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 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: http://www.oecd.org/countries/costarica/  . As of April 2019, Costa Rica has passed 12 of the 22 technical bodies required for OECD accession, with the Investment Committee being one of the ten that remain.

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 2019, INA will launch a network of centers to support small and medium enterprises based upon the U.S. Small Business Development Center (SBDC) model.

The World Bank’s “Doing Business” evaluation for 2018, http://www.doingbusiness.org  , states that business registration takes nine 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.

Costa Rica has bilateral investment treaties (BITs) in force with Argentina, Canada, Chile, China, the Czech Republic, France, Germany, South Korea, the Netherlands, Paraguay, Qatar, Spain, Switzerland, Taiwan and Venezuela.  Treaty texts are on the COMEX website (http://www.comex.go.cr/Tratados  ).  The investment chapter of CAFTA-DR includes all aspects of a BIT thereby making a separate BIT with the United States unnecessary.   United Nations Conference on Trade and Development (UNCTAD) (http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu  ) features a parallel list of both signed investment treaties and those entered into force.

Costa Rica has in-force free trade agreements (FTA) with five groupings of countries.  The Central American Free Trade Agreement CAFTA-DR is with the United States, Nicaragua, Honduras, El Salvador, Guatemala, and Dominican Republic.  The European Union Association Agreement with Central America is with all EU members, Guatemala, Honduras, El Salvador, Nicaragua, and Panama. The European Free Trade Association (EFTA) free trade agreement is with Iceland, Liechtenstein, Norway, Switzerland, Panama and Guatemala.  The free trade agreement with the Caribbean nations of CARICOM is with Trinidad and Tobago, Guyana, Barbados, Belize, and Jamaica.    With Costa Rica’s March 2019 ratification of the South Korea Central American Free Trade Agreement between South Korea, Costa Rica, El Salvador, Honduras, Nicaragua and Panama, that FTA is now in force between Costa Rica and South Korea.  Costa Rica also has individual FTAs with Canada, Mexico, Panama, Colombia, Peru, Chile, China, and Singapore. Costa Rica in recent years has slowed the pace at which it has negotiated and signed new free trade agreements.

Costa Rican and U.S. tax authorities currently coordinate under the terms of two agreements, a Taxation Information Exchange Agreement (TIEA) signed in 1989, and a U.S-Costa Rica intergovernmental agreement titled “Agreement between the Government of the United States of America and the Government of the Republic of Costa Rica to Improve International Tax Compliance and to Implement FATCA” signed in December 2013 and expected to enter-into-force (EIF) during 2019.  Costa Rica has active bilateral or regional tax information exchange agreements with 16 other jurisdictions, in addition to a number of signed agreements that are not yet in force; see the Global Forum on Transparency and Exchange of Information for Tax Purposes for the full list: http://www.eoi-tax.org/jurisdictions/CR#agreements  .  Of those 16 agreements, two (Germany, Spain) are “Double Tax Conventions” that address overlapping tax obligations in addition to simple information exchange.  Costa Rica is also a party to the OECD “Convention on Mutual Administrative Assistance in Tax Matters,” which entered into force in August 2013: http://www.oecd.org/tax/exchange-of-tax-information/Status_of_convention.pdf .

In accordance with its international commitments to address the use of corporate tax havens, the Costa Rican government in 2013 adopted a new set of transfer pricing rules, followed by their implementation regulations [DGT-R-44-2016 published by the internal revenue department (DGT) of the Finance Ministry] in September 2016.  Large transnational companies must declare and justify the transfer-pricing methods they are using in a manner consistent with international norms.

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://costarica.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 basis justifying the procedures.

Accounting, legal, and regulatory procedures are transparent and consistent with international norms.  The Costa Rican College of Public Accountants (Colegio de Contadores Públicos 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 República), 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. 

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.  Investments in state-protected sectors under concession mechanisms can be especially complex due to frequent challenges in the constitutional court of contracts permitting private participation in state enterprise activities. 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   (labor regulations), 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.

Competition and Anti-Trust 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), a semi-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 is considered to be underfunded and weak; the OECD has repeatedly emphasized the need to reform COPROCOM in order to assure regulatory independence and sufficient operating budget. The government’s draft law to strengthen COPROCOM and give it more autonomy has faced considerable opposition.

Expropriation and Compensation

The three principal expropriating ministries in recent years have been the Ministry of Public Works – MOPT (highway rights-of-way), the 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) a requirement that the expropriating institution complete registration of the property within six months; (c) a two-month period during which the tax office must appraise the affected property; (d) a requirement that the tax office itemize crops, buildings, rental income, commercial rights, mineral exploitation rights, and other goods and rights, separately and in addition to the value of the land itself;  (e) 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 (f) 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.

