Policies Towards Foreign Direct Investment

Costa Rica actively courts foreign direct investment (FDI), placing a high priority on attracting and retaining high-quality foreign investment. There are some limitations to both private and foreign participation in specific sectors, as detailed in the following section.

The Foreign Trade Promotion Corporation (PROCOMER) as well as the Costa Rican Investment and Development Board (CINDE) lead Costa Rica’s investment promotion efforts. CINDE has had great success over the last several decades in attracting and retaining investment in specific areas, currently services, advanced manufacturing, life sciences, light manufacturing, and the food industry. In addition, the Tourism Institute (ICT) attends to potential investors in the tourism sector. CINDE, PROCOMER, and ICT are strong and effective guides and advocates for their client companies, prioritizing investment retention and maintaining an ongoing dialogue with investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

Costa Rica recognizes and encourages the right of foreign and domestic private entities to establish and own business enterprises and engage in most forms of remunerative activity. The exceptions are in sectors that are reserved for the state (legal monopolies – see #7 below “State Owned Enterprises, first paragraph) or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, transport services, professional services, and aspects of broadcasting). Properties in the Maritime Zone (from 50 to 200 meters above the mean high-tide mark) may only be leased from the state and with residency requirements. In the areas of medical services, telecommunications, finance and insurance, state-owned entities dominate, but that does not preclude private sector competition. Costa Rica does not have an investment screening mechanism for inbound foreign investment, beyond those applied under anti-money laundering procedures. U.S. investors are not disadvantaged or singled out by any control mechanism or sector restrictions; to the contrary, U.S. investors figure prominently among the various major categories of FDI.

Other Investment Policy Reviews

The OECD accession process for Costa Rica beginning in 2015 has produced a series of changes by Costa Rica and recommendations by the OECD; within that context the OECD in April 2018 published the “OECD Economic Surveys Costa Rica 2018.” http://www.oecd.org/countries/costarica/oecd-economic-surveys-costa-rica-2018-eco-surveys-cri-2018-en.htm  .

In the same context, the OECD offers a number of recent publications relevant to investment policy, including “Digital Economy Policy in Costa Rica”, “Consumer Policy in Costa Rica”, and “Enhancing the Use of Competitive Tendering in Costa Rica’s Public Procurement System”: http://www.oecd.org/countries/costarica/ . As of April, 2020, Costa Rica has passed all relevant OECD committees and aims to receive the invitation to formally accede to the OECD in May, 2020.

The World Trade Organization WTO conducted its 2019 “Trade Policy Review” of Costa Rica in September of that year. Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals: https://www.wto.org/english/tratop_e/tpr_e/tp492_e.htm 

The United Nations Conference on Trade and Development UNCTAD produced in 2019 the report Overview of Economic and Trade Aspects of Fisheries and Seafood Sectors in Costa Rica: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2583 

The United Nations Food and Agricultural Organization FAO published in 2018 the report “The successes and shortcoming of Costa Rica exports diversification policies”, focusing on agricultural products: http://www.fao.org/documents/card/en/c/18308EN .

Business Facilitation

Costa Rica’s single-window business registration website, crearempresa.go.cr , brings together the various entities – municipalities and central government agencies – which must be consulted in the process of registering a business in Costa Rica. A new company in Costa Rica must typically register with the National Registry (company and capital registry), Internal Revenue Directorate of the Finance Ministry (taxpayer registration), National Insurance Institute (INS) (basic workers’ comp), Ministry of Health (sanitary permit), Social Security Administration (CCSS) (registry as employer), and the local Municipality (business permit). Crearempresa is rated 17th of 32 national business registration sites evaluated by “Global Enterprise Registration” (www.GER.co ), which awards Costa Rica a relatively lackluster rating because Crearempresa has little payment facility and provides only some of the possible online certificates.

Traditionally, the Costa Rican government’s small business promotion efforts have tended to focus on participation by women and underserved communities.  The women’s institute INAMU, vocational training institute INA, MEIC, and the export promotion agency PROCOMER through its supply chain initiative have all collaborated extensively to promote small and medium enterprise with an emphasis on women’s entrepreneurship. In 2020, INA began launching a network of centers to support small and medium-sized enterprises based upon the U.S. Small Business Development Center (SBDC) model.

The World Bank’s “Doing Business” evaluation for 2019, http://www.doingbusiness.org , states that business registration takes ten steps in 22.5 days. Notaries are a necessary part of the process and are required to use the Crearempresa portal when they create a company. Women do not face explicitly discriminatory treatment when establishing a business.

Outward Investment

The Costa Rican government does not promote or incentivize outward investment. Neither does the government discourage or restrict domestic investors from investing abroad.

Transparency of the Regulatory System

Costa Rican laws, regulations, and practices are generally transparent and foster competition in a manner consistent with international norms, except in the sectors controlled by a state monopoly, where competition is explicitly excluded. Publicly-traded companies adhere to International Accounting Standards Board standards under the supervision of SUGEVAL, the stock and bond market regulator.

Rule-making and regulatory authority is housed in any number of agencies specialized by function (telecom, financial, health, environmental) or location (municipalities, port authorities). Tax, labor, health, and safety laws, though highly bureaucratic, are not seen as unfairly interfering with foreign investment. It is common to have Professional Associations that play a regulatory role. For example, the Coffee Institute of Costa Rica (ICAFE), a private sector organization, promotes standardization of production models among national producers, roasters and exporters, as well as setting minimum market prices.

Costa Rica is a member of UNCTAD’s international network of transparent investment procedures (http://www.businessfacilitation.org ). Within that context, the Ministry of Economy compiled the various procedures needed to do business in Costa Rica: https://tramitescr.meic.go.cr/ . Accounting, legal, and regulatory procedures are transparent and consistent with international norms. The Costa Rican College of Public Accountants (Colegio de Contadores Publicos de Costa Rica -CCPA) is responsible for setting accounting standards for non-regulated companies in Costa Rica and adopted full International Financial Reporting Standards. For more, see the international federation of accountants IFAC: https://www.ifac.org/about-ifac/membership/country/costa-rica .

Regulations must go through a public hearing process when being drafted. Draft bills and regulations are made available for public comment through public consultation processes that will vary in their details according to the public entity and procedure in question, generally giving interested parties sufficient time to respond. The standard period for public comment on technical regulations is 10 days. As appropriate, this process is underpinned by scientific or data-driven assessments.

Regulations and laws, both proposed and final, for all branches of government are published digitally in the government registry “La Gaceta”: https://www.imprentanacional.go.cr/gaceta/ . The Costa Rican American Chamber of Commerce (AmCham – http://amcham.co.cr  ) and other business chambers closely monitor these processes and often coordinate responses as needed.

The government has mechanisms to ensure laws and regulations are followed. The Comptroller General’s Office conducts operational as well as financial audits and as such provides the primary oversight and enforcement mechanism within the Costa Rican government to ensure that government bodies follow administrative processes. Each government body’s internal audit office and, in many cases, the customer-service comptroller (Contraloria de Servicios) provide additional support.

There are several independent avenues for appealing regulatory decisions, and these are frequently pursued by persons or organizations opposed to a public sector contract or regulatory decision. The avenues include the Comptroller General (Contraloria General de la Republica), the Ombudsman (Defensor de los Habitantes), the public services regulatory agency (ARESEP), and the constitutional review chamber of the Supreme Court. The State Litigator’s office (Procuraduria General) is frequently a participant in its role as the government’s attorney.

The review and enforcement mechanisms described above have kept the regulatory system relatively transparent and free of abuse, but have also rendered the system for public sector contract approval exceptionally slow and litigious. There have been several cases in which these review bodies have overturned already-executed contracts, thereby interjecting uncertainty into the process. Bureaucratic procedures are frequently long, involved and can be discouraging to new investors.

A similarly transparent process applies to proposed laws. The Legislative Assembly generally provides sufficient opportunity for supporters and opponents of a law to understand and comment upon proposals. To become law, a proposal must be approved by the Assembly by two plenary votes. The signature of ten legislators (out of 57) is sufficient after the first vote to send the bill to the Supreme Court for constitutional review within one month, although the court may take longer.

Costa Rica is transparent in reporting its public finances and debt obligations, including explicit and contingent liabilities. The Ministry of Finance provides monthly updates on public debt, generally on the 20th of the month, with the debt categorized as Central Government, Central Government and Non-Financial Sector, and Central Bank of Costa Rica: https://www.hacienda.go.cr/contenido/12519-informacion-de-la-deuda-publica 

The following chart covers contingent debt as of December 31, 2019: https://www.hacienda.go.cr/docs/5e27072cb4e07_12.19%20Resumen%20deuda%20contingente.xlsx 

The General Controller’s Office produced the following report on unregistered debt, summing to 1.27 percent of GDP: https://cgrfiles.cgr.go.cr/publico/docs_cgr/2019/SIGYD_D_2019015487.pdf 

International Regulatory Considerations

While Costa Rica does consult with its neighbors on some regulations through participation in the Central American Integration System SICA (http://www.sica.int/sica/sica_breve.aspx ), Costa Rica’s lawmakers and regulatory bodies habitually refer to sample regulations or legislation from OECD members and others. Costa Rica’s commitment to the OECD accession process accentuated this traditional use of best-practices and model legislation. Costa Rica regularly notifies all draft technical regulations to the WTO Committee on Technical Barriers in Trade (TBT).

Legal System and Judicial Independence

Costa Rica uses the civil law system. The fundamental law is the country’s political constitution of 1949, which grants the unicameral legislature a particularly strong role. Jurisprudence or case law does not constitute legal precedent but can be persuasive if used in legal proceedings. For example, the Chambers of the Supreme Court regularly cite their own precedents. The civil and commercial codes govern commercial transactions. The courts are independent, and their authority is respected. The roles of public prosecutor and government attorney are distinct: the Chief Prosecuting Attorney or Attorney General (Fiscal General) operates a semi-autonomous department within the judicial branch while the government attorney or State Litigator (Procuraduria General) works within the Ministry of Justice and Peace in the Executive branch. Judgments and awards of foreign courts and arbitration panels may be accepted and enforced in Costa Rica through the exequatur process. The Constitution specifically prohibits discriminatory treatment of foreign nationals.

