Guidance

Overseas business risk: Costa Rica

Updated 23 May 2018

1. General overview

Costa Rica’s investment climate has been favourable for many years. Foreign direct investment is high and has been a significant contributor to Costa Rica’s economic growth. Despite challenges to the country’s competitiveness, including rising operating costs, a complicated legal environment, bureaucratic red tape, and infrastructure deficiencies, Costa Rican government actions to address this issue have moved Costa Rica up in the ease of doing business ranking considerably.

Prior to the global economic crisis, Costa Rica enjoyed stable economic growth. The economy contracted 1.3% in 2009 but resumed growth at about 4% per year in 2010-14. Growth over 2016 was 4.3%. While the traditional agricultural exports of bananas, coffee, sugar, and beef are still the backbone of commodity based export trade, a variety of industrial and specialized agricultural products have broadened export trade in recent years. High value-added goods and services, including medical devices, have further bolstered exports.

Tourism continues to bring in foreign exchange, as Costa Rica’s impressive biodiversity makes it a key destination for ecotourism. Foreign investors remain attracted by the country’s political stability and high education levels, as well as the incentives offered in the free-trade zones; Costa Rica has one of the highest levels of foreign direct investment per capita in Latin America. In April 2016, British Airways launched a direct flight from London to San Jose. Around 81,000 British nationals visited Costa Rica in 2016.

Costa Rica has an open economy focused on industrial production, services, tourism and agriculture. Its main industrial products are: microprocessors, medical equipment, electronic components and food processing. These goods, along with pineapple, banana, dairy products and coffee, are the country’s main export products. The currency is Colón (¢) and the exchange rate is £1 = ¢737.

As one of the most stable countries in Latin America, Costa Rica stands out in a number of ways:

• population is 4.9 million
• the country is in third place in competitiveness in Latin America
• the absolute GDP is $58.1 billion and GDP per capita is approximately $11,800 with a growth rate of 4.3%
• inflation is situated at 1.64% interest rates in US dollars are 10% and in Costa Rican colones 4.55%, which demonstrates that the country is one of the most developed in Latin America and the most stable economy in Central America

Foreign Direct Investment is an important part of the market’s economy. In 2015, it received around $2.8 billion, and in recent years, several multinational companies have set up their hubs in the country. Investors are interested in Costa Rica because of its high standards of living, its political and economic stability and its excellent educational system.

The country has free trade agreements with the European Union, United States, Canada, Mexico, China, Singapore, the rest of Central America and Caribbean countries among others. The US-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force on 1 January 2009 after significant delays within the Costa Rican legislature. CAFTA-DR has increased foreign direct investment in key sectors of the economy, including the insurance and telecommunications sectors which were recently opened to private investors.

Although the business climate in Costa Rica is favourable, obstacles remain. Difficulties which foreign companies can encounter include bureaucracy, slow decision-making processes, and lack of clarity and transparency in tax administration, and the slowness of the Costa Rican judicial system. Companies can also experience delays in customs, extra paperwork requirements and delays in processing payment.

2. Politics

Some political challenges should be considered when doing business in Costa Rica. As previously mentioned this could include bureaucracy and lack of transparency, slowness in the judiciary system and in decision-making processes, and delays in customs. The country has also faced a fiscal deficit for some time.

Although unemployment is one of the highest in the region (8.2%) and poor infrastructure causes problems; trade liberalisation has boosted productivity growth, economic diversification and investment.

High energy costs, bureaucracy, weak investor protection, and legal uncertainty, conflicting responsibilities between agencies, remain impediments to greater international company’s competitiveness. The legal system, whilst solid, can be very slow and often disappointing.

President Luis Guillermo Solís is keen to promote foreign direct investment. During his term of office, he has connected with several political leaders worldwide. This includes visiting and lobbying with Asian countries, North and South America and some European countries. The President is looking for international private investment in the country, offering Costa Rica’s main opportunity with the Free Trade Zones (FTZs).

Costa Rica’s continued popularity as an investment destination is well illustrated by historic FDI which climbed steadily from the year 2000 (GBP 263.82 million) to 2008 (over GBP 1.29 billion), and reaching a peak of over GBP 1.68 billion (5.4 percent of GDP) in 2013 before dropping back to GBP 1.35 billion in 2014.

