PROS and CONS of Incorporating in Costa Rica (Published in The Costa Rica News)
Why do most expats form an S.A. or an S.R.L. in Costa Rica? Is it just because attorneys want to make extra legal fees?
The truth is that a large percentage of the assets and bank accounts controlled by foreigners are owned by their local corporations that mostly act as holding companies, but is it really necessary? Let’s first look at the PROS that would justify creating a company in Costa Rica:
• To do business: article 8 of the Costa Rican Commerce Code establishes that foreigners will be allowed to conduct business only if they become permanent residents, so corporations are used to circumvent this limitation and be used to purchase assets and to provide professional services to local businesses.
• Limited Liability: both types of entities the S.A. (Sociedad Anónima) and the S.R.L. (Sociedad de Responsabilidad Limitada) are granted limited liability so they respond only with their equity and not with that of their shareholders. This characteristic was created by governments to promote entrepreneurship and commercial ventures.
• Asset Planning: Based on that same limited liability it is highly recommended to minimize exposure to possible litigation by forming separate legal entities to hold assets individually, thus protecting the hard earned assets of individuals. This has to be observed as available regulatory advantages and not as strategies to evade taxes.
• Corporate Banking: Currently financial institutions around the world strictly supervise the opening of bank accounts by nonresidents at foreign jurisdictions and Costa Rica is not the exception. Banks are supervised by the local governing entity which requires specific Know Your Client information and the vital aspect is that the corporation is seen as a first intention to settle in Costa Rica and will normally be enough for them to open the account.
Now let’s look at the CONS of incorporating in Costa Rica:
• Payment of the Yearly Corporations Tax: As of April of 2012 the Costa Rican government passed a Law #9024 that mandates that all existing legal entities are obligated to pay a yearly flat tax. If the companies are active they have to pay every January the equivalent of approximately US$350.00 or approximately US$175.00 for inactive ones.
• Corporate Maintenance: Because corporations normally own valuables it is important to maintain them properly and that requires certain organization. Corporations have to celebrate a mandatory yearly shareholders meeting, have to maintain a Resident Agent, have to keep the legal books in custody and have to declare and pay corporate income tax if they have commercial activity.
Despite the newly created tax corporations are still a synonym for doing business in Costa Rica and it’s up to the individual to evaluate the Pros and Cons and to decide if in his specific case forming a corporation is worth the extra effort.
The limited liability of corporations has saved capitals but has also created unnecessary disputes and difficult situations due to lack of attention to detail. Whatever your decision is please take the formation of your company very seriously and ask for a detailed explanation of its rights and obligations to a specialized attorney.
Augusto Arce has a JD from the Universidad de Costa Rica and a Global Masters in Business Administration from Thunderbird School of Global Management and the Tec de Monterrey. Mr. Arce has more than 15 years of experience in foreign advisory and currently is the Managing Partner of GLC Abogados.
The Costa Rica News (TCRN) San Jose Costa Rica