Chapter 3 Running a Business in Costa Rica posted by on May 7, 2012
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Ahh, so now you have arrived in paradise, but……

Let me tell you a little story about myself, and I think you may find that you relate to it.

For the first 2 years or so that I was here, I did almost nothing constructive.  I had purchased a computer and had dial up internet access, which was all that was available in those days, but it didn’t work very well.  Still, I was able to get my “internet fix” every day.  So, between the internet, computer, and the local bars and restaurants, I was occupying most of my time and was not bored.  I was, what you might call, semi retired, though at a very young age of 38 and 39.

But, as time went on, I found that partying 5 days a week and fooling around on my computer and the internet was starting to get old and boring.  Many people look forward to that glorious retirement they have always dreamed of, but, many also find that after a year or so of relaxing, they need something to keep them occupied, so either look for a job or small business to start.

Others come here with the intent to start a business from the beginning.

And still others come here thinking that they are going to get a regular job here.  Well, that route is not easy at all, and is almost impossible for the regular person.  The only exceptions have been teaching English or working in a sportsbook or call center under the table.  For full details on this, see our Jobs page elsewhere on this website.

For example, you can form a Costa Rican corporation [most often this is the SA, or sociedad anomina type], and the corporation can take on contract work.  They can appoint you to fulfill the contract on behalf of the SA, and then the “employer” pays the SA and you can withdraw your money from the SA.

We represent a very competent local law firm and consulting business that can meet most of your legal, residency, and relocation needs.  It also provides business consulting and services that you may find useful.  We will tell you more about this in this chapter as well as the appropriate chapters on residency and other matters. In the meantime, if you wish to contact us, simply fill out or contact form on our contact page.

Business Structures

The types of business structures in Costa Rica are pretty much like those you are familiar with: sole proprietorships, partnerships, and corporations [SA’s are the most common form, and work much like the regular corporations back home].  Of these forms, for an expat doing business here, the SA is almost the only choice.  If you have a “partner,” you simply give him or her whatever percentage of the stock you agree to.  The corporate structure limits your liability, and is really the only totally legal and clean way most foreigners can start and run a business here.

[Since this was written about 7 years ago, another structure, the SRL, has gained popularity. It is the Costa Rican version of the LLC and like the LLC has simplified procedures of operation. Our attorneys report they are now doing more of these than the regular corporation. If you are interested in getting started, fill out the contact form on this site.]

In case you are not aware of it already, the Costa Rican bureaucracy can be a real head ache for you.  The best alternative is to hire a professional and reliable local law firm to handle these matters for you.  The process may still take 6 months or longer, depending on the type of business you are starting.  The most difficult would probably be a bar that wishes to have the recognition of the ICT, or the Tourism Institute.

If you business is dealing with tourists, you will no doubt want to get ICT recognition anyway, as it gives you advantages over not having the status.  One of the main benefits is that this status gives you a level playing field across the country, whereas without this status you are subject to the whims of the local municipality in your area.

One word about the above:  a non ICT recognized local business will have to apply to their local municipality for final licensing.  This can either be a breeze or it can be very bad, depending n the municipality you plan to locate in.

Some municipalities have an anti gringo outlook [this seems to be the case in Alajuela, for instance, according to some reports that we have seen].  On the other hand, others will roll out the welcome mat for you and even provide some advice and assistance.  It has been reported to us that two of the best in this regard in the Central Valley are Escazu and Santa Ana.

Another option, which may soon be closing, is to open your business in a free trade zone if it is suitable for that.  Import/export operations, call centers, etc., have all benefited form locating in these zones, because the local municipality does not come into play, and you operate under a totally different and more flexible set of rules.  Unfortunately, these zones may soon expire unless they are renewed by the next government.  But it is no accident that some of the largest “business parks” and multinational corporations operate from these special areas.

So, LOCATION as well as ICT status can be every bit as important as what you are doing and the legal structure of the business, depending on the type of business..

One final word of caution, be very careful if trying to locate a business in the Maritime Zone right on the beach.  For years, this law has not been properly enforced, but, lately, there has been a drive to enforce it, which has been a rude awakening to some long established beach businesses, some of which have been bulldozed to the ground after sometimes decades of operation.  So, if you are locating in this zone or especially buying an existing business in this area, WATCH OUT!  Again, competent and honest legal advice can save you a WHALE of a lot of hurt and misery down the road.  NOT getting GOOD legal advice is perhaps the worst “money saving” mistake you could ever make!

See our chapter on Government and Law for more details on corporate structure and other legal matters.

Buying a Business

One option many expats take is to buy an existing business from someone else.

