With Costa Rica being one of the most ambitious and diverse economies of Latin America, keen investors are looking towards establishing commercial operations in sectors ranging from tourism to energy development to coffee exportation.
Starting a business in Costa Rica can be manageable if you are well informed and advised. First of all, you need to set up a company which will be the vehicle to conduct business operations in the region. More importantly, you should know what kind of company fits your business goals, interests and specific requirements.
The most common legal entity types in Costa are the Public Limited Company (¨Sociedad Anónima¨ – S.A.) and the Limited Liability Company (¨Sociedad de Responsabilidad Limitada¨ – S.R.L.). They can be assumed by practically any kind of business. On the other hand, if you want to expand an existing business, there exists the possibility of establishing a foreign branch office.
In this article, we will clarify some of the main differences between a Foreign Branch Office and a Local Costa Rican Company.
Similarities Between a Local Company and a Foreign Branch Office in Costa Rica.
Company´s Capital
Neither independent companies nor foreign branch offices are limited with regards to the company’s share capital. Branch offices need the amount of social capital stated in the shareholder´s agreement of the Parent Company and in the incorporation document. There are no restrictions on which currency must be used, with many companies using the US Dollar as their prefered currency.
Incorporation Process
Even though independent companies and branch offices have different requirements for incorporation, both need to be registered in the National Registry and in the Ministerio de Hacienda to act as a unique tax-paying company. In order to be able to hire local and foreign personnel, further registrations at the Caja Costarricense de Seguro Social (CCSS) and the Instituto Nacional de Seguros (INS) are required.
Corporate Bank Account
The prerequisites for opening corporate bank accounts are the same for local companies as they are for foreign branch offices. The National Registry demands certifications regarding the initial deposit – this will depend on the type of account that will be opened. To make the initial deposit, banks generally need proof of the net income of the legal entity.
Differences Between a Local Company and a Foreign Branch Office in Costa Rica.
Company Name
Independent Company: To choose a name for an independent local company, you first need to check if the name is available in the National Registry database. This name must not be similar to any other existing company names in Costa Rica. Next, the name must be followed by the suffix ¨Sociedad Anónima¨ or ¨Sociedad de Responsabilidad Limitada¨. Both can be shortened to ¨S.A¨ or ¨S.R.L.¨, respectively, depending on what type of legal entity your company chooses to incorporate.
Foreign Branch Office: The Branch office must always have the exact same name as the parent company, identifying that it is not a separate legal entity, but more an extension of its parent company.
Legal Representation
Local Company: In case of an S.A., the President of the Board of Directors, and if appointed by the shareholder, any other member of the Board can legally represent the local Costa Rican company. On the other hand, a Manager or Submanager appointed by the shareholders can legally represent an S.R.L. If the legal representative is not a resident of Costa Rica, a resident agent, who must be a lawyer, has to be appointed. Many foreign companies choose to work with a trusted local law firm who can provide legal representation services should they not have a suitable representative in the region.
Foreign Branch Office: The legal representative is denoted in the shareholder´s agreement issued during the establishment of the foreign branch office. If the legal representative is not a resident of Costa Rica, a resident agent, who must be a lawyer, has to be appointed.
Company Bylaws
Local Company: The company´s bylaws are drafted in the incorporation document. In addition, statutes, such as management, board members, social capital and dividends distribution are included and must be approved by the National Registry during the company incorporation process.
Foreign Branch Office: The Branch Offices’ bylaws must be the same as the Parent Company, including the company’s social objective. An exception can be made to the bylaw of social capital, which must be recorded in the incorporation document in accordance with the shareholder´s agreement of the Parent Company.
Legal Responsibility
The main differences in daily activities regarding local companies and foreign branch offices lie in the legal responsibilities. The Parent Company is fully responsible for all liabilities of the foreign branch office. Furthermore, the legal representative of both the mother company and branch office takes responsibility for the foreign branch offices tax obligations.
What Type of Company Should you Choose In Costa Rica?
Most multinational corporations that need financial support and/or legal ties in a foreign country consider establishing a foreign branch office; for example banks or financial institutions. Since there might be difficulties for SMEs to set up a foreign branch office due to not having a parent company, limited market knowledge and/or lack of financial support, proper advice and guidance is essential in order to succeed in the Costa Rican business environment.
It is recommended to work with a local legal firm to ensure that you establish the correct legal entity based on your business needs, requirements and objectives in the region.
Operating in Costa Rica can be easy once you understand the legal requirements and requisites of the local and national authorities, such as the Caja Costarricense de Seguro Social (CCSS) and the Ministerio de Hacienda. If you want to know more about opening and operating a business in Costa Rica, don’t hesitate to contact our bi-lingual Country Coordinator, Josseline here.
Interested in doing business in Latin America? Check out this video to learn more.
