Choosing a Corporate Structure to do Business and/or invest in

Choosing a Corporate Structure to do Business and/or invest in
Real Estate in Costa Rica

Many foreign individuals starting a business in Costa Rica or merely purchasing real estate for investment purposes decide to use a corporate entity as the owner of such. This decision is a very wise one, and it is what we highly recommend to our clients as the first choice to be followed.

Ownership through a corporation allows one to have flexibility and more predictability in areas ranging from estate planning (if share ownership is properly structured the investor can avoid his heirs a painful and lengthy long-distance probate procedure), tax management (as an example, rules on corporate expenses are more flexible than the ones on personal ones), and representation (shareholders meetings can facilitate granting special powers of attorney or other types of authorizations for many actions thus not requiring local presence in the country).

The first question often asked by our clients is whether to use (or form) a Costa Rican corporate entity or use one already existing and controlled by such individuals abroad. Our advice is, in most cases, the use of a local entity. Although foreign corporate entities can own land and engage in business activities in the country, registration procedures (both at the Public Register and with government entities) as well as negotiation of contracts with private parties can get complicated, delayed and/or find obstacles when they are involved.

In any event, if a foreign entity will be used, note should be taken that we normally recommend registering the foreign entity in the Costa Rican Commercial Register as a branch or at least to register specific powers of attorney for such also in the Costa Rican Commercial Register. Both cases require a special and formal procedure that may take several weeks.

As mentioned before, in the great majority of cases, the use of a local corporate entity is preferred. Although Costa Rican commercial law contemplates many types of corporate forms, only two of them offer the investor the comfort of having structures similar to the limited liability companies to which he or she may be used to in their countries of origin.

Such corporate forms are the “Sociedad de Responsabilidad Limitada” and the “Sociedad Anónima”. In both cases, shareholders are only responsible for their participation on the company’s social capital and their own personal assets are fully protected and out of reach from any potential creditor the company may have.

The “Sociedad de Responsabilidad Limitada”, also referred to as “S.R.L.”, “Limitada” or “Ltda”, is a simpler form than the “Sociedad Anónima” and in most cases fills-up the blanks on its legal treatment from the much broader regulation of the “Sociedad Anónima”. S.R.L.’s are usually used only if any of their special features are especially appealing to the investor.

The special features of the S.R.L. are mainly the following:

Shares cannot be transferred to non-shareholders without the previous express consent of the other shareholders, who have a right of first refusal to purchase them.
These companies require, for their administration, no more than one individual (Manager), thus this is an especially appealing structure for cases in which the investor does not want to use and register (making public) the names of additional individuals to form part of what in the S.A. would be called a Board of Directors, as explained below.

The “Sociedad Anónima”, also referred to as “S.A.”, is the most widely used corporate structure in Costa Rica. It is pretty flexible and its legal treatment is extensive. In general terms, it can have any type of social capital (usually a low amount is used without any negative consequence) divided in as many shares as the investor desires (normally structured in a way in which they can be divided in as much shareholders that can be previewed, since such shares are, by law, not divisible).

The S.A. has many features, of which the most important are:

Since the positions of President, Secretary and Treasurer are legally mandatory and must be occupied by three different individuals, it must have a Board of Directors of at least three members, as well as one Comptroller, who must not hold any powers of attorney on behalf of the company.
Shares are represented by physical documents and more than one of them can be included in a certificate. They can be transferred to any non-shareholder without the approval of the other shareholders. Transfer is made through a combination of a transfer contract, the endorsement of share certificate(s) and an entry in the company’s Shareholders Registry Book.
Its By-Laws can be changed at any time, as well as any powers of attorney existing for the company, by means of a Shareholders Meeting, which can be held with the presence of all the shareholders or with individuals appointed by a proxy issued by them.
It is possible to establish special features for the protection of minorities and their voting rights.
Their legal representatives (holding powers of attorney to act on behalf of the company) are liable for any actions taken against the interest of the company and/or its shareholders.
They must have three corporate books (shareholders meetings, shareholders registry book and board of directors meeting book) and three accounting books. These books must be authorized by the local tax authorities and are a requirement for implementing any change in the company’s By-Laws or in its power of attorney structure since no shareholders meeting can be held without being recorded in the specific book authorized for such purposes.