The Costa Rican Judicial System is comprised of the civil, administrative, and criminal court structure.  The judicial system generally upholds contracts, but caution should be exercised when making investments in sectors reserved or protected by the Constitution or by laws for public operation. Furthermore, independent government agencies, including municipal governments, which grant construction permits, can issue permits or requirements that may contradict the decisions of other independent agencies, causing significant project delays.

Costa Rica’s commercial code details all business requirements necessary to operate in Costa Rica. The laws of public administration and public finance contain most requirements for contracting with the state.

The legal process to resolve cases involving squatting on land can be especially cumbersome. Land registries are at times incomplete or even contradictory. Buyers should retain experienced legal counsel to help them determine the necessary due diligence regarding the purchase of property.

Laws and Regulations on Foreign Direct Investment

Costa Rican websites are useful to help navigate laws, rules and procedures including that of the investment promotion agency CINDE, http://www.cinde.org/en  (“essential info”), the export promotion authority PROCOMER, http://www.procomer.com/ (incentive packages), and the Health Ministry, https://www.ministeriodesalud.go.cr/  (product registration and import/export). In addition, the State Litigator’s office (www.pgr.go.cr  – the “SCIJ” tab) compiles relevant laws.

Several public institutions are responsible for consumer protection as it relates to monopolistic and anti-competitive practices. The “Commission for the Promotion of Competition” (COPROCOM), an autonomous agency housed in the Ministry of Economy, Industry and Commerce, is charged with investigating and correcting anti-competitive behavior across the economy. SUTEL, the Telecommunications Superintendence, shares that responsibility with COPROCOM in the Telecommunications sector. Both agencies are charged with defense of competition, deregulation of economic activity, and consumer protection. COPROCOM has traditionally been underfunded and weak but under a law passed in 2019 gained greater regulatory independence and sufficient operating budget.

Expropriation and Compensation

The three principal expropriating government agencies in recent years have been the Ministry of Public Works – MOPT (highway rights-of-way), the state-owned Costa Rican Electrical Institute – ICE (energy infrastructure), and the Ministry of Environment and Energy – MINAE (National Parks and protected areas). Expropriations generally conform to Costa Rica’s laws and treaty obligations, but there are allegations of expropriations of private land without prompt or adequate compensation.

Article 45 of Costa Rica’s Constitution stipulates that private property can be expropriated without proof that it is done for public interest. The 1995 Law 7495 on expropriations further stipulates that expropriations require full and prior payment. The law makes no distinction between foreigners and nationals. Provisions include: (a) return of the property to the original owner if it is not used for the intended purpose within ten years or, if the owner was compensated, right of first refusal to repurchase the property back at its current value; (b) detailed provisions for determination of a fair price and appeal of that determination on the part of the former owner; (c) provision that upon full deposit of the calculated amount the government may take possession of land despite the former owner’s dispute of the price; and (d) provisions providing for both local and international arbitration in the event of a dispute. The expropriations law was amended in 1998, 2006, and 2015 to clarify and expedite some procedures, including those necessary to expropriate land for the construction of new roads. (For full detail go to https://PGRweb.go.cr/SCIJ  – when reviewing the articles of the law go to the most recent version of each article.)

There is no discernible bias against U.S. investments, companies, or representatives during the expropriations process. Costa Rican public institutions follow the law as outlined above and generally act in a way acceptable to the affected landowners. However, when landowners and government differ significantly in their appraisal of the expropriated lands’ value, the resultant judicial processes generally take years to resolve. In addition, landowners have, on occasion, been prevented from developing land which has not yet been formally expropriated for parks or protected areas; the courts will eventually order the government to proceed with the expropriations but the process can be long.

Dispute Settlement

ICSID Convention and New York Convention

In 1993, Costa Rica became a member state to the convention on International Center for Settlement of Investment Disputes (ICSID Convention). Costa Rica paid the awards resulting from unfavorable ICSID rulings, most recently in 2012 regarding private property belonging to a German national within National Park boundaries.

Costa Rica is a signatory of the convention on the Recognition and Enforcement of Arbitral Awards (1958 New York Convention). Consequently, within the Costa Rican legal hierarchy the Convention ranks higher than local laws although still subordinate to the Constitution. Costa Rican courts recognize and enforce foreign arbitral awards. Judgments of foreign courts are recognized and enforceable under the local courts and the Supreme Court.

Investor-State Dispute Settlement

Disputes between investors and the government grounded in the government’s alleged actions or failure to act – termed investment disputes ‒ may be resolved administratively or through the legal system.

Under Chapter 10 of the CAFTA-DR agreement, Costa Rica legally obligated itself to answer investor arbitration claims submitted under ICSID or UNCITRAL, and accept the arbitration verdict. To date there have been two claims by U.S. citizen investors under the provisions of CAFTA-DR. Extensive documentation for both cases is filed on the Foreign Trade Ministry (COMEX) website: http://www.comex.go.cr/tratados/cafta-dr/ , under “documentos relevantes”. No local court denies or fails to enforce foreign arbitral awards issued against the government.

In some coastal areas of Costa Rica, there is a history of invasion and occupation of private property by squatters who are often organized and sometimes violent.  It is not uncommon for squatters to return to the parcels of land from which they were evicted, requiring expensive and potentially dangerous vigilance over the land.  Nevertheless, in recent years the Supreme Court has refused title to squatters on land already titled, thus removing some incentive for persistent squatters.

International Commercial Arbitration and Foreign Courts

The right to solve disputes through arbitration is guaranteed in the Costa Rican Constitution. For years, the practical application was regulated by the Civil Procedural Code, which made it ineffective with no arbitration cases until 1998, the year the local arbitration law #7727 was enacted. A 2011 law on International Commercial Arbitration (Law 8937), drafted from the UNCITRAL model law (version 2006), brought Costa Rica to a dual arbitration system, with two valid laws, one law for local arbitration and one for international arbitration. Under the local act, arbitration has to be conducted in Spanish and only attorneys admitted to the local Bar Association may be named as arbitrators.  All cases brought before an arbitration panel, under the rules of local arbitration centers, will normally be resolved within two months of the closing arguments hearing.  Parties can withdraw their case or reach an out-of-court settlement before the arbitral tribunal delivers an award.  If the award meets the review criteria, the losing party has the option to request that the Costa Rican Supreme Court examine the award, but only on procedural matters and never on the merits. Under the local Law for International Arbitration, proceedings may be held in English and foreign attorneys are authorized to serve as arbitrators. The following arbitration centers are in operation in Costa Rica:

• Centro de Conciliacion y Arbitraje. Costa Rican Chamber of Commerce (CCA)
• Centro de Resolución de Controversias. Costa Rican Association of Engineers and Architects
• Centro Internacional de Conciliacion y Arbitraje (CICA). Costa Rican American Chamber of Commerce (AMCHAM)
• Centro de Arbitraje y Mediacion/Centro Iberoamericano de Arbitraje (CAM). Costa Rican Bar Association.

Beyond such arbitration options, law #7727 also facilitates courts’ enforcement of conciliation agreements reached under the law. Some universities and municipalities operate “Casas de Justicia” (Justice Houses) open to the public and offering mediation and conciliation at no cost. Law #8937 empowered local arbitration centers, beginning with that pertaining to the Engineers and Architects’ Association, to implement Dispute Board regulations, as a method to address construction disputes.

Outcomes in local courts do not appear to favor state-owned enterprises (SOEs) any more or less than other actors.  SOEs can sign arbitral agreements, but must follow strict public laws to obtain the permissions necessary and follow correct procedures, otherwise the agreement could be voided. Once SOEs find themselves in arbitration, they are subject to the same standards and treatment as any other actor.

U.S. companies cite the unpredictability of outcomes as a source of rising judicial insecurity in Costa Rica. The legal system is significantly backlogged, and civil suits may take several years from start to finish. Some U.S. firms and citizens satisfactorily resolved their cases through the courts, while others see proceedings drawn out over a decade without a final resolution.   A new civil procedural code implemented in October 2018 (Law #9342) was designed to accelerate judicial processes by emphasizing oral argument over the traditional written submissions, but processes are still slow. Commercial arbitration has consequently become an increasingly common dispute resolution mechanism.

Bankruptcy Regulations

The Costa Rican bankruptcy law, addressed in both the commercial code and the civil procedures code, is similar to corresponding U.S. law, according to local experts. Title V of the civil procedures code outlines creditors’ rights and the processes available to register outstanding credits, administer the liquidation of the bankrupt company’s assets, and pay creditors according to their preferential status. The Costa Rican system also allows for successive alternatives to full bankruptcy: “convenio preventivo” or arrangement with creditors; “administracion por intervencion” or administration through judicial intervention; “reorganizacion con intervencion judicial” or reorganization through judicial intervention; and finally bankruptcy. As in the United States, penal law will also apply to criminal malfeasance in some bankruptcy cases. In the World Bank’s “resolving insolvency” ranking within the 2019 “Doing Business” report, Costa Rica ranked #13 of 190 (http://www.doingbusiness.org/rankings ).

Investment Incentives

Four investment incentive programs operate in Costa Rica: the free trade zone system, an inward-processing regime, a duty drawback procedure, and the tourism development incentives regime. These incentives are available equally to foreign and domestic investors, and include tax holidays, training of specialized labor force, and facilitation of bureaucratic procedures. Costa Rica’s Foreign Trade Promotion Authority (PROCOMER) is in charge of the first three programs and companies may choose only one of the three. As of early 2020, 482 companies are in the free trade zone regime, 90 in the inward processing regime, and 10 in duty drawback.

The Costa Rican Tourism Board (ICT) administers the tourism incentives; through 2019 over 1,120 tourism firms are declared as such with access to incentives of various types depending on the firm’s operations (hotels, rent-a-car, travel agencies, airlines and aquatic transport). The free trade zone regime is based on the 1990 law #7210, updated in 2010 by law #8794 and attendant regulations, while inward processing and duty drawback derive from the General Customs Law #7557. Tourism incentives are based on the 1985 law #6990, most recently amended in 2001.

The inward-processing regime suspends duties on imported raw materials of qualifying companies and then exempts the inputs from those taxes when the finished goods are exported. The goods must be re-exported within a non-renewable period of one year. Companies within this regime may sell to the domestic market if they have registered to do so and pay applicable local taxes. The drawback procedure provides for rebates of duties or other taxes that were paid by an importer for goods subsequently incorporated into an exported good. Finally, the tourism development incentives regime provides a set of advantages, including duty exemption – local and customs taxes – for construction and equipment to tourism companies, especially hotels and marinas, which sign a tourism agreement with ICT.