President Solís is improving countryside access with road maintenance, a mega-port construction and airports. In terms of infrastructure, Costa Rica has a powerful energy supply network (98.55% from renewable sources). With the liberalisation of the telecommunications sector, mobile phone coverage is wider and internet connection is commonplace. The country is carrying out major improvements in the main seaports, airports and highways with a new port terminal on the Caribbean coast scheduled to start operations next year (an investment worth over GBP 650 million) and maintenance works on the Caldera port being carried out in the next two years.

Costa Rica has one of the highest innovation potentials in the region thanks to a high-quality educational system, good use of ICT and an above-average capacity to innovate and use available technology. Despite these strengths, the country still faces significant challenges that it must address to improve its competitive edge. The quality of transport infrastructure is poor, procedures to start a business are lengthy, and available financing for businesses— especially through local equity markets—is scarce, affecting the conditions for entrepreneurship.

3. Economics

Costa Rica offers investors excellent conditions and incentives given by the government as part of the export and investment promotion strategy. The country provides the most attractive and cost-effective tax incentives in the region. It is an excellent location for business and trade because it is at the heart of the Americas, with ports on both the Pacific and Atlantic coasts.

Free Trade Agreements provide preferential access to over 57 trade partners, including the UK. Moreover, Costa Rica is in the process of becoming a member of the Organisation for Economic Co-Operation and Development (OECD) and the Pacific Alliance (one of the most important trade organisations in the Americas).

3.1 Trade between UK and Costa Rica

Trade between the UK and Costa Rica has increased in the last few years. Exports of goods to the UK were £210 million in 2015. Those exports are made up of electronic chips, fresh fruit and vegetables. In the same period, imports of UK products reached £81 million in pharmaceuticals, chemicals, vehicles and spare parts, whisky, machinery and petroleum products.

UK businesses established in Costa Rica are: AstraZeneca, Land Rover, VITEC Group, BAT and Glaxosmithkline.

3.2 Strengths of the market

• open and well-diversified economy
• English is generally spoken
• high literacy rate (97.8%)
• GDP constantly growing since 1991
• highly educated and efficient workforce - best educational system in Latin America
• ranked first in political stability in Latin America, with more than 120 years of solid democracy
• safest country in Latin America
• second recipient of foreign direct investment per capita in Central America and third in Latin America
• international standards for Intellectual Property protection

3.3 Tax and customs considerations

Four investment incentive programs operate in Costa Rica: the free trade zone system, an inward-processing regime, a duty drawback procedure, and the tourism development incentives regime. These incentives are available equally to foreign and domestic investors.

The Free Trade Zone Regime provides 100% tax exemption to all sectors with an option for either 10-year period or no expiration period. For manufacturing projects with an investment of USD $10 million (approximately £6.5 million) or more they can receive 100% income tax exemption for an 8-year period and the following 4 years a 50% income tax exemption (additional 8-year renewal periods are possible if significant reinvestment is made). Companies that apply can set up their operations inside one of the privately-owned Free Trade Zone Industrial Parks. Most of these industrial parks are located within 20 miles from the main international airport.

Other taxes include:

• sales tax: 13%
• selective consumption tax: between 5% and 75% depending on the product

Customs procedures in Costa Rica are carried out through an agent responsible for presenting declaration forms to the Customs Office. The importer must provide all required documentation, such as commercial invoices, bills of lading, insurance agreements (if any),and technical specifications of the product. This is done mainly to designate the correct coding of the merchandise within the Central American Customs System.

The following sectors offer the greatest opportunities to UK companies:

Services

Costa Rica works with multifunctional modern processes like financial analysis, regional centres, software development and information technologies, engineering and design. The country stands as the first exporter of high value added services in Latin America, over Chile and Brazil. The amount of companies in the sector grew from 6 to 139 in the last 17 years. There are many opportunities for UK companies in the services sector, including: contact centres; shared and back office services; digital technologies; design and engineering; and regional hubs.