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, there are currently several cases in which landowners and government differ significantly in their appraisal of the expropriated lands’ value; in those cases, judicial processes took 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.  The Costa Rican police and judicial system have at times failed to deter or to peacefully resolve such invasions. 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.

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, must be resolved within 155 days after the complaint is served to the defendant; if the case does not fall under such arbitration centers’ rules then the award must be rendered within two months of final statements of the parties.  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 UNCITRAL 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
• Centro de Resolución de Controversias. Costa Rican Association of Engineers and Architects
• Centro Internacional de Conciliación y Arbitraje. Costa Rican American Chamber of Commerce (AMCHAM)
• Centro de Arbitraje y Mediación/Centro Iberoamericano de Arbitraje (CIAR).  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.

The most frequently heard complaint about Costa Rican court process is that litigation can be long and costly.  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.  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: “convenion 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 2018 “Doing Business” report, Costa Rica ranked #134 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 2019, 453 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; over 1,000 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.  Current initiatives include a proposal suggested by the OECD to eliminate the current requirement that service firms in FTZ regime may sell no more than 50 percent into the local market, and a proposal to work with the Customs agency to simplify the procedures that FTZ companies must follow to recycle or donate materials.

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; one recent program is dedicated to helping small and medium enterprises (SME) obtain international certifications such as ISO9000.

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.  With entry into force of law #8968 ‒ Personal Data Protection Law and its corresponding regulation ‒ in 2014, companies must notify the Data Protection Agency (PRODHAB) of all existing databases  from which personal information is sold or traded. The notification requirement applies in some cases to employee databases maintained, used, or accessed by third parties. Databases pay an annual registration fee.

Costa Rica does not require any IT providers to turn over source code or provide access to encryption.  The regulation associated with law #8968 did originally mandate that PRODHAB be given “super-user” privileges in databases registered with the agency, but that requirement was never acted upon and was reversed by a new regulation effective December 2016.

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. In addition, squatters do have rights under Costa Rican law such that legally purchased and registered property if left unoccupied long enough and under certain circumstances may revert to the person occupying the land rather than the registered owner.  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 47th of 190 for ease of “registering property” within the World Bank 2018 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, infringement of IPRs is relatively common in both physical and online markets. Costa Rica is a signatory of many major international agreements and conventions regarding intellectual property.  Building on the existent regulatory and legal framework, CAFTA-DR required Costa Rica to further strengthen and clarify its IPR regime, with several new IPR laws added to the books in 2008.  Prior to that, the GATT agreement on Trade Related Aspects of Intellectual Property (TRIPS) took effect in Costa Rica on January 1, 2000.  Costa Rica in 2002 ratified the World Intellectual Property Organization (WIPO) internet treaties pertaining to Performances and Phonograms (WPPT) and Copyright (WCT).

The Ministry of Foreign Trade (COMEX) and Costa Rica’s National Registry agreed in 2017 to amend the country’s treatment of geographic indicators (GI) to require that any GI identify a generic term in a compound name.  On February 27, 2019, through Executive Decree 41572-JP-COMEX, Costa Rica’s updated GI decree entered into force.

Online piracy is another major concern for the country with poor enforcement of online IPR infractions and lengthy notice and takedown procedures.  On February 8, 2019, Costa Rica passed and published in La Gaceta, Executive Decree #41557-COMEX-JP with modifications to the existing regulation on Internet Service Providers -ISP’s- (Executive Decree #36880-COMEX-JP) that significantly shorten the 45 days previously allowed for notice and takedown of pirated online content.  Amendments of Articles 12 and 13 of the regulation effectively create an expeditious safe harbor system for ISP’s in Costa Rica without requiring new legislation or changes to the General Law of Public Administration.

During 2018, the Registry of Industrial Property implemented a series of tools to support the services provided by the Patent Office.  As of December 3, 2018, the Patent Office began accepting electronic filing of international applications through ePCT-filing. Since 2016, Costa Rica has been a member of the Cooperation Systems on Aspects of Operational Information and Industrial Property (PROSUR), and as part of its activities has implemented a pilot program of Accelerated Patent Procedure, PPH by its acronym in Spanish.