Foreign Trade Zones/Free Ports/Trade Facilitation

Individual companies are able to create industrial parks that qualify for free trade zone (FTZ) status by meeting specific criteria and applying for such status with PROCOMER. Companies in FTZs receive exemption from virtually all taxes for eight years and at a reduced rate for some years to follow. Established companies may be able to renew this exemption through additional investment. In addition to the tax benefits, companies operating in FTZs enjoy simplified investment, trade, and customs procedures, which provide a convenient way to avoid Costa Rica’s burdensome business licensing process. Call centers, logistics providers, and software developers are among the companies that may benefit from FTZ status but do not physically export goods. Such service providers have become increasingly important participants in the free trade zone regime. PROCOMER and CINDE are traditionally proactive in working with FTZ companies to streamline and improve law, regulation and procedures touching upon the FTZ regime. See their most recent study of the benefits of FTZ regime for the broader economy at www.procomer.com. (Search for “Balance de Las Zonas Francas 2014-2018”).

Performance and Data Localization Requirements

Costa Rica does not impose requirements that foreign investors transfer technology or proprietary business information or purchase a certain percentage of inputs from local sources. However, the Costa Rican agencies involved in investment and export promotion do explicitly focus on categories of foreign investor who are likely to encourage technology transfer, local supply chain development, employment of local residents, and cooperation with local universities. The export promotion agency PROCOMER operates an export linkages department focused on increasing the percentage of local content inputs used by large multinational enterprises.

Costa Rica does not have excessively onerous visa, residence, work permit, or similar requirements designed to inhibit the mobility of foreign investors and their employees, although the procedures necessary to obtain residency in Costa Rica are often perceived to be long and bureaucratic. Existing immigration measures do not appear to have inhibited foreign investors’ and their employees’ mobility to the extent that they affect foreign direct investment in the country. The government is responsible for monitoring so that foreign nationals do not displace local employees in employment, and the Immigration Law and Labor Ministry regulations establish a mechanism to determine in which cases the national labor force would need protection. However, investors in the country do not generally perceive Costa Rica as unfairly mandating local employment. The Labor Ministry prepares a list of recommended and not recommended jobs to be filled by foreign nationals. Costa Rica does not have government/authority-imposed conditions on any permission to invest.

Costa Rica does not require Costa Rican data to be stored on Costa Rican soil. Under law #8968 ‒ Personal Data Protection Law – and its corresponding regulation, companies must notify the Data Protection Agency (PRODHAB) of all existing databases from which personal information is sold or traded. Databases pay an annual registration fee.

Costa Rica does not require any IT providers to turn over source code or provide access to encryption. Costa Rica does not impose measurements that prevent or unduly impede companies from freely transmitting customer or other business-related data outside the economy/country’s territory. The measures that do apply under the data privacy law and regulation are equally applicable to data managed within the country.

Real Property

The laws governing investments in land, buildings, and mortgages are generally transparent. Secured interests in both chattel and real property are recognized and enforced. Mortgage and title recording are mandatory and the vast majority of land in Costa Rica has clear title. However, there are continuing problems of overlapping title to real property and fraudulent filings with the National Registry, the government entity that records property titles. Potential investors in Costa Rican real estate should also be aware that the right to use traditional paths is enshrined in law and can be used to obtain court-ordered easements on land bearing private title; disputes over easements are particularly common when access to a beach is an issue. Costa Rica is ranked 49th of 190 for ease of “registering property” within the World Bank 2019 Doing Business Report.

Foreigners are subject to the same land lease and acquisition laws and regulations as Costa Ricans with the exception of concessions within the Maritime Zone (Zona Maritima Terrestre – ZMT). Almost all beachfront is public property for a distance of 200 meters from the mean high tide line, with an exception for long-established port cities and a few beaches such as Jaco. The first 50 meters from the mean high tide line cannot be used for any reason by private parties. The next 150 meters, also owned by the state, is the Maritime Zone and can only be leased from the local municipalities or the Costa Rican Tourism Institute (ICT) for specified periods and particular uses, such as tourism installation or vacation homes. Concessions in this zone cannot be given to foreigners or foreign-owned companies.

Intellectual Property Rights

Costa Rica’s legal structure for protecting intellectual property rights (IPR) is quite strong, but enforcement is sporadic and does not always get the attention and resources required to be effective. As a result, IPR infringement occurs in both physical and online markets. While Costa Rica is not included in the Notorious Market List, it hadbeen listed in United States Trade Representative (USTR) Special 301 Report’s Watch List since 1995. However, the 2019 Special 301 Report noted the substantial progress made by Costa Rica and, as a result, USTR did not include Costa Rica in the 2020 report.

Costa Rica is a signatory of many major international agreements and conventions regarding intellectual property.  Building on the existent regulatory and legal framework, the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) required Costa Rica to strengthen and clarify its IPR regime further, with several new IPR laws added to the books in 2008.  Prior to that, the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) took effect in Costa Rica on January 1, 2000.  In 2002, Costa Rica ratified the World Intellectual Property Organization (WIPO)Performances and Phonograms Treaty and the WIPO Copyright Treaty More recently, in December 2019, Costa Rica approved the Beijing Treaty on Audiovisual Interpretations and Executions, though the National Assembly must now pass legislation to grant protections to audiovisual performers over their performances. In 2019, the Copyright Registry drafted legislative reforms currently pending with the National Assembly for the full implementation of the Marrakesh Treaty.

While online piracy remains a concern for the country, in February 2019, Costa Rica modified the existing regulation on internet service providers (ISPs) to shorten significantly the 45 days previously allowed for notice and takedown of pirated online content, creating an expeditious safe harbor system for ISPs in Costa Rica. To meet a longstanding CAFTA-DR requirement mandating government use of legal software, the National Registry launched LegalSoft, a new software program to track software licenses and renewal dates across 95 government institutions, in March 2020.

During 2019, the National Registry of Industrial Property announced implementation of TMview and DesignView, search tools that allow users to consult trademarks and industrial design data. Also, in 2019, the Directorate of Industrial Property and the Office of Invention Patents started a comprehensive review of current regulations with the goal of guaranteeing greater legal certainty on patents for invention.

The Costa Rican government does not release official statistics on the seizure of counterfeit goods, but the Chamber of Commerce compiles statistics from Costa Rican government sources: http://observatorio.co.cr/. In 2019, Costa Rica’s Economic Crimes Prosecutor investigated 71 IPR cases, down from the totals in 2018 and 2017 but roughly equal to 2016. As in years past, prosecutors ultimately dismissed several cases due to lack of interest, collaboration, and follow-up by the representatives of trademark rights holders.  The Costa Rican government publishes statistics on IPR criminal enforcement at http://www.comex.go.cr/estad percentC3 percentADsticas-y-estudios/otras-estad percentC3 percentADsticas/ .

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Contact at the U.S. Embassy in Costa Rica:
Attention: Investment Climate Statement
Economics Section
Embassy San Jose, Costa Rica
2519-2000
SanJoseEcon@state.gov

Country/Economy resources:

• Costa Rican American Chamber of Commerce (AmCham): http://www.amcham.co.cr/
• The U.S. Embassy in Costa Rica (Consular Section) maintains an extensive list of legal service providers, including some firms engaged in intellectual property law.  This list does not represent an endorsement on the part of the U.S. government: http://costarica.usembassy.gov/attorney.html.
• The Department of Commerce also maintains a list of Business Service Providers that includes law firms specializing in IPR, under the Business Service Provider tab at: http://redirect.state.sbu/?url=www.export.gov/costarica .
• Observatory of Illicit Trade: http://observatorio.co.cr/ 

Capital Markets and Portfolio Investment

The Costa Rican government’s general attitude towards foreign portfolio investment is cautiously welcoming, seeking to facilitate the free flow of financial resources into the economy while minimizing the instability that might be caused by the sudden entry or exit of funds. The securities exchange (Bolsa Nacional de Valores) is small and is dominated by trading in bonds. Stock trading is of limited significance and involves less than 20 of the country’s larger companies, resulting in an illiquid secondary market. There is a small secondary market in commercial paper and repurchase agreements. The Costa Rican government has in recent years explicitly welcomed foreign institutional investors purchasing significant volumes of Costa Rican dollar-denominated government debt in the local market. The securities exchange regulator SUGEVAL is generally perceived to be effective.

Costa Rica accepted the obligations of IMF Article VIII, agreeing not to impose restrictions on payments and transfers for current international transactions or engage in discriminatory currency arrangements, except with IMF approval. There are no controls on capital flows in or out of Costa Rica or on portfolio investment in publicly-traded companies. From 2014 to 2018, law #9227 allowed the Central Bank to discourage short-term investments from overseas through taxes on interest and a special reserve requirement, but the Central Bank never used that law which was abrogated within the context of OECD-recommended reforms. Some capital flows are subject to a withholding tax (see section on Foreign Exchange and Remittances). Within Costa Rica, credit is largely allocated on market terms, although long-term capital is scarce. Favorable lending terms for USD-denominated loans compared to colon-denominated loans have made USD-denominated mortgage financing popular and common. Foreign investors are able to borrow in the local market; they are also free to borrow from abroad, although withholding tax may apply.

Money and Banking System

Costa Rica’s financial system boasts a relatively high financial inclusion rate, estimated by the Central Bank by June 2019 at 78 percent (the percentage of adults over the age of 15 holding a bank account). As part of an ongoing financial inclusion campaign, the Costa Rican government in early 2016 began allowing non-resident foreigners to open what are termed “simplified accounts” in Costa Rican financial institutions. Resident foreigners have full access to all banking services.

The banking sector is healthy. Non-performing loans have risen over the past year to 2.42 percent of total loans as of December 2019; the state-owned commercial banks had a higher 3.06 percent average. The country hosts a large number of smaller private banks, credit unions, and factoring houses, although the three state-owned banks are still dominant, accounting for just under 50 percent of the country’s financial system assets. Consolidated total assets of the country’s public commercial banks were approximately USD 27.5 billion in December 2019, while consolidated total assets of the eleven private commercial and cooperative banks were about USD 19 billion. Combined assets of all bank groups (public banks, private banks and others) were approximately USD 57.5 billion as of December 2019.