Companies in Costa Rica must additionally register before the Tax Authorities. In the event the company is not involved in business activities in the country for the specific fiscal year (for example, when it is solely used for holding assets), formal tax registration is not required (only book authorization) although a fiscal year end declaration is always needed (though it will state that no economical activity existed during the period) in order to avoid the application of penalties.

The normal fiscal year for companies declaring taxes in Costa Rica goes from October 1 to September 30 of each year; filings can usually be made until the end of December. A different fiscal year can be authorized for companies that are fully owned or related to foreign entities that have a different term in their countries of registration.

It is important to conclude that the choice of corporate structure must ideally be made at the time the investment or business project is being created. This decision will have a major impact and specific consequences on the implementation of said project and if taken wisely, it will be one of the foundations for its success.

Planning to Invest in Costa Rica

ABC’s to Incorporating, Buying Property and Becoming a Resident

Many of our foreign clients have similar concerns when we first discuss their investment plans in Costa Rica. Almost everyone we have met wants to know about incorporating, buying property and obtaining residency.
We believe these three issues are the main components of what we would call the "typical investment package"; which, just by following some basic steps would make your Costa Rican venture a very successful one.

Incorporating in Costa Rica

The typical limited liability company (“Sociedad Anónima” or “S.A”.) must be incorporated by at least two people before a Costa Rican Notary Public. After such incorporation, the shares may be transferred and it is legally feasible to have a corporation in which one person is the owner of all shares.

The incorporators must choose a name (which must not be similar to any existing corporate name); appoint a Board of Directors (which, by law, must have a minimum of three members, President, Treasurer and Secretary) and a Comptroller. Each one of these positions must be occupied by a different person; however, the initial incorporators may occupy them.

Other crucial issues to be decided are the capital of the corporation (the higher the capital, the more registration taxes are to be paid); the number of shares composing such capital (a share cannot be divided according to Costa Rican Law -fractions of shares are not acceptable-; thus, it is advisable to have a number of shares that would permit future distributions of the participation in the company) and the representation of the newly formed company (there must be at least one representative of the company with powers of attorney to act on its behalf; however, at the time of incorporation, or later on, the powers of the company's representatives may be limited, for example, to specific actions or amounts).

Costa Rica has what we like to call a "hybrid" corporate system. The incorporation deed, as well as all changes to the company's By-Laws, are recorded in the Public Registry, where any person has access to them. However, all transfers of the company's shares are recorded in the Shareholders Registry Book, which is kept by the corporation and is only available to company's shareholders and officials; all other parties can only review it with a Court order.

When you are buying real estate, it is advisable to do it on a corporation's name. In this case, transfers could be made easier and the structure may be more flexible for other transactions and for organizational matters.

Buying Real Estate

Most properties in Costa Rica are registered in a computer system called "Folio Real". This system is centralized at the offices of the Public Registry in San José. Before buying land (or even before seriously considering an offer to buy land) a title search in Folio Real should be performed.
Such a title search will show all data on the property, including area, ownership, boundaries, location, mortgages and other liens.
A few properties have not been incorporated to the "Folio Real" system yet. They are still registered in special books kept in the Public Register. Such properties may also be accurately title searched in the Public Registry.

When considering buying land, the first question to be asked is if you are being offered ownership rights (derecho de propiedad) or occupation rights (“derechos de ocupación”). In the case of occupation, you would be dealing with land that has not been registered, cannot be title-searched and must go through a long process in order to be registered. Ownership rights, in the contrary, are registered and are equal to the concept of owning land in the United States or Canada.

Another situation one may encounter regarding land, especially in beaches, is the concession. In this case, the government gives a private party the right to use the land for a specific period of time. In general terms, the concession may be considered as a lease. The concessions' registration system is different than the one for regular land, and has particular requirements regarding zoning, terms, occupation, etc.
In conclusion, before buying, before offering or even before seriously considering a piece of land, enquire about its status and perform a title search: these simple steps could save you a lot of money and effort, and will definitely make your Costa Rican investment worthwhile.

Residency

Investing in a country as beautiful as Costa Rica is the final pretext many people are looking for to leave everything behind and start a new and different life. Understandably, one of the most popular concerns is to become a resident.

