Top 10 challenges of doing business in Costa Rica
Article 6 minute read

Top 10 challenges of doing business in Costa Rica

26 June 2018

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 61st out of 190 economies assessed by the World Bank Ease of Doing Business Survey 2018.

Ranked by the World Economic Forum (WEF) as number one for innovation 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 May 2018, growth is projected to remain solid, supported by strong exports and inflows of foreign direct investment.

Costa Rica’s investment climate has been generally favourable for many years. Consequently, foreign direct investment (FDI) is high and has been a significant contributor to Costa Rica's economic growth. FDI in Costa Rica increased by 586.80 USD Million in the fourth quarter of 2017.

A dynamic high-tech industry is reflected in the FDI inflow. Today, nearly 300 high-tech companies, 24% of which are Fortune 100, have established successful operations in Costa Rica and are still growing.

TMF Group in Costa Rica assists local and international clients, providing financial, legal, HR and payroll services across the country, supporting business start-ups, company management and expansion strategies.

Starting a Business

Starting a business in Costa Rica involves nine procedures and can take up to 22.5 days – good by comparison with elsewhere in the Latin American/Caribbean region, where the average is 31.7 days. The usual form of entity 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.

Construction permits, property registration and electricity supply

Obtaining a construction permit is a lengthy, cumbersome process, involving 17 procedures and taking up to 135 days. The country is ranked 70th for ease of dealing with a construction permit, compared with a regional average of 63.59.

Registering a property takes five procedures and 177 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 45 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.

Labour

The unemployed population rose to 10.3% in the first quarter of 2018, compared with 9.1% in the first quarter of 2017. The employment rate was 51.8%, while in the same period last year it was 54%. More than 40% 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.

Costa Rican employers report favourable hiring plans for the third quarter of 2018, according to a report by the ManpowerGroup : 13% of employers expect to increase staffing levels, 4% anticipate a decrease, 82% forecast no change and 1% don’t know. 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.

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.

Taxation

Costa Rica is ranked 60th for ease of paying taxes, on a par with the regional average. But 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 value added General Sales 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.

Trading across Borders

Costa Rica is ranked 73rd for ease of trading across borders, compared with a regional average of 68.71. But the country scores significantly better than the regional average of hours needed for border compliance per consignment, with Costa Rica taking 20 hours compared to 62.5. It also fares better than the regional average in the cost of border compliance, at $375 compared with $526.5

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.

Enforcing Contracts

The country ranks 129th in contract enforcement, according to the World Bank 2018 report, as it can take 852 days to undertake legal action and enforce judgement, compared with the global best of 164 days.

Resolving Insolvency

Costa Rica is ranked 131st in ease of resolving insolvency, according to the latest World Bank report. The process can take up to three years, just longer than the regional average of 2.9 years.

Credit

A relatively high ranking of 12th in ease of obtaining credit in the World Bank 2018 report recognises recent measures to make obtaining credit easier.

Costa Rica improved access to credit by adopting a new secured transactions law that establishes a functional secured transactions system and a modern, centralized, 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.

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 Group Costa Rica is experienced in supporting all aspects of opening and running a business in Costa Rica. 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, talk to us.

Written by

Lyndsey Wheeler

Managing Director - Mid America

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