Costa Rica’s Central Bank performs the functions of a central bank while also providing support to the four autonomous financial superintendencies (Banking, Securities, Pensions and Insurance) under the supervision of the national council for the supervision of the financial system (CONASSIF). The Central Bank developed and operates the financial system’s transaction settlement mechanism “SINPE.” In addition to managing all transaction settlement between banks, SINPE allows all financial institutions to offer clients the opportunity to transfer money to and from accounts with any other account in the financial system. Such direct bank transfer has become a common means of payment in the country.

Foreign banks may establish operations in the country under the supervision of the banking regulator SUGEF and as such are subject to the same regulatory burden as locally owned banks. The Central Bank has a good reputation and has had no problem in maintaining sufficient correspondent relationships. Costa Rica is steadily improving its ability to ensure the efficacy of anti-money laundering and anti-terrorism finance and was removed from intensive monitoring by the Financial Action Task Force in 2017. The Costa Rican financial sector in broad terms appears to be satisfied to date with the available correspondent banking services.

Cyber currencies are currently legal in Costa Rica, but Costa Rica’s Central Bank has taken a cautious approach to them in general, warning Costa Ricans that such currencies do not enjoy any formal backing. The financial authorities have also noted that cyber currencies are a potential avenue for money laundering.

Foreign Exchange and Remittances

Foreign Exchange

No restrictions are imposed on expatriation of royalties or capital except when these rights are otherwise stipulated in contractual agreements with the government of Costa Rica. However, Costa Rican sourced rents and benefits remitted overseas, including royalties, are subject to a withholding tax (see below). When such remittances are paid to a parent company or related legal entity, transfer pricing rules and certain limitations apply.

There are no restrictions on receiving, holding, or transferring foreign exchange. There are no delays for foreign exchange, which is readily available at market clearing rates and readily transferable through the banking system. Dollar bonds and other dollar instruments may be traded legally. Euros are increasingly available in the market. Costa Rica has a floating exchange rate regime in which the Central Bank is ready to intervene, if necessary, to smooth any exchange rate volatility.

Remittance Policies

Costa Rica does not have restrictions on remittances of funds to any foreign country; however, all funds remitted are subject to applicable withholding taxes that are paid to the country’s tax administration.  The default level of withholding tax is 30 percent with royalties capped at 25 percent, dividends at 15 percent, professional services at 25 percent, transportation and communication services at 8.5 percent, and reinsurance at 5.5 percent (different withholding taxes also apply for other types of services).  By Costa Rican law, in order to pay dividends, procedures need to be followed that include being in business in the corresponding fiscal year and paying all applicable local taxes.  Those procedures for declaring dividends in effect put a timing restriction on them.  Withholding tax does not apply to payment of interest to multilateral and bilateral banks that promote economic and social growth, and companies located in free trade zones pay no dividend withholding tax.  Spain, Germany, and Mexico have double-taxation tax treaties with Costa Rica, lowering the withholding tax on dividends paid by companies from those countries.

Sovereign Wealth Funds

Costa Rica does not have a Sovereign Wealth Fund.

Costa Rica’s state-owned enterprises (SOEs) are commonly known by their abbreviated names. They include monopolies in petroleum-derived fuels (RECOPE), lottery (JPS), railroads (INCOFER), local production of ethanol (CNP/FANAL), water distribution (AyA), and electrical distribution (ICE, CNFL, JASEC, ESPH). SOEs have market dominance in insurance (INS), telecommunications (ICE, RACSA, JASEC, ESPH), and finance (BNCR, BCR, Banco Popular, BANHVI, INVU, INFOCOOP). They have significant market participation in parcel and mail delivery (Correos), and ports operation (INCOP and JAPDEVA). Six of those SOEs hold significant economic power with revenues exceeding 1 percent of GDP: ICE, RECOPE, INS, BNCR, BCR and Banco Popular. Audited returns for each SOE may be found on each company’s website, while basic revenue and costs for each SOE are available on the General Controller’s Office “Sistema de Planes y Presupuestos” https://www.cgr.go.cr/02-consultas/consulta-pp.html . The Costa Rican government does not currently hold minority stakes in commercial enterprises.

No Costa Rican state-owned enterprise currently requires continuous and substantial state subsidy to survive. Many SOEs turn a profit, which is allocated as dictated by law and boards of directors. Financial allocations to and earnings from SOEs may be found in the “Sistema de Informacion de Planes y Presupuestos (SIPP)” within the General Controller’s Office (CGR) site.

U.S. investors and their advocates cite some of the following ways in which Costa Rican SOEs competing in the domestic market receive non-market-based advantages because of their status as state-owned entities.

• Electricity generated privately must be distributed through the public entities (including rural electricity cooperatives not strictly classified as SOEs) and is limited to 30 percent of total electrical generation in the country: 15 percent to small privately-owned renewable energy plants and 15 percent to larger “build-operate-transfer” (BOT) operations.
• Telecoms and technology sector companies have called attention to the fact that government agencies often choose SOEs as their telecom services providers despite a full assortment of private-sector telecom companies. The information and telecommunications business chamber (CAMTIC) has been advocating for years against what its members feel to be unfair use by government entities of a provision (Article 2) in the public contracting law that allows noncompetitive award of contracts to public entities (also termed “direct purchase”) when functionaries of the awarding entity certify the award to be an efficient use of public funds. CAMTIC has compiled detailed statistics showing that while the yearly total dollar value of Costa Rican government direct purchases in the IT sector under Article 2 has dropped considerably from $226 million in 2017, to $72.5 million in 2018 and $27.5 million in 2019, the number of purchases has actually increased from 56 purchases in both 2017 and 2018 to 86 in 2019.
• The state-owned insurance provider National Insurance Institute (INS) has been adjusting to private sector competition since 2009 but in 2019 still registered 82 percent of total insurance premiums paid; 13 insurers are now registered with insurance regulator SUGESE: (https://www.sugese.fi.cr/SitePages/index.aspx ). Competitors point to unfair advantages enjoyed by the stateowned insurer INS, including a strong tendency among SOE’s to contract their insurance with INS.

Costa Rica is not a party to the WTO Government Procurement Agreement (GPA) although it is registered as an observer. Costa Rica strives to adhere to the OECD Guidelines on Corporate Governance for SOEs (www.oecd.org/daf/ca/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm ).

Privatization Program

Costa Rica does not have a privatization program and the markets that have been opened to competition in recent decades – banking, telecommunications, insurance and Atlantic Coast container port operations – were opened without privatizing the corresponding state-owned enterprise(s). However, in response to the growing fiscal deficit, in February 2020 the Minister of Hacienda announced the government would investigate the privatization of the state liquor company (Fanal), as well as the International Bank of Costa Rica (Bicsa).

Corporations in Costa Rica, particularly those in the export and tourism sectors, generally enjoy a positive reputation within the country as engines of growth and practitioners of Responsible Business Conduct (RBC). The Costa Rica government actively highlights its role in attracting high-tech companies to Costa Rica; the strong RBC culture that many of those companies cultivate has become part of that winning package. Large multinational companies commonly pursue RBC goals in line with their corporate goals and have found it beneficial to publicize RBC orientation and activities in Costa Rica. Many smaller companies, particularly in the tourism sector, have integrated community outreach activities into their way of doing business. There is a general awareness of RBC among both producers and consumers in Costa Rica.

The Costa Rican government maintains and enforces laws with respect to labor and employment rights, consumer protection and environmental protection. Costa Rica has no mineral extraction industry with its accompanying issues. Costa Rica encourages foreign and local enterprises to follow generally accepted RBC principles such as the OECD Guidelines for Multinational Enterprises (MNE) and maintains a national contact point for OECD MNE guidelines within the Ministry of Foreign Trade (see http://www.oecd.org/investment/mne/ncps.htm ).

Some Costa Rican government agencies took the principles of public-private partnership to heart by working with private companies in addressing specific social issues.  For example, since 2003 the Foundation Paniamor (www.paniamordigital.org ) is the designated lead agency in Costa Rica guiding the network of 429 (through December 2019) tourism-related businesses which are signatories to the “Code of Conduct” an initiative of the Costa Rican Tourism Board (ICT). The purpose of this code is to organize and direct the private sector’s work against the sexual commercial exploitation of children and adolescents.

Costa Rica has laws, regulations, and penalties to combat corruption. Though the resources available to enforce those laws are limited, Costa Rica’s institutional framework is strong, such that those cases that are prosecuted are generally perceived as legitimate. Anti-corruption laws extend to family members of officials, contemplate conflict-of-interest in both procurement and contract award, and penalizes bribery by local businessmen of both local and foreign government officials. Public officials convicted of receiving bribes are subject to prison sentences up to ten years, according to the Costa Rican Criminal Code (Articles 347-360). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses. In recent years, Costa Rica saw several publicized cases of firms prosecuted under the terms of the U.S. Foreign Corrupt Practices Act.

Costa Rica ratified the Inter-American Convention Against Corruption in 1997. This initiative of the OECD and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption and implies a series of follow up actions: http://www.oas.org/juridico/english/cri.htm . Costa Rica also ratified the UN Anti-Corruption Convention in March 2007, has been a member of the Open Government Partnership (OGP) since 2012, and as of July 2017 is a party to the OECD Convention on Combatting Bribery of Foreign Public Officials.

The Costa Rican government has encouraged civil society interest in good governance, open government and fiscal transparency, with a number of NGO’s operating unimpeded in this space. While U.S. firms do not identify corruption as a major obstacle to doing business in Costa Rica, some have made allegations of corruption in the administration of public tenders and in approvals or timely processing of permits. Developers of tourism facilities periodically cite municipal-level corruption as a problem when attempting to gain a concession to build and operate in the restricted maritime zone.