Costa Rican Immigration Laws allow foreign citizens to become residents in specific cases that range from having a family relationship with a local citizen (marrying a Costa Rican, having Costa Rican children) to demonstrating the government that the applicant will not be a burden for the country, mainly showing sound resources to be established in Costa Rica and, in some cases, to create a business here. Our mainly recommended regimes are the resident pensioner and the resident annuitant status. They are both administered by the I.C.T. (Costa Rican Tourism Board).

The resident pensioner status is used for foreign citizens who have retired from government service or from selected private entities and receive from them a permanent life retirement income of no less than US$600.00 per month. Such amount must be transferred periodically to Costa Rica, and its reception and conversion into colones (Costa Rican currency) at designated institutions has to be demonstrated.

The resident annuitant regime is applicable to all foreign nationals, regardless of age, receiving a fixed monthly income of no less than US$1,000.00. The funds of the deposit can come locally or from abroad and their conversion into colones (Costa Rican currency) at designated institutions has to be demonstrated.

Investing in Costa Rica can be one of your life's best decisions. There are many things to discover and experience. Being wise enough to plan your investment will make this venture real and sound.

Legalizing your Immigration status in the country

A step that due to recent polices you should not wait too long to take

Many foreign citizens living in Costa Rica with an irregular immigration status may have felt a real and immediate threat in the last few months: a considerable increase in actions by the Immigration Authorities against individuals staying illegally in the country has been detected, which, although mainly targeted to the large number of Nicaraguan irregular immigrants historically present in Costa Rica, has certainly affected Americans, Canadians and Europeans as well.

The above-mentioned measures are a follow-up to a policy established during the administration of ex-President Rodriguez for the massive deportation of illegal aliens. To that effect, the Immigration Authorities acquired buses to transport illegal immigrants (mainly Nicaraguan) to their country of origin and trained specific officers for the duty of investigating and deporting them. Nevertheless, once this policy was ready for operation, the process was stopped by a decree authorizing an immigration amnesty for Central American citizens.

By the end of the amnesty period the deportation process reinitiated. Immigration officers and policemen have gone to several areas of the country where a large number of illegal aliens live and many of them have been deported and taken to their countries of origin. Immigration Authorities also randomly visit companies that employ foreigners and other places frequented by them in order to detect and deport individuals with an irregular status. It must be clear that although these measures mainly affect Nicaraguans, they definitely apply and cover all foreign citizens staying illegally in Costa Rica, either because they entered the country illegally or because their tourist visas or residency permits have expired.

Under those premises, it is surprising how many foreigners living as investors or working as expatriates for multinational companies in Costa Rica do not legalize their immigration status and that of their dependents. In many cases, we consider that this happens mainly due to a lack of appropriate knowledge of the regulations and policies in force. In most cases, as stated above, these individuals face the uncertainty of an irregular situation which; if they would have been better informed, could have allowed them to become legitimate residents of the country: As we have also made clear, this situation may even result in being deported from the country, as well as spending the night in jail and/or not being permitted to re-enter after leaving for a few days.

A considerable number of the individuals forming the above mentioned groups assume that the country’s immigration “entanglement” will not permit them to obtain their residency because the procedures are very complicated and offer uncertain outcomes and that the requirements are impossible to be met. In such situations, it is important to make them aware of the existence of a fairly broad menu of possibilities of being covered by the law and that although the different regimes, procedures and requirements seem not to be aligned following a clear path, understanding them, together with qualified counsel, can make obtaining residency in Costa Rica a reachable goal.

Based on the above, we consider important to briefly refer to the different immigration regimes that might be applicable for the previously mentioned profiles.

General Requirements

When initiating residency procedures, it is important for the applicants to produce a series of documents which must meet several key formalities that will facilitate the progress of the applications; among them:

Birth Certificate, to be issued by the appropriate authorities at the place of birth.
Certificate of Clean Criminal Record, to be issued by the corresponding authority of the country where the applicant has lived during the last six months before his arrival to Costa Rica.
Marriage Certificate, to be issued by the country of registration of the marriage (if applicant’s spouse is to be included under the regime).
Physical presence in Costa Rica for fingerprinting (which generates a background check).
All documents originating abroad require authentication by the Costa Rican Consulate nearest to their place of issue and in the event they are not in Spanish, they must be officially translated in Costa Rica.

