Costa Rica Is On Its Way to Creating New Incentives for Foreign Investors

Costa Rica is looking for new ways to attract foreign direct investment. In that sense, a bill that’s currently being discussed in the Legislative Assembly promises to create new incentives for foreign investors in exchange of injecting more US dollars into the country’s economy, which has been hit hard by the Covid-19 pandemic.

The ‘Law of Incentives for the Attraction and Promotion of Foreign Innovation and Technology Companies’ was introduced in June 2021 and this past March 2022 it was affirmatively ruled by the economic affairs commission of Congress. This means that it has to pass two parliamentary debates and be voted on before being signed into a law.

If passed, the new law would give benefits to foreign investors such as exemptions on the import of cars, tax exemptions, priority on procedures to establish their companies in a lawful manner, and also the same incentives that companies running on Free Economic Zones (“zonas francas”) already have.

The bill explains that, long before the pandemic, the country was dependent on foreign investment. However, during the last years the country’s risk grade has been classified as speculative with high credit risk. This has made it difficult to continue attracting the much-needed foreign investment the country craves.

The negative risk rating of the country “has caused a lack of investment from international companies, causing a shortage of dollars in the market, where under a regimen implemented by the Central Bank a relevant amount of the North American currency is needed in order to avoid an exponential rise in the exchange rate.”

The bills adds that during the past couple of years it has not been possible for there to be sufficient US dollars in the country, not only due to a lack of investment but also of tourists. These two problems, along with external factors, have triggered the exchange rate, which at the same time has incremented the cost of living in Costa Rica.

Possible investments and conditions

The bill establishes that the foreign direct investment could be implemented via any of the following investment mechanisms:

• Leases or acquisition of property, personal or real estate.

• Acquisition of shares of companies established in Costa Rica, in accordance with the current legislation.

• Production of raw materials and intermediate products.

• Provision of specialized technical services in technology and innovation.

• Creation of new companies.

• Others established by law.

The conditions these investors would have to meet are the following:

• The transfer of foreign capital has to be channeled through the national financial system.

• The minimum investment capital must be US $100,000, whether in real estate, assets, stocks, securities and productive projects or projects of national interest. The investment must increase by 10% annually during the first five years and 20% after that.

• All the personnel hired must be Costa Rican or resident in the country, and at least 50% of its suppliers have to be local from start.

• At least half of the workers must have a salary that’s three times the minimum wage of an unskilled worker. If not, the company has to train personnel for the required tasks and give them a subsidy that is at least the minimum wage of an unskilled worker.

• The company must have at least 20 employees and increase its personnel by 10% annually for the first five years, and 20% after that.

• That the labor relations carried out in these companies respects the country’s labor legislation.

• They have to be companies that already have operations abroad and that contribute to the development of activities that chain industry, college education, innovation promoting agencies, and regulatory authorities.

Benefits to foreign investors

If the companies or investors meet the above-mentioned requirements and conditions, they would enjoy the following incentives:

• These companies would be eligible for all of the fiscal benefits established in the law that regulates Free Economic Zones.

• These investors could import vehicles with tax exemptions.

• Five year exemption in personal and real estate property taxes, as well as municipal patents.

• Exemption from taxes on local purchases of goods and services necessary for the operation and administration of the authorized activity.

• They would receive priority to expedite permits and procedures in all government institutions, so that they do not have red tape problems.

The bill’s objectives

With these incentives, the bill is intended to attract more foreign companies to Costa Rica, in order to inject more US dollars into the local market. This, the legislative text says, would bring stability to the exchange rate without the need for an intervention by the Central Bank.

It would also generate new jobs that are of better quality. With higher wages, these workers’ ability to buy goods or services would increase by 38%, according to the plan. This way, production increases and there’s a greater tax collection, which could help the country overcome its fiscal crisis of the last few years.

Since a new Legislative Assembly will take office in May 2022, it is not clear yet if it will be passed before the change of government. It was presented by a representative of the National Liberation Party (PLN in Spanish), which is the largest fraction both in the current and future Congress, so it will probably have a lot of support.

We at Outlier Legal Services will keep an eye on this and other bills and laws meant to attract more foreign investment in Costa Rica. If you are a foreigner with plans to invest in this country, you can reach out to us to give you advise.