Resources to Report Corruption

Contact within government Anti-Corruption Agency:

Name: Armando López Baltodano
Title: Procurador Director de la Area de la Etica Publica, PGR
Organization: Procuraduria General de la Republica (PGR)
Address: Avenida 2 y 6, Calle 13. San Jose, Costa Rica.
Telephone Number: 2243-8330, 2243-8321
Email Address: evelynhk@pgr.go.cr

Contact at “watchdog” organization:

Evelyn Villarreal F.
Asociación Costa Rica Íntegra
Tel:. (506) 8355 3762
Email 1: evelyn.villarreal@cr.transparency.org
Email 2: crintegra.vice@gmail.com

Since 1948, Costa Rica has not experienced significant domestic political violence. There are no indigenous or external movements likely to produce political or social instability. However, Costa Ricans occasionally follow a long tradition of blocking public roads for a few hours as a way of pressuring the government to address grievances; the traditional government response has been to react slowly, thus giving the grievances time to air. This practice on the part of peaceful protesters can cause logistical problems.

Crime increased in Costa Rica in recent decades and U.S. citizen visitors and residents are frequent victims.  While petty theft is the main problem, criminals show an increased tendency to use violence. Some crime in Costa Rica is associated with the illegal drug trade.  Please see the State Department’s Travel Advisory page for Costa Rica for the latest information- https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/costa-rica-travel-advisory.html

The Costa Rican labor force has high educational standards. The country boasts an extensive network of publicly-funded schools and universities while Costa Rica’s national vocational training institute (INA) and private sector groups provide technical and vocational training. The National Statistics Institute (INEC) reports that the labor force grew in 2019 including the female work force which registered a participation rate of 50 percent, although unemployment continued to increase. According to INEC, informal employment rose significantly from 44.9 percent of total employment in 2018 to 46.5 percent in December 2019 (approximately 1 million persons); 39.2 percent of the economically active population in the nonagricultural sector was in the informal economy. The overall unemployment rate was 12.4 percent in 2019 while youth unemployment (between 15 and 24) reached 34.1 percent that year.

The rapid growth of Costa Rica’s service, tourism, and technology sectors has stimulated demand for English-language speakers. Throughout 2019, President Alvarado continually emphasized the need for English language proficiency in the labor force to reactivate the economy. Several public and private institutions are also active in Costa Rica’s efforts to increase English proficiency, including the 60-year-old U.S.-Costa Rican binational center (the Centro Cultural Costarricense Norteamericano), which offers general and business English courses to as many as 5,000 students annually and receives U.S. government funding. The Peace Corps has a Teaching English as a Foreign Language program for teachers and students. While the presence of numerous multinational companies operating shared-services and call centers draws down the supply of speakers of fluent business and technical English, the pool of job candidates with English and technical skills in the Central Valley is sufficient to meet current demand. However, the current finite number of job candidates with these skills is a limiting factor on the ability of foreign and local businesses to expand operations.

The government does not keep track of shortages or surpluses of specialized labor skills. Foreign nationals have the same rights, duties, and benefits as local employees. The government is responsible for ensuring that foreign nationals do not displace local employees in employment. Labor law provisions apply equally across the nation, both within and outside free trade zones. The Immigration Law and the Labor Ministry’s regulations establish a mechanism to determine in which cases the national labor force would need protection. The Labor Ministry prepares a list of recommended and not-recommended jobs to be filled by foreign nationals.

There are no restrictions on employers adjusting employment to respond to fluctuating market conditions. The law does not differentiate between layoffs and dismissal without cause. There are concepts established in the law related to unemployment and dismissals such as the mandatory savings plan (Fondo de Capitalizacion Laboral), as well as the notice of termination of employment (preaviso) and severance pay (cesantia). Costa Rican labor law requires that employees released without cause receive full severance pay, which can amount to close to a full year’s pay in some cases. Although there is no insurance for workers laid off for economic reasons, employers may voluntarily establish an unemployment fund.

Costa Rican labor law and practice allows some flexibility in alternate schedules but is nevertheless based on a 48-hour week made up of eight-hour days. Workers are entitled to one day of rest after six consecutive days of work. The labor code stipulates that the workday may not exceed 12 hours. Use of temporary or contract workers for jobs that are not temporary in nature to lower labor costs and avoid payroll taxes does occur, particularly in construction and in agricultural activities dedicated to domestic (rather than export) markets. No labor laws are waived to attract or retain investment‒all labor laws apply in all Costa Rican territory, including free trade zones. The government has been actively exploring ways to introduce more flexibility into the labor code to facilitate teleworking and flexible work schedules.

Costa Rican law guarantees the right of workers to join labor unions of their choosing without prior authorization. Unions operate independently of government control and may form federations and confederations and affiliate internationally. Most unions are in the public sector, including in state-run enterprises. Collective bargaining agreements are common in the public sector. “Permanent committees of employees” informally represent employees in some enterprises of the private sector and directly negotiate with employers; these negotiations are expressed in “direct agreements,” which have a legal status. Based on 2019 statistics, 88.1 percent of government employees are union members as compared to 3 percent in the private sector. In 2019, the Labor Ministry reported 105 collective bargaining agreements, 73 with public sector entities and 32 within the private sector, covering 10.3 percent of the working population. The Ministry reported a total of 155 “direct agreements” in different sectors (agriculture, industry and transportation) during 2018. In May 2019, the Constitutional Chamber of the Supreme Court found that some concessions to the workers in the collective bargaining agreement between a government agency and its labor union were illegal and therefore repealed sections of the agreement.

In the private sector, many Costa Rican workers join “solidarity associations,” through which employers provide easy access to saving plans, low-interest loans, health clinics, recreation centers, and other benefits. A 2011 law solidified that status by giving solidarity associations constitutional recognition comparable to that afforded labor unions. Solidarity associations and labor unions coexist at some workplaces, primarily in the public sector. Business groups claim that worker participation in permanent committees and/or solidarity associations provides for better labor relations compared to firms with workers represented only by unions. However, some labor unions allege that private businesses use permanent committees and solidarity associations to hinder union organization while permanent workers’ committees displace labor unions on collective bargaining issues in contravention of internationally recognized labor rights.

The Ministry of Labor has a formal dispute-resolution body and will engage in dispute-resolution when necessary; labor disputes may also be resolved through the judicial process. The Ministry of Labor’s regulations establish that conciliation is the mechanism to solve individual labor disputes, as defined in the Alternative Dispute Resolution Law (No. 7727 dated 9 December 1997). The Labor Code and ADR Law establish the following mechanisms: dialogue, negotiation, mediation, conciliation, and arbitration. The Labor Law promotes alternative dispute resolution in judicial, administrative and private proceedings. The law establishes three specific mechanisms: arbitration to resolve individual or collective labor disputes (including a Labor Ministry’s arbitrator roster list); conciliation in socio-economic collective disputes (introducing private conciliation processes); and arbitration in socio-economic collective disputes (with a neutral arbitrator or a panel of arbitrators issuing a decision). The Labor Ministry also participates as mediator in collective conflicts, facilitating and promoting dialogue among interested parties. The law provides for protection from dismissal for union organizers and members and requires employers found guilty of anti-union discrimination to reinstate workers fired for union activities.

The law provides for the right of workers to conduct legal strikes, but it prohibits strikes in public services considered essential (police, hospitals and ports). Strikes affecting the private sector are rare and do not pose a risk for investment.

Child and adolescent labor is uncommon in Costa Rica, and it occurs mainly in agriculture in the informal sector.    In 2019, Costa Rica continued to expand its Casas de la Alegria (Houses of Joy) program, run by the government and civil society, thereby providing an alternative to children joining their parents in the fields and working. Between 2011 and 2016, employment by minors under 15 fell by 76 percent from 34,494 to 8,071, or 1.1 percent of the population, according to Costa Rica’s Ministry of Labor reporting.

Chapter 16 of the U.S.-Central American Free Trade Agreement (CAFTA-DR) obliges Costa Rica to enforce its laws that defend core international labor standards. The government, organized labor, employer organizations, and the International Labor Organization signed a memorandum of understanding to launch a Decent Work Program for the period 2019-2023, which aims to improve labor conditions and facilitate employability for vulnerable groups through government-labor-business tripartite dialogue.

In October 2019, the Constitutional Chamber of the Supreme Court ruled in favor of most of the provisions in a proposed bill regulating strikes, including a prohibition on strikes by workers in ten essential public services and permission to employers to suspend pay to striking workers. (Note: On January 20, 2020, President Alvarado signed it into law). In September 2019, President Alvarado signed the work-from-home bill into law (Law 9738) which allows telecommuting as an alternative work arrangement for workers in the public and private sectors. The dual-technical education bill also became law in September (Law 9728). This law allows students to train in two learning environments (a technical institution and a training company), providing them comprehensive training and better transitioning into the labor market.

The Development Finance Corporation (DFC) offers both financing and insurance coverage against expropriation, war, revolution, insurrection, and inconvertibility for eligible U.S. investors in Costa Rica

In Costa Rica, DFC’s 2019 portfolio exposure totaled USD 123.3 million across 8 projects, mostly in the financial services to support lending to small and medium enterprise. Costa Rica is a member of the Multilateral Investment Guarantee Agency, a member of the World Bank group.

* Source for Host Country Data: Costa Rican Central Bank (BCCR). US FDI stock in Costa Rica is registered as $23,550.6 million, while CR FDI stock in the US is registered as $129.2 million.
* For 2019 GDP in dollars with National Accounts exchange rate, the Costa Rican Central Bank (BCCR) is “Host Country Statistical Source”.
*  For “Total Inbound Stock of FDI as percent host GDP”, source is UNCTAD as detailed above.

Costa Rica’s open and globally integrated economy receives FDI principally from the United States followed by Europe and Latin America. Costa Rica’s outward FDI is more regionally focused on its neighbors Nicaragua, Guatemala and Panama, with the United States and Colombia following. The source of this information on direct investment positions is the IMF’s Coordinated Direct Investment Survey (CDIS) site (http://data.imf.org/CDIS).

The source of the information above is the IMF’s Coordinated Portfolio Investment Survey http://data.imf.org/CPIS , “Reported Portfolio Investment Assets by Economy of NonResident Issuer: Total Portfolio Investment”, from June 2019.

Attention: Investment Climate Statement
Economics Section
Embassy San Jose, Costa Rica
2519-2000
SanJoseEcon@state.gov

Policies Towards Foreign Direct Investment

Panama depends heavily on foreign investment and has worked to make the investment process attractive and simple.  With few exceptions, the Government of Panama makes no distinction between domestic and foreign companies for investment purposes.  Panama benefits from stable and consistent economic policies, a dollarized economy, and a government that consistently supports trade and open markets.