Resident Annuitant and Resident Pensioner Policies

These two policies allow a fast and positive outcome for residency applications based on (i) receiving a monthly income of no less than one thousand United States Dollars for at least five years, in a permanent, irrevocable and constant manner (in the case of the resident annuitant status) or (ii) receiving a life pension of no less than six hundred United States Dollars (in the case of the resident pensioner status), pension that we recommend to come from a government entity.

In both cases, the applicant’s spouse and children under eighteen years old can be covered in the regime.

Company Recognition Status

This policy permits companies established in the country and with an accounting net worth currently higher than approximately one hundred forty five thousand United States Dollars to be granted, after filing a series of corporate and legal documents, a specific authorization in the form of a recognition from the Immigration Authorities, permitting to obtain residencies for its foreign employees. Currently there is no limitation as to the number of non Costa Rican employees that could be covered by this regime by the company.

This residency will be linked directly to working for the applicant company (this residency allows staying in the country as long as the beneficiary works for said company only). This status allows coverage of the main applicant’s spouse and children under eighteen years old, who may study but not work while in the country.

Entrepreneur's Residency

This policy is applicable to financially sound people who wish to establish a business venture in Costa Rica. The business plan must be determined beforehand, and presented to the immigration authorities as part of the application.

The applicant must be able to prove that he or she will not be a burden to the country and that his or her enterprise (of which such individual shall be the holder of a full power of attorney) will produce enough revenue to support the applicant while residing in Costa Rica.

The applicant must incorporate his business according to Costa Rican law, and must prove that all necessary permits and authorizations for the business have been at least requested, if not already granted. The existence of actual business premises must be documented, and the financial feasibility or soundness of the business venture proven.

The residency status produced in this case does not permit the beneficiary to be hired as an employee, and he or she may only work as an administrator to his own business.

Temporary Work Permit

This regime allows the applicant to obtain the residency based on the existence of a labor contract.

The applicant must be able to prove that, he has been hired by a local company, attaching a copy of the labor contract and an application by the company.

Financially Sound Immigrant Residency

This status is applicable to financially sound foreign citizens who want to reside permanently in Costa Rica, but prefer to determine how their income
will be generated only after they are established in the country.

The Immigration Council has ample discretion regarding this kind of application. Policies and procedures of this entity may change from time to time and its determination of what is a financially sound individual is subjective. Due to such fact, it is difficult for us to offer certainty as to the outcome of this kind of application, although adequate planning and analysis allows for a high rate of success.

As with other similar policies, it is imperative that the applicant proves that he or she will not be a burden to the country. Among the most accepted, the following constitute strong proof of income: real estate ownership in the country or abroad, revenue from rental of houses or business premises, bonds or securities and bank accounts with balances of at least US$100.000, and any other sources of income that could be duly documented.

An assessment of each case’s particular situation will permit to better support a decision on one of the above indicated options. The applicant’s awareness of the existing choices and his understanding of the broad range of existing alternatives certainly justify the regularization of a precarious immigration situation.

Calculation table for transfer of real estate

Example value - $ 100,000.00

Stamps	%
Registry	0.005		$ 500.00
Agrarian	0.001		$ 100.00
Law 7535	0.002		$ 200.00
Municipality	0.002		$ 200.00
Lawyer Board*	0.00025	¢ 75.00	$ 25.00
Treasury Department C.R.*	¢ 625.00		less than $ 2.00
National archive**	¢ 20.00		less than $ 1.00
Transfer taxes	0.0151		$ 1,510.00
Legal fees	0.0125		$ 1,250.00
Total about 3.8%	0.03758 plus fixed costs above**		$ 3,788.00

** Over the first ¢ 100,000.00 a fixed rate of ¢ 75.00 has to be cancelled.
* According to specific table rates, shown maximun payment in colones.
Up tu ¢1,000,000.00 you pay 1.50% in legal fees, and 1.25% above that.
Law office of Alvaro Camacho - (506) 224-8252 - attorney@racsa.co.cr