While Costa Rica is not listed in the Notorious Market Report, it is and has been listed in the USTR’s Special 301 Watch List since 1995.  However, the 2018 Special 301 Report noted that Costa Rica has taken steps to increase intragovernment coordination on IP matters resulting in a significant increase in the number of criminal investigations and prosecutions. The Costa Rican government does not release official statistics on the seizure of counterfeit goods, but the Chamber of Commerce compiles the following from Costa Rican government sources: http://observatorio.co.cr/.  Costa Rica’s Economic Crimes Prosecutor investigated 75 cases as of September 2018, on pace for a similar number to the 99 cases investigated in 2017. As in years past, prosecutors ultimately dismissed a number of cases due to lack of interest, collaboration, and follow-up by the representatives of trademark rights holders.  The Costa Rican government continues to publish statistics on IPR criminal enforcement at http://www.comex.go.cr/estad percentC3 percentADsticas-y-estudios/otras-estad percentC3 percentADsticas/  .

Costa Rica has made less progress on implementing a systematic solution to ensure that government entities use licensed software.  Only one person currently compiles and tracks the data, stalling the effort to fully monitor compliance.

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 Mission:

Attention:  Investment Climate Statement
Economics Section
Embassy San Jose, Costa Rica
2519-2000
Email: 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: https://cr.usembassy.gov/u-s-citizen-services/attorneys/).
• 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://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 recently 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. However, law #9227 adopted in 2014 allows the Central Bank, in coordination with the executive branch, to discourage short-term investments through the imposition of taxes on interest earned by foreign non-residents on Costa Rican bonds and also provides for a special reserve requirement of up to 25 percent of the value of those bonds.  The Central Bank has never used the powers given it by law #9227, and within the context of OECD-recommended reforms the Costa Rican government has committed to abrogating it. 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 at 75 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 but remained low at 2.14 percent of total loans as of December 2018; the state-owned banks had a higher 3.12 percent average.  The country hosts a large number of smaller private banks, credit unions, and factoring houses, although the four 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 billion in December 2018, while consolidated total assets of the eleven private commercial and cooperative banks were over USD 20 billion Combined assets of all bank groups (public banks, private banks and others) were approximately USD 58.1 billion as of December 2018.

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 from July 1 2019, 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.  Both Spain and Germany 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, BanCredito, 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 state-owned enterprises may be found in the “Sistema de Informacion de Planes y Presupuestos (SIPP)” within the General Controller’s Office (CGR) site: https://cgrweb.cgr.go.cr/pr02/f?p=150220:2:::NO:::  

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 overwhelmingly 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 non-competitive award of contracts to public entities when functionaries of the awarding entity certify the award to be an efficient use of public funds.  CAMTIC asserts that since 2016, the government has used Article 2 in 135 separate instances for a total contracted amount of over USD 400 million in information and communications technology (ICT) goods and services.

– The state-owned insurance provider National Insurance Institute (INS) has been adjusting to private sector competition since 2009 but in 2018 still registered 72 percent percent of total insurance premiums paid; 13 insurers are now registered with insurance regulator SUGESE: (https://www.sugese.fi.cr/SitePages/index.aspx  ).  New market entrants point to unfair advantages enjoyed by the state-owned 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).

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 428 (through December 2018) 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 340-347). 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:

Armando López Baltodano
Procurador Director de la Area de la Etica Publica, PGR
Procuraduria General de la Republica (PGR)
Avenida 2 y 6, Calle 13.  San Jose, Costa Rica
Telephone:  2243-8330, 2243-8394
Email: RocioCHT@PGR.go.cr

Contact at “watchdog” organization:

Evelyn Villarreal F.
Asociación Costa Rica Íntegra
Telephone: (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.   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 is relatively well-educated.  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.  According to the National Statistics Institute (INEC), as of December 2018, informal employment rose significantly from 41 percent in 2017 to 44.9 percent of total employment in 2018; 37.7 percent of the economically active population in the nonagricultural sector is in the informal economy.  The overall unemployment rate was 12 percent in 2018 while youth unemployment (between 15 and 24) reached 31.7 percent that year.

Several factors influenced Costa Rica’s labor market during 2018, including deceleration of the economy stemming from nation-wide public sector strikes, a drop in consumer confidence which reduced consumption, and the conflict in Nicaragua, which affected regional trade.  The Labor Ministry described the labor market in 2018 as a paradox: while the unemployment rate rose, the number of individuals employed also rose. Costa Rica has invested heavily in education and training, but the government recognizes it needs to focus on getting better results from its investment.  The government announced in November 2018 the creation of the National Qualifications Framework for Vocational Education and Training, a strategy to organize vocational education and to standardize and raise the quality of education.