Theoretically, this option can save you lots of time and trouble, meaning you can skip most of the onerous start up procedures and hurdles and go directly to the starting gate.

While this is a definite advantage over starting a business from scratch, the downside of this is that you can be taken to the cleaners by an unscrupulous seller who is trying to dump their problems on you.  The possible problems are many, which may include unpaid back wages to employees, loss of a license or lease, or other legal problems that may not be readily apparent.

The best thing to do is to have a good lawyer check into the legal status of the proposed purchase, digging real deep into potential problem areas.  He can then tell you whether he thinks the business has a clean bill of health or not.  You will also need to have a good accountant do a THOROUGH inspection of the books and records, and perhaps even conduct a complete audit to make sure all taxes, wages, social security payments, etc. are current.  Any one of these items could be a REAL EXPENSIVE problem for you if no detected before you buy the business, so to get the best experts n your side is the best investment you could possibly make.

Labor

Unless your business is going to be a one man or one woman enterprise, you will need to hire employees.  Be very careful in this area, because the labor laws are pretty strict, and there are minimum salaries depending on the type of work.  Ignoring these regulations can be very expensive for you if you get caught in violation.

The 3 basic legal principles that determine the existence of an employment relationship under Costa Rican labor law are established in the Labor Code, as follows:

1.  Section 2: “Employer is any person or corporate entity, private of public, that employs the services of another or of others, based on an express or implied labor contract, written or verbal, individual or joint.”

2.  Section 4: “Employee is any person that gives another person or entity his material, intellectual or material/intellectual services, based on an express or implied labor contract, written or verbal, individual or joint.”

3.  Section 18: “Individual labor contract, whatever it is actually called, is any contract, written or oral, in which a person commits to give another person or entity his services or to undertake a piece of work, under permanent dependency, and immediate or delegated direction of such other entity or person in exchange for a payment of any kind or form.”

From these legal foundations, local case law is unanimous in stating that there are three basic elements in a labor relationship, whose presence is crucial to determine if the link between the parties is of the labor kind, thus subject to all stipulations and protections of the Labor Code or of a non labor kind, solely governed by ordinary and non protectionist civil regulations.
Such basic elements are that the service must be given personally; that such service must be paid for and that it must be given under subordination with respect to the employer.  Of these three criteria, subordination is considered as the main and essential element for the determination of the presence or not of an employment type relationship since the other two may be present and yet not necessarily involve the application of labor law.

PERSONAL SERVICE

A contractual relationship cannot be considered as of the labor type, if the service is not provided personally, which is essential to labor relationships and basically means that what has been contracted can only be performed by a sole individual, who cannot be substituted.
In a labor relationship, the party receiving the services is not only interested in the provision of the services per se, but also on the personal capacities of a specific individual.  Local case law has clearly stated that an important factor to rule out the existence of a labor relationship is if it is detected that services are given by parties other than the one signing the agreement.
Local Courts have even considered that once and if the possibility of substitution is existent and has actually happened, it is not necessary to determine if the other elements that create a labor relationship are or are not present (mainly, as indicated, payment and subordination) since the sole absence of the “personal service” element is considered sufficient to rule out the application of labor law.
The above said does not mean that a labor relationship will be avoided by solely indicating in the agreement between the parties that the services can be performed by other individuals.  Such fact must be confirmed in the day to day reality of the services rendered and as such, services must be performed by the contracting party or any other individual selected by such for those purposes, if the replacement meets the criteria established in the contract.
In order to establish the non-existence of this personal element to avoid entering into a labor agreement, it is recommended to have a corporation execute the agreement on behalf of the service provider, and for it to issue locally authorized official invoices for the payment of the services.  For this mechanism to actually work, it will be optimal for the service providing company executing the service contract to have several employees and that as such they could be used to provide the services, following the guidelines set up in the agreement.

PAYMENT

For the relationship to be considered as of labor type, the service provider must have  compensation for his work.  Payment in an employment relationship can be calculated by unit of time, by task or by piece of work and made in currency, in currency and specie, or by participation in earnings, sales or collections from the employer.