In 2019, the United States ran a $7.26 billion trade in goods surplus multi-billion dollar trade surplus with Panama.  Both countries signed a Trade Promotion Agreement (TPA) that entered into force in October 2012.  The U.S.-Panama TPA has significantly liberalized trade in goods and services, including financial services.  The TPA also includes sections on customs administration and trade facilitation, sanitary and phyto-sanitary measures, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

Panama has one of the few Latin American economies that is predominantly services-based. Services represent nearly 80 percent of Panama’s GDP.  The TPA has improved U.S. firms’ access to Panama’s services sector and gives U.S. investors better access than other WTO members under the General Agreement on Trade in Services.  All services sectors are covered under the TPA, except where Panama has made specific exceptions.  Under the agreement, Panama has provided improved access in sectors like express delivery, and granted new access in certain areas that had previously been reserved for Panamanian nationals.  In addition, Panama is a full participant in the WTO Information Technology Agreement.

The office of Panama’s Vice Minister of International Trade within the Ministry of Foreign Affairs is the principal entity responsible for promoting and facilitating foreign investment and exports.  Through its ProPanama service (http://propanama.mire.gob.pa/sobre-propanama ) the government provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama.  In some cases, other government offices may work with investors to ensure that regulations and requirements for land use, employment, special investment incentives, business licensing, and other requirements are met.  Panama also has a Minister Counselor for Investment, part of the presidency.  While there is no formal investment screening by Panama, the government monitors large foreign investments, especially in the energy sector.

Panama passed a Private Public Partnership (PPP) law in 2019, as an incentive for private investment, social development, and job creation.  This law was developed as a first-level legal framework that orders and formalizes the formula for the private sector to invest, with the prospect of reasonable profitability, in public initiative projects, expanding the State’s options to meet social needs.

Limits on Foreign Control and Right to Private Ownership and Establishment

The Panamanian government imposes some limitations on foreign ownership in the retail and media sectors where, in most cases, ownership must be Panamanian.  However, foreign investors can continue to use franchise arrangements to own retail within the confines of Panamanian law (under the TPA, direct U.S. ownership of consumer retail is allowed in limited circumstances).  There are also limits on the number of foreign workers in some foreign investment structures.

In addition to limitations on ownership, approximately 55 professions are reserved for Panamanian nationals.  Medical practitioners, lawyers, accountants, and customs brokers must be Panamanian citizens.  The Panamanian government also instituted a regulation requiring that ride share platforms use drivers that possess commercial licenses, which are available only to Panamanian nationals.  The Panamanian government also requires foreigners in some sectors to obtain explicit permission to work.

With the exceptions of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative activity.  Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation.  Business visas (and even citizenship) are readily obtainable for significant investors.

Other Investment Policy Reviews

N/A

Business Facilitation

Procedures regarding how to register foreign and domestic businesses, as well as how to obtain a notice of operation, can be found at the Ministry of Commerce and Industry’s website (https://www.panamaemprende.gob.pa/ ) where one may register a foreign company, create a branch of a registered business, or register as an individual trader from any part of the world.  Corporate applicants must submit notarized documents to the Mercantile Division of the Public Registry, the Ministry of Commerce and Industry and the Social Security Institute.  Panamanian government statistics show that applications for foreign businesses typically take between one to six days to process.

The process for online business registration is clear and available to foreign companies.  Panama is ranked 51 out of 190 countries for starting a business and 88 out of 190 for protecting minority investors, according to the 2019 World Bank’s Doing Business Report (http://www.doingbusiness.org/en/data/exploreeconomies/panama#DB_rp ).

Outward Investment

The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 and was amended in 2001.  The BIT ensures that, with some exceptions, U.S. investors receive fair, equitable, and nondiscriminatory treatment, and that both parties abide by international law standards, such as for expropriation and compensation and free transfers.  Following the October 31, 2012, implementation of the TPA, the investor protection provisions in the TPA have supplanted those in the BIT.  However, until October 30, 2022, investors may choose to invoke dispute settlement under the BIT for disputes that arose prior to entry into force of the TPA, or for disputes relating to investment agreements that were completed before the TPA entered into force.  Panama has closely scrutinized, and in some cases disputed, which firms may qualify for preferred treatment under the BIT and TPA.  Panama has a bilateral taxation treaty with the United States.

Panama also has 21 bilateral investment protection agreements with:  Argentina, Canada, Chile, Cuba, the Czech Republic, the Dominican Republic, Finland, France, Germany, Italy, Korea, the Netherlands, Qatar, Spain, Sweden, Switzerland, Ukraine, the United Kingdom, Israel and Uruguay.  Panama signed four BITs that are pending entry into force: Belgium, Luxembourg, Haiti, and United Arab Emirates.

Panama established diplomatic relations with the People’s Republic of China in June 2017.  Under the then-Varela administration, parties were negotiating a free trade agreement, however, there have been no further negotiations since July 2019 when the Cortizo administration took office.

Transparency of the Regulatory System

Panama has five regulators, four that supervise the activities of financial entities (banking, securities,  insurance, and “designated non-financial businesses and professions (DNFBPs)” and a fifth supervisor that oversees credit unions. Each of the regulators regularly publish detailed sector reports, as well as information regarding fines and sanctions on their websites.  Panama’s banking regulator began publishing fines and sanctions in late 2016.  The securities and insurance regulators have published fines and sanctions since 2010.  Law 23 of 2015 created the regulator for DNFBPs, which began publishing fines and sanctions in 2018.  In January 2020, the regulator for DNFBPs was granted independence and Superintendent status similar to that of the banking regulator.

In 2012, Panama modified the securities law to regulate brokers, fund managers, and matters related to the securities industry.  The Securities Superintendent is generally considered a competent and effective regulator.  Panama is a full signatory to the International Organization of Securities Commissions (IOSCO).

Panama is a member of UNCTAD’s international network of transparent investment procedures (http://panama.eregulations.org/ ).  Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal bases justifying the procedures.

International Regulatory Considerations

In 2006, at the time of the negotiations of the TPA, the parties also signed an agreement regarding “Sanitary and Phytosanitary Measures and Technical Standards Affecting Trade in Agricultural Products.”  That agreement entered into force on December 20, 2006.

The Panamanian Food Safety Authority (AUPSA) was established by Decree Law 11 in 2006 to issue science-based sanitary and phytosanitary (SPS) import policies for agricultural and food products entering Panama.  AUPSA does not have regulatory authority for domestic products.  In the last four years, AUPSA, as well as other parts of the government, have implemented or proposed measures that restrict market access.  These measures have also increased AUPSA’s ability to limit the import of certain agricultural goods, for example as fresh or chilled onions.  In that particular case, AUPSA modified its import requirement adding that imported onions can only be commercialized before 120 days have elapsed since harvest of the onion bulb, and each shipment must be accompanied by a laboratory analysis certifying the shipment to be free of Ditylenchus dipsaci.  In another case, AUPSA certified that a bio-tech agricultural product met international standards and did not pose a threat to human consumption, but the Ministry of Health (MINSA) refused to recognize U.S. and international standards, which resulted in a loss of investment of more than $100 million.

On October 28, 2019, the Government of Panama introduced draft bill 164 which would eliminate AUPSA and create the National Service for Food Import and Export Procedures (SENTA in Spanish).  As of the writing of this report, that draft bill 164 still in the National Assembly.

Legal System and Judicial Independence

In 2016, Panama transitioned from the civil to accusatory justice system with the goal of simplifying and expediting criminal cases.  Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the United States.  Judicial pleadings are not always a matter of public record, nor are the processes always transparent.

Some U.S. firms have reported inconsistent, unfair, and/or biased treatment from Panamanian courts.  The judicial system’s capacity to resolve contractual and property disputes is often weak, hampered by a lack of technological tools, and susceptible to corruption.  The World Economic Forum’s 2019 Global Competitiveness Report rated Panama’s judicial independence at 129 of 137 countries.

The Panamanian judicial system suffers from significant budget shortfalls that continue to affect all areas of the system.  The transition to the accusatory justice system, with no increased funding, resulted in an insufficient budget (which was insufficient even before the transition) for the personnel, infrastructure, and operating requirements of both a backlogged inquisitorial system and the new accusatory justice system.  The budget shortfall’s continued impact is evident in poorly trained accusatory justice system personnel and often inadequate technological tools, especially in investigations and forensics.. The judiciary’s lack of independence continues as a legacy of a highly politicized system of appointments for judges, prosecutors, and other officials from the most senior positions on down.  Furthermore, under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

Laws and Regulations on Foreign Direct Investment

Panama has different laws governing incentives depending on the activity, including the Multinational Headquarters Law, the Tourism Law, the Investment stability Law, miscellaneous laws associated with certain sectors, including the film industry, call centers, certain industrial activities, and agriculture exports.  In addition, laws may differ depending on the economic zone, including the Colon Free Zone, the Panama Pacifico Special Economic Area, and the City of Knowledge.  Proinvex (http://proinvex.mici.gob.pa/ ), within the Ministry of Commerce and Industry, provides more details on tax and other benefits.

Government policy and law treat Panamanian and foreign investors equally with respect to access to credit.  Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc.), plus a country-risk premium.

The Ministries of Tourism, Public Works, and Commerce and Industry, as well as the Minister Counselor for Investment court foreign investment.  However, once a company invests in Panama, some have reported more difficulty in navigating their new environment, especially in tourism, branding, imports, and infrastructure development.  Although individual ministers have been responsive to U.S. companies, the root issues are more difficult to address.  U.S. companies have complained about non-payment issues from several ministries, which have stalled payments without any official statement as to the merits of the contract terms.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights.  Investor demand is generally limited because of the small pool of qualified investors.  While some Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Competition and Anti-Trust Laws

Panama’s Consumer Protection and Anti-Trust Agency, established by Law 45, October 31, 2007, and modified by Law 29 of June 2008, reviews transactions for competition related concerns and serves as a consumer protection agency.

Expropriation and Compensation

Panamanian law recognizes the concept of eminent domain.  In at least one circumstance, a U.S. company has expressed concern about not being reimbursed at fair market value following the government’s revocation of a concession.

Dispute Settlement

ICSID Convention and New York Convention

Panama is a Party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards).