Advanced manufacturing

Costa Rica is first in Latin America for production process sophistication. It has a consolidated industry that operates with a high level of complexity, diversity of manufactured products and great dynamism. This is due to a strong educational system that leads to a highly skilled workforce. In the last 15 years the amount of companies in this sector has doubled which has established the country as a relevant part of Global Value Chains. There are many opportunities for UK companies, including provision of electronics; and automotive and aerospace components.

Life sciences

Costa Rica is leader in MedTech investment in the region. According to the MEDTECH report 2014 the country has attracted 47 MedTech projects over a five-year period including 18 in 2012, and ranking 7th globally in terms of the number of manufacturing projects ahead of the Netherlands, Brazil and Mexico. The sector has grown over 190% in the last decade.

Opportunities for UK companies include: medical devices and biotechnology development

Clean technologies

Costa Rica aims to be carbon neutral by 2021, which brings opportunities for green technologies. UK companies can help with development and production of components within the supply chain.

4. Business and Human Rights

In Costa Rica, foreigners have equal rights and obligations; they have no limits to property handling and they can conduct business activities freely, since there is free capital movement without foreign exchange controls. Multinational companies must comply with the same procedures and regulations as local companies do to start operations in the country.

Costa Rica still has some limitations and regulatory procedures, especially regarding the protection of public health, (human, animal or plant), security, the environment, and the compliance with the adequate quality standards. There are also laws and regulations in the following areas: Anti-discrimination and Harassment; Child and Youth Labour; Statutory Cash Bonus; Workplace Safety; Social Security and Insurance; Taxes; Pensions; Immigration; Association and Union; Confidentiality/Non-Disclosure of Information.

5. Bribery and corruption

Costa Rica has ratified the UN Anticorruption Convention, the OECD Convention on Combating Bribery and the Inter-American Convention against Corruption in 1997. This initiative of the Organization for Economic Cooperation and Development (OECD) and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption. Costa Rica also ratified the UN Anti-Corruption Convention in March 2007 and has laws, regulations and penalties to combat corruption, though the resources available to enforce those laws have been limited.

A series of high-profile corruption cases in recent years involving directors of state-owned enterprises as well as two ex-presidents have helped emphasise that even senior officials may be prosecuted on corruption charges. Acts of bribery, including those directed against government officials, are criminal acts punishable by imprisonment. Public officials convicted of receiving bribes are subject to prison sentences of up to ten years, according to the Costa Rican Criminal Code (Articles 340-347). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses.

6. Terrorism and security

Read the latest on terrorism and protective security in Costa Rica on the FCO’s travel advice page

7. Intellectual Property

While the legal framework governing intellectual property exists, Costa Rica does not adequately enforce those rights. Significant delays in judicial proceedings and a lack of official investigators, public prosecutors, and criminal and civil judges specializing in intellectual property continue to hamper effective enforcement.

Costa Rica is a signatory to the main International agreements on Intellectual property and is a member of the World Intellectual Property Organisation (WIPO). The Costa Rican Legislative Assembly has also ratified the General Agreement on Tariffs and Trade (GATT) agreement on Trade Related Aspects of Intellectual Property (TRIPS) and the Paris Convention for the Protection of Industrial Property. In September 2000, Congress passed a law which brings into force international treaty obligations with the WTO and TRIPS.

In order to obtain a patent in Costa Rica, an applicant must apply to the Registry Office. This process usually takes two years. To register a trademark, the applicant must submit a power of attorney requiring only notarization, a certified copy of the original registration or a legalised Declaration of Adoption of the Trademark. In addition, the applicant or local representative must supply one printing block and twenty prints of the trademark.

The registration processes take approximately seven to eight months.

8. Contact

Contact the Department for Business and Trade team in Costa Rica for further information.

Email: ukin.costarica@fco.gov.uk

9. Useful links

British Embassy San José

CINDE –Costa Rican Investment Promotion Agency

Costa Rican Ministry of Economy and Industry

Costa Rican Ministry of Foreign Trade

Costa Rican Central Bank (Main Economic Statistics)

PROCOMER -Costa Rica’s Trade Promotion Authority