SUBORDINATION

As indicated above, this element is considered essential for the existence of a labor relationship.  It is defined as the condition in which the employee’s autonomy is limited, with regards to the provision of the services, due to the written or oral agreement with the employer, such limitation coming from the capacity of the employer to guide the employee’s activities.
Subordination is also considered as an actual dependency condition created by the employer’s right to direct and give orders, and the consequent obligation by the employee of following such orders and directions and submitting to the employer’s will.  For subordination to exist, it is not enough to detect the possibility of giving orders, since the right to give them and to replace at will the individual providing the services is also considered to be needed by local Courts in order to confirm the existence of this element.
Subordination includes the possibility by the employer to establish disciplinary actions against the employee in cases of bad performance or misbehavior, basically being capable of imposing direct orders and penalties in case such orders are not followed.  Evidently, this possibility is many times in a gray area, since a non labor relationship must also give the possibility to the contracting party to establish guidelines on how the service will be provided.  The key here would be to establish such guidelines, but not a direct supervision and disciplinary regime for the individuals providing the service.
The sole obligation to render reports on how the tasks have been completed does not by itself creates a subordination regime, since it is considered as an essential duty of information from one party to the other which could be present in a non labor relationship as a performance obligation.
If, though, the performance of the services is controlled by the service receiver with regards to the actual manner of undertaking of the work activities — such as, for example, establishing exact hours and days of work as only one example — and not only to their quality, the relationship will be very probably considered as of labor type.
What is also accepted by the local labor laws as a non labor relationship is when the party contracting the services, instead of directly controlling how such services are rendered, is merely coordinating the activities.
In these cases of coordination, the link of the service provider with the contracting company’s commercial activities does not consist of a direct involvement on how the services are provided,  but on the indication of a specific “business program” in which the services are provided as a means for the completion of such program.  Coordination must not infringe on the autonomy of the service provider with respect to the choice of the specific means or forms used for performing the services.
With respect to schedules, it is considered that subordination exists even if such schedules can be agreed upon by the parties at the outset of the contract, but,  once they have been set up, the service provider cannot change them unilaterally and must comply with them as originally agreed.
In general terms, there are elements that can be put in the contract (and to be effective, to be present in the actual provision of the services over time) to define the services as not being provided with subordination.  Such elements come into play if the service provider: (i) works on his own; (ii) bears the risks associated with his activities; (iii) is liable before the law for any illegal actions he may engage in while providing the services; (iv) pays his own social security, taxes, etc.; (v) hires his own employees, if any; (vi) works as an independent, for another employer or employers; (vi) has the power of selecting a replacement for himself; (vii) provides the services in a place or places not imposed by the service receiver; (viii) does not get, from the service receiver, the instruments, tools or materials he needs to perform the services.
Although the existence or non-existence of the following points will not rule out or imply the existence, by themselves, of a labor relationship, the following elements would be considered by a local Court of Law so as to “suspect” the existence of such a relationship, and, as such, should be avoided, if possible, and as many of them as also possible: (i) exclusivity (as opposed to the possibility of providing services for other parties); (ii) place of work under employer’s control; (iii) periodical and fixed payment; (iv) submission to hourly shifts and schedules; (v) not having the possibility to accept or reject provision of specific services; (vi) provision by the employer to the employee of the material and personal means needed for performing the services; (vii) registration before the Costa Rican Social Security Agency and the length and continuity of the service relationship.

WORK CONTRACT AND THE PRINCIPLE OF “REALITY CONTRACT”

Section 18 of the Costa Rican Labor Code, which has been already referred to above, establishes the presumption of the existence of a contract -written or oral- between the employer and the worker. The sole initiation of the work relationship is sufficient for the presumption of the existence of the contract and such agreement compels the two parties to obey the obligations and rights established in the law.
Everything that is agreed upon by the parties of the labor relationship, being agreed in writing or not, but existing as the current conditions of the work relationship, becomes part of it.  This corresponds to a basic principle of local labor law (principle of “Contrato Realidad” –Reality Contract in English –) which establishes that no matter what has been agreed in writing as the contractual relationship employer-employee or no matter what the prior contractual relationship contents were, what rules is the current and real contents of the employment relationship, even though they are different from the agreement, all in favor of the employee (i.e. real work schedules vs. Contractually agreed work schedules; actually paid salaries and compensations vs. contractually agreed compensation; etc.).
While applying the “Reality Contract” principle to the labor relationships vs. non-labor service agreements issue, we must bear in mind that under local laws and case law, it is not important how the contract itself is labeled by the parties, as it is constantly indicated by Labor Courts that they consider that the employer frequently uses several mechanisms to avoid the application of labor law, giving the contract the appearance of a non labor matter.
At the end of the day, local Labor Courts will examine how the actual relationship between the parties occurred, and in view of such and the detection and evaluation of the elements that have been covered in the paragraphs above, they will make the determination of its nature and the applicable legal regime.