Investor-State Dispute Settlement

Resolving commercial and investment disputes in Panama can be a lengthy and complex process.  Despite protections built into the U.S.-Panamanian trade agreements, investors have  struggled to resolve investment issues in courts and often revert to arbitration.  There are frequent claims of bias and favoritism in the court system and complaints about the lack of adequate titling, inconsistent regulations, and a lack of trained officials outside of the capital.  The World Economic Forum – Global Competitiveness Index 2019 report ranks the independence of Panama’s judicial system 129 out of 137  countries (http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf ).  There have been allegations that politically connected businesses have benefited from court decisions, and that judges have “slow-rolled” dockets for years without taking action.  Panamanian legal firms often suggest writing binding arbitration clauses into all commercial contracts.

International Commercial Arbitration and Foreign Courts

The Panamanian government accepts binding international arbitration of disputes with foreign investors.  Panama is a party to the 1958 New York Convention as well as to the 1975 Panama Convention.  Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996.  Panama adopted the UNCITRAL model arbitration law as amended in 2006.  Law 131 of 2013 regulates national and international commercial arbitrations in Panama.

Bankruptcy Regulations

Commercial law is comprehensive and well established.  The World Bank 2020 Doing Business Indicator currently ranks Panama 113 of 190 jurisdictions for resolving insolvency because of slow court systems and complexity of the process.  Panama adopted a new Insolvency law in 2016, but the Doing Business ranking has not yet shown material improvement for this metric.

Investment Incentives

Panama provides Industrial Promotion Certificates (IPCs) to incentivize industrial development in high value-added sectors.  Targeted sectors include research and development, management and quality assurance systems, environmental management, utilities and human resources.  Approved IPC’s provide up to 35 percent in tax reimbursements, and preferential import tariffs of 3 percent. It is also considering a law to provide incentives for the manufacturing sector.

Law 1 (2017) modifies Law 28 (1995) by exempting exports from income tax and provides a zero percent import duty for machinery for those companies that export 100 percent of their products.  Producers to sell a portion of their products into the domestic market will pay a three percent import tariff for machinery and supplies.

Public-private partnership law incentive includes for private investment, social development, and job creation.  The law will establish a clear institutional framework for developing, improving, operating and/or maintaining public infrastructure for the provision of public services.

Foreign Trade Zones/Free Ports/Trade Facilitation

Panama is home to the Colon Free Trade Zone, the Panama Pacifico Special Economic Zone, and 16 other “free zones” (11 actives zones and five in development).  The Colon Free Trade Zone has more than 2,500 businesses, while the Panama Pacifico Special Economic Zone has more than 340 businesses, and the remaining free zones host 126 companies.  These zones provide special tax and other incentives for manufacturers, back office operations and call centers.  Additionally, the Colon Free Zone offers companies preferential tax and duty rates that are levied in exchange for basic user fees and a five percent dividend tax (or two percent of net profits if there are no dividends).  Banks and individuals in Panama pay no tax on interest or other income earned outside Panama.  No taxes are withheld on savings or fixed time deposits in Panama.  Individual depositors do not pay taxes on time deposits.  Free zones offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate within them.  Investment incentives offered by the Panamanian government apply equally to Panamanian and foreign investors.

Performance and Data Localization Requirements

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfers.  There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors, or invest in research and development (R&D) or other facilities. Companies are required to have 90 percent Panamanian employees.  There are exceptions to this policy, but the government must approve these on a case-by-case basis.  Fields dominated by strong unions, such as construction, have opposed issuing work permits to foreign laborers and some investors have struggled to staff large projects fully.  Visas are available and the procedures to obtain work permits are generally not considered onerous.

As part of its effort to become a hub for finance, logistics, and communications, Panama has endeavored to become a data storage center.  According to the Panamanian Authority for Government Innovation (AIG, http://www.innovacion.gob.pa/noticia/2834 ), the majority of these firms offer services to banking and telephone companies in Central America and the Caribbean.  Panama boasts exceptional international connectivity, with seven undersea fiber optic cables.

Panama’s data protection law (Law 81, March 26, 2019) establishes the principles, rights, obligations, and procedures that regulate the protection of personal data.  The National Authority for Transparency and Access to Information will oversee enforcement of the law that will go into effect in March 2021.  The National Authority for Government Innovation is working closely with large private sector companies to draft specific data protection regulations.  The concept of the personal privacy of communications and documents is provided for in the Panamanian Constitution as a fundamental right (Political Constitution, article 29).  The Constitution also provides for a right to keep personal data confidential (article 44).  The Criminal Code imposes an obligation on businesses to maintain the confidentiality of information stored in databases or elsewhere, and establishes several crimes for the misuse of such information (Criminal Code, articles 164, 283, 284, 285, 286).  Panama’s electronic commerce legislation also states that providers of electronic document storage must guarantee the protection, reliability, and proper use of information and data stored on behalf of their customers (Law 51, July 22, 2008, article 55).

Real Property

The majority of land in Panama, and almost all land outside of Panama City, is not titled; a system of rights of possession exists, but there are multiple instances where such rights have been successfully challenged.  The World Bank’s Doing Business 2020 report (http://www.doingbusiness.org/data/exploreeconomies/panama  ) notes that Panama has risen to 87 out of 190 countries on the Registering Property indicator, though it still ranks 141st in Enforcing Contracts.  Panama enacted Law 80 (2009) to address the lack of titled land in certain parts of the country; however, it does not address deficiencies in government administration or the judicial system.  In 2010, the National Assembly approved the creation of the National Authority of Land Management (ANATI) to administer land titling; however, investors complain about ANATI’s capabilities and lengthy adjudication timelines.

The judicial system’s capacity to resolve contractual and property disputes is generally considered weak and susceptible to corruption, as illustrated by the most recent World Economic Forum’s Global Competitiveness Report 2017-2018 (https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018 ), which rates Panama’s judicial independence as 120 out of 137 countries.  Americans should exercise greater due diligence in purchasing Panamanian real estate than they would in purchasing real estate in the United States.  Engaging a reputable attorney and licensed real estate broker is strongly recommended.

Intellectual Property Rights

Panama has an adequate and effective domestic legal framework to protect and enforce intellectual property rights (IPR).  The U.S.-Panama TPA improved standards for the protection and enforcement of a broad range of IPR, including for patents; trademarks; undisclosed tests and data required to obtain marketing approval for pharmaceutical and agricultural chemical products; and digital copyright products such as software, music, books, and videos.  In order to implement the requirements of the TPA, Panama passed Law 62 of 2012 (industrial property) and Law 64 of 2012 (copyrights).  Law 64 also extended copyright protection to the life of the author plus 70 years, mandates the use of legal software in government agencies, and protects against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal signals.

Panama is a member of the Paris Convention for the Protection of Industrial Property.  Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing, or 15 years for pharmaceutical patents.  Panama has expressed interest in participating in the Patent Protection Highway with the U.S. Patent and Trademark Office (USPTO).  Law 35, amended by Law 61 of 2012, also provides trademark protection, simplifies the registration of trademarks, and allows for renewals for 10-year periods.  The law grants ex-officio authority to government agencies to conduct investigations and seize suspected counterfeited materials.  Decree 123 of 1996 and Decree 79 of 1997 specify the procedures that National Customs Authority (ANA) and Colon Free Zone officials must follow to investigate and confiscate merchandise.  In 1997, ANA created a special office for IPR enforcement; in 1998, the Colon Free Zone followed suit.

The Government of Panama is making efforts to strengthen the enforcement of IPR.  A Committee for Intellectual Property (CIPI), comprising representatives from five government agencies (the Colon Free Zone, the Offices of Industrial Property and Copyright under the

Ministry of Commerce and Industry (MICI), the Customs Administration (ANA), and the Attorney General), under the leadership of the MICI, is responsible for the development of intellectual property policy. Since 1997, two district courts and one superior tribunal have exclusively adjudicated antitrust, patent, trademark, and copyright cases.  Since January 2003, a specific prosecutor with national authority over IPR cases has consolidated and simplified the prosecution of such cases.  Law 1 of 2004 added crimes against IPR as a predicate offense for money laundering, and Law 14 establishes a 5 to 12-year prison term, plus possible fines.

Panama is not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Embassy point of contact:

Colombia Primola
Economic Specialist
PrimolaCE@state.gov

Local lawyers list:  https://pa.usembassy.gov/u-s-citizen-services/attorneys/

Capital Markets and Portfolio Investment

Government policy and law with respect to access to credit treat Panamanian and foreign investors equally.  Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc), plus a country-risk premium.

Some private companies, including multinational corporations, have issued bonds in the local securities market.  Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights.  Investor demand is generally limited because of the small pool of qualified investors.  While some Panamanians may hold overlapping interests in various businesses, there is not an established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

Money and Banking System

Panama’s 2008 Banking Law regulates the country’s financial sector.  The law concentrates regulatory authority in the hands of a well-financed Banking Superintendent (https://www.superbancos.gob.pa/ ).

Panama’s banking sector is developed and highly regulated.  However, some U.S. citizens and entities have had difficulty meeting the high documentary threshold for establishing legitimacy of their activities both inside and outside of Panama.  Banking officials counter these complaints by citing the need to comply with international financial transparency standards.  Several of Panama’s largest banks have gone so far as to refuse to establish banking relationships with whole sectors of the economy, such as e-commerce, in order to avoid all possible associated risks.  Private U.S. citizens have also faced difficulty opening bank accounts in Panama, due to regulatory issues.  This results in a large number of legitimate businesses excluded from banking services in Panama.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments.  The free flow of capital is actively supported by the government and is viewed as essential to Panama’s 70 banks (2 official banks, 40 domestic, 18 international plus 10 representational offices).

There are no restrictions on, nor practical measures to prevent hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation.  There are no government or private sector rules to prevent foreign participation in industry standards setting consortia.  Financing for consumers is relatively open for mortgages, credit cards, and personal loans, even to those earning modest incomes.

Panama’s strategic geographic location, dollarized economy, status as a regional financial, trade, and logistics center, and favorable corporate and tax laws make it an attractive target for money launderers.  Money laundered in Panama is believed to come in large part from the proceeds of drug trafficking.  Tax evasion, bank fraud, and corruption are also believed to be major sources of illicit funds.  Criminals have been accused of laundering money via bulk cash smuggling and trade at airports, seaports, through shell companies, and the active free trade zones.

