idea for expats to become familiar with these so as not to cause offence or end up in embarrassing situations. For instance, it can take a while to adjust to the Costa Rican idea of personal space. Acquaintances and strangers tend to allow less distance between themselves. Touching among acquaintances is also considered to be perfectly normal. It is also a practice to get to know each other even in business settings. Family is important in Costa Rica and it is a norm to ask one another about their families, or share details about them.
Have you run a business in Costa Rica? Share your experiences in the comments!
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Article content received from: Expat Focus,