PRESUMPTION OF THE EXISTENCE OF A LABOR RELATIONSHIP

As per local laws and case law, the general rule is that the existence of a labor relationship when services are provided is always presumed, and the employer must bear the burden of proof of the contrary.
Notwithstanding the above, the general rule is reversed, as established by case law, when services are not provided personally (but by a corporate entity) and the parties expressly state, by the means of a written contract, that the relationship is not of a labor nature.  In this case, the burden of proof is transferred to the service provider’s side, who must demonstrate the existence of the elements that we have stated as determining an employment relationship.  In this type of situations, as indicated by local case law, what is applied is a case by case examination of the facts and proof in order to determine if the specific matter will be governed by labor law.

LEGAL OBLIGATIONS BY THE EMPLOYER IF THE RELATIONSHIP IS CONSIDERED A LABOR RELATIONSHIP

Although all measures possible to try to characterize the relationship as out of the reach of local labor law are taken, the type of activities that will be performed certainly pose a high risk of being considered by a local Labor Court, if a dispute arises, as constituting a regular labor relationship between the parties.
If that happens, it is important to have a clear picture of the obligations that will materialize for the employer, which mainly consist in penalties for the lack of registration of the employees before the local Social Security Administration, as well as the payment of all labor related compensations to which regular employees are entitled under Costa Rican labor law, namely: vacations, Christmas bonus (also called thirteenth month), right of notice of termination and severance pay.

Below are the details for each of the above:

Vacations

With regards to vacations, besides holidays and Sundays, the employee is entitled to two weeks of paid vacation for each fifty weeks worked or, in cases of contracts that terminate before such 50 weeks, a day for each month worked. Vacations can be divided, but only in two segments.
Upon termination of the employment contract, unused vacation time should be paid using as a base the average of salaries earned during the last six months.

Christmas Bonus

Employees must be paid a bonus of one month’s salary after a year of work (“aguinaldo”), or an amount proportionate to the time worked, if it less than a year.

Right of notice of termination

After three months of employment, an employee has the right to receive notice in the event of termination of employment without just cause by the employer (if notice is not given, he must be paid one month’s salary, or a fraction if he has been employed for less than one year).

Severance payment

If the worker is fired without justification after at least three months of service, the employer has to pay a severance payment whose amount increases in accordance with the time served and could be up to twenty two days per year worked, with a maximum calculated on the basis of eight years, all according to a specific calculation table indicated by the Labor Code.

Minimum Wages

Costa Rica closely controls salaries. While countries to the north have minimum wages, Costa Rica has a separate minimum wage for nearly every type of job. And the numbers keep changing, thanks to a continual devaluation of the colon.
Every six months the government negotiates salary increases with various employee unions. If the negotiations fail, as they do from time to time, the president may issue a decree setting the new salaries in conjunction with the Consejo Nacional de Salarios.
Under the latest decree that covers the first half of 2005, blue collar workers in agriculture, tourism, manufacturing and a host of other areas must earn from 3,903 to 5,377 colons daily, depending on qualifications. That’s from $8.45 to $11.64. And that’s for a day.
We used to publish the minimum salaries, but as they are subject to change twice per year this is not feasible. Check with your attorney for the current rates that affect your business.

A bare bones list of minimum salaries usually is available at news outlets in the metropolitan area and legal bookstores. However, the Ministerio de Trabajo y Seguridad Social has many more job classifications and specific minimum salaries in its files.
Most professionals work for salaries established by their colegios or trade organizations. For example, lawyers are supposed to get 10 percent of the value of any contract they prepare.
Most companies try to pay around the legal minimum, although more enlightened ones reward good employees. Although the salaries seem low by North American standards, they are good for Latin America, and employees here have the benefit of free medical care, pensions and other benefits not fully reflected in the paycheck.

Professional Resources

If you are spending all of the money to either buy or start a business, it is only wise to seek professional advice in all aspects of your purchase or start up, which means seeking competent, professional advice in many areas.

It is hard enough moving to an unfamilliar town or city in your native country, but, in a foreign country where you may not even have a good command of the local language, Spanish, it would be suicidal and foolish to proceed on your own without such help.  After all, if you find yourself on the wrong side of some obscure regulation or another, you might have a very costly fine or other penalty — or, in a worse case scenario, you might lose your business altogether.

We have found from experience that the best idea is to have your own personal advisor(s) to “help show you the ropes.” Whether you need legal, accounting, relocation, or just about any other type of service, I am here to be your guide and at your service with professional assistance and recommendations based on my 16+ years here in this country. You can reach me by picking up the phone and calling my US phone number at: 408-834-8909. If no one answers, leave a message and the best time to call. Or, you can reach me by using the contact form on this website.

I wish you the best of luck in your business experience here in Costa Rica.

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