In 2015, Panama strengthened its legal framework, amended its criminal code, harmonized legislation with international standards, and passed an anti-money laundering/combating the financing of terrorism (AML/CFT) reform law.  Panama passed Law 18 (2015) that severely restricts the use of bearer shares; companies still using these types of shares must appoint a custodian and maintain strict controls over their use. Panama passed Law 70 (2019) that criminalizes tax evasion and defines tax evasion as a money laundering predicate offense.

The Financial Action Task Force (FATF) added Panama to its grey list of jurisdictions subject to ongoing monitoring due to strategic AML/CFT deficiencies in June 2019.  FATF cited Panama’s lack of “positive, tangible progress” in measures of effectiveness, but commended Panama’s ongoing progress, particularly in increasing effectiveness of the Financial Analysis Unit, responses and international cooperation on law enforcement requests, and strength in seizures and confiscation of assets involved in financial crimes.  Key deficiencies identified by FATF include a lack of effectiveness of the Attorney General’s office in investigating, prosecuting, and convicting money launderers; ineffective supervision of lawyers, corporate services, and offshore activities, including identification of beneficial owners; lack of effectiveness of Panama’s tax evasion law; a lack of proactive inter-institutional coordination; and ineffective penalties.  Panama agreed to an Action Plan with concrete measures to be completed in stages by May 2020 and September 2020.  Due to the COVID-19 pandemic, FATF announced in April 2020 that Panama would receive a four-month extension on its Action Plan, pushing the deadlines to September 2020 and January 2021.

Panama is only beginning to accurately track criminal prosecutions and convictions related to money laundering.  Law enforcement needs more tools and training to conduct long-term, complex financial investigations, including undercover operations.  The criminal justice system remains at risk for corruption.

Foreign Exchange and Remittances

Foreign Exchange

Panama’s official currency is the U.S. Dollar.

Remittance Policies

Panama has customer due diligence, bulk cash, and suspicious transaction reporting requirements for money service providers (MSB) including 19 remittance companies.  In 2017, the Bank Superintendent assumed oversight of AML/CFT compliance for MSBs.  The Ministry of Commerce and Industry (MICI) grants operating licenses for remittance companies under Law 48 (2003).

Sovereign Wealth Funds

Panama started a sovereign wealth fund, called the Panama Savings Fund (FAP), in 2012 with an initial capitalization of $1.3 billion.  From 2015 onwards, the law mandates contributions to the National Treasury from the Panama Canal Authority in excess of 3.5 percent of GDP must be deposited into the Fund.  In October 2018, the accumulation rule of the savings was modified, determining that when the contributions of the Canal exceeded 2.5 percent of the GDP, half of the surplus would be destined to national savings.  President Cortizo, signed Law 139 on April 2 that allows the use of the $1.3 billion FAP assets to confront the COVID-19 health crisis.

State-owned enterprises (SOEs) are required to send a report to the Ministry of Economy and Finance, the Comptroller’s Office and the Budget Committee of the National Assembly within the first ten days of each month showing their budget implementation.  The reports detail income, expenses, investments, public debt, cash flow, administrative management, management indicators, programmatic achievements, and workload.  SOEs are also required to submit quarterly financial statements.  SOEs are audited by the Comptroller’s Office.

The National Electricity Transmission Company (ETESA) is an example of an SOE in the energy sector, and Tocumen Airport and the National Highway Company (ENA) are SOEs in the transportation sector. Financial allocations and earnings from SOEs are publicly available at the Official Digital Gazette (http://www.gacetaoficial.gob.pa/ ).

Privatization Program

Panama’s privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations.  The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria.  The Government of Panama undertook a series of privatizations the mid-1990s including most of the electricity generation, distribution, ports and telecommunications sectors.  There are presently no privatization plans for any major state-owned enterprise.

Panama maintains strict domestic laws relating to labor and employment rights and environmental protection.  While enforcement of these laws is not always stringent, major construction projects are required to complete environmental assessments, guarantee worker protections, and comply with government standards for environmental stewardship.

In May 2012, Panama adopted ISO 26000 to guide businesses in the development of corporate social responsibility (CSR) platforms.  In addition, business groups including the Association of Panamanian Business Executives (APEDE) and the American Chamber of Commerce (AmCham) are active in encouraging and rewarding good CSR practices.  Since 2009, the AmCham has given an annual award to recognize member companies for their positive impact on the local community and environment.

Corruption is Panama’s biggest challenge.  Panama ranked 101 out of 180 countries in the 2019 Transparency International Corruption Perceptions Index.  U.S. investors allege corruption is rampant in the private sector and all levels of the Panamanian government; purchase managers and import/export businesses have been known to overbill or take percentages off purchase orders while judges, mayors, members of the National Assembly, and local representatives have reportedly accepted payments for facilitating land titling and court rulings.  The Foreign Corrupt Practice Act (FCPA) precludes U.S. companies from engaging in bribery and other activities, and U.S. companies look carefully at levels of corruption before investing or bidding on government contracts.

The process to apply for permits and titles can be opaque, and civil servants have been known to ask for payments at each step of the approval process.  The land titling process has been very troublesome for multiple U.S. companies, which have waited in some cases decades for cases to be resolved.

Panama’s government lacks strong systemic checks and balances that would serve to incentivize accountability.  Under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which in turn has led to charges of a de facto “non-aggression pact” between the branches.

In late 2016, Brazilian construction firm Odebrecht admitted to paying $59 million in bribes to win Panamanian contracts of at least $175 million between 2010 and 2014.  Odebrecht’s admission was confined to bribes paid during the previous administration.  The scandal’s reach has yet to be fully determined and Odebrecht’s activities including construction on the second metro line and the expansion of Tocumen airport have continued.

Anti-corruption mechanisms exist, such as whistleblower and witness protection and conflict-of-interest rules.  However, the general perception is that anti-corruption laws are weak, not applied rigorously, that government enforcement bodies and the courts are not effective in pursuing and prosecuting those accused of corruption, and the lack of a strong professionalized career civil service in Panama’s public sector has hindered systemic change.  The fight against corruption is also hampered by the government’s refusal to dismantle Panama’s dictatorship-era libel and contempt laws, which can be used to punish whistleblowers, while those accused of acts of corruption are seldom prosecuted and almost never jailed.

U.S. investors in Panama complain about a lack of transparency in government procurement.  The parameters of government tenders often change during the bidding process, creating confusion and the perception the government tailor-makes tenders for specific companies.  For example, the Panama NG Power project has been stalled due to legal challenges alleging the government created the terms of the tender specifically for the Chinese-led consortium.  Odebrecht, furthermore, is still doing business in Panama and actively applying for government projects

Under President Cortizo, Panama has taken some measures to improve the business climate and urge transparency.  These include a new public-private partnership (APP) law that covers construction, maintenance, and operations projects valued at more than $10 million. The law is designed to implement checks and balances and eliminate discretion in contracting, a positive step that will increase transparency and create a level playing field for investors. In addition, the public procurement law was reintroduced in the National Assembly for discussion to improve the bidding processes so that no tenders could be “made to order”. This law is currently under review in the National Assembly as of May 2020.

Panama ratified the UN’s Anti-Corruption Convention in 2005 and the Organization of American States’ Inter-American Convention Against Corruption in 1998.  However, there is a perception that Panama should more effectively implement the conventions.

Resources to Report Corruption

ELSA FERNÁNDEZ AGUILAR
Directora Nacional de Transparencia y Acceso a la Informacion (ANTAI)
Autoridad Nacional de Transparencia y Acceso a la Informacion
Ave. del Prado, Edificio 713, Balboa, Ancon, Panama, República de Panama
(507) 527-9270 / 71/72/73/74
www.antai.gob.pa 

Panama is a peaceful and stable democracy.  On rare occasions, large-scale protests can turn violent and disrupt commercial activity in affected areas.  Mining and energy projects have been sensitive, especially those that involve development in the designated indigenous areas called Comarcas.

In May 2019, Panama held national elections that international observers agreed were free and fair.  The transition to the new government was smooth.  Panama’s Constitution provides for the right of peaceful assembly, and the government respects this right.  No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required.  Unions, student groups, employee associations, elected officials, and unaffiliated groups frequently attempt to impede traffic and commerce in order to force the government or business to agree to demands.

Panama had a seven percent 2019 unemployment rate.  Unemployment is estimated to rise to 14-20 percent as a result of the 2020 COVID-19 economic crisis.  There is a shortage of skilled workers in accounting, IT, customer service, and specialized construction and also a dearth of English speaking workers.  Panama’s non-agriculture labor force is nearly 1.6 million people and around forty-four percent of workers are employed in the informal sector.  The majority of informal labor occurs in indigenous communities including the Comarca Kuna Yala, Comarca Embera, and Comarca Ngabe Bugle.  Panama spends approximately 13 percent of its budget, or 3 percent of GDP, on education.  While Panama has one of the highest minimum wages in the hemisphere, the 2018-2019 World Economic Forum Global Competitiveness Report ranked Panama 89 out of 141 countries for its low skillset of university graduates

The government’s labor code remains highly restrictive.  Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes.  Employers outside of these areas, such as the tourism sector, have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay.  The Panamanian government has issued waivers to the regulations on an ad hoc basis in order to address employers’ needs, but there is no consistent standard for obtaining such a waiver.  While the majority of public-sector employees can strike and organize professional associations, they cannot organize unions.  Private sector unions are required to register with the Ministry of Labor.  If the ministry does not respond to a private-sector union registration application within 15 calendar days, the union automatically gains legal recognition, provided the request is submitted directly with supported documentation established by law.

The United States and Panama signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC, now DFC) in April 2000.  However, the World Bank classified Panama as a high-income country in July 2018, and as such Panama no longer qualifies for support under DFC.  Panama has ten active projects under DFC that were initiated prior to 2018. The projects are valued at $220.85 million in the financial sector, $45.5 million in the energy sector, and $7.5 million in the real estate sector.  Panama has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1996.

Table 4: Sources of Portfolio Investment
Data not available.

Commercial Section
Luis.Saldana@trade.gov
Building 783, Basilio Lakas Street, Clayton
www.trade.gov