The rapid growth of Costa Rica’s service, tourism, and technology sectors has stimulated demand for English-language speakers and prompted the Costa Rican government to declare English language and computer literacy to be a national priority at all levels of education.  In August 2018, the government announced an “Alliance for Bilingualism,” a public-private initiative to increase English teaching in the country. Several public and private institutions are also active in Costa Rica’s drive to 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.  In 2010, the Peace Corps initiated a program in Teaching English as a Foreign Language and maintains an active program. While the presence of numerous multinational companies operating shared-services and call centers draw 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.

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 monitoring 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 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 establish voluntarily 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 8-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 in order 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. 

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.  The vast majority of unions developed in the public sector, including state-run enterprises. “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 2018 statistics, 90.4 percent of government employees are union members as compared to 3.2 percent in the private sector. In 2018, the Labor Ministry reported 112 collective bargaining agreements, 80 with public sector entities and 32 within the private sector, covering 10.1 percent of the working population. The Ministry reported a total of 155 “direct agreements” in different sectors (agriculture, industry and transportation) during 2018.   The government continued in 2018 with the renegotiation of collective labor agreements in the public sector that began in 2016.

In the private sector, many Costa Rican workers join “solidarity associations,” under 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 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 alternate 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. Public sector labor unions paralyzed government services with strikes in September 2018 to protest against a fiscal reform bill that became law in December 2018.  The government enforced the law by lifting blockades and clearing port entrances to guarantee the free transit of citizens and goods. Labor courts declared most of the strikes in the public sector illegal and most workers returned to work after four weeks (except for teachers’ union, which continued to strike for three months).

Child and adolescent labor is uncommon in Costa Rica.  The government has implemented a strategy to eliminate any remaining child labor by 2020 through programs to encourage school attendance, awareness campaigns on social media, increased inspections by the Labor Ministry, and improvements to child care in targeted areas.  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 Department 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, employers 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 December 2018, the government enacted a law to cut the fiscal deficit which amends and regulates legal provisions on public sector employment.  There are several bills pending before the National Assembly, including a reform to provisions regulating strikes, a bill expanding the list of essential services in which employees are prohibited from striking, and a bill facilitating internships, apprenticeships, and vocational education.

The Overseas Private Investment Corporation (OPIC) offers both financing and insurance coverage against expropriation, war, revolution, insurrection and inconvertibility for eligible U.S. investors in Costa Rica. OPIC can provide insurance for U.S. investors, contractors, exporters, and financial institutions.  Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. company is a participant.

In Costa Rica, OPIC’s 2018 portfolio exposure totaled USD 151 million across 15 projects in financial services, real estate/construction, and utility sectors.  OPIC continues to be active in Costa Rica. For more information, see OPIC’s master list of projects by year: https://www.opic.gov/opic-action/all-project-descriptions  .   Costa Rica is a member of the Multilateral Investment Guarantee Agency, a member of the World Bank group.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

* For 2017 GDP in dollars with National Accounts exchange rate, the Costa Rican Central Bank (BCCR) is “Host Country Statistical Source”.  http://indicadoreseconomicos.bccr.fi.cr/indicadoreseconomicos/Cuadros/frmVerCatCuadro.aspx?idioma=1&CodCuadro= percent202999  

* For 2017 US FDI stock in Costa Rica, and Costa Rican FDI stock in the US, the Costa Rican Central Bank (BCCR) is “Host Country Statistical Source

* For “Total Inbound Stock of FDI as  percent host GDP”, local statistical source is BCCR.  GDP for 2017 was USD 58,174.6 million; total Inbound FDI stock in 2017 was USD 36,742.7.

Table 3: Sources and Destination of FDI

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 U.S. and Colombia following.

Stock Positions.  IMF’s Coordinated Direct Investment Survey (CDIS) site: (http:/data.imf.org/CDIS)

Table 4: Sources of Portfolio Investment

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

Policies Towards Foreign Direct Investment

Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI.  Mexico’s macroeconomic stability, large domestic market, growing consumer base, rising skilled labor pool, welcoming business climate, and proximity to the United States all help attract foreign investors.

Historically, the United States has been one of the largest sources of FDI in Mexico.  According to Mexico’s Secretariat of Economy, FDI flows to Mexico from the United States totaled USD 12.3 billion in 2018, nearly 39 percent of all inflows to Mexico (USD 31.6 billion).  The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI. Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region.  In the past, foreign investors have overlooked Mexico’s southern states, although that may change if the new administration’s focus on attracting investment to the region gain traction.

The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico.  The law is consistent with the foreign investment chapter of NAFTA. It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment.  The Foreign Investment Law provides details on which business sectors are open to foreign investors and to what extent. Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.

The new administration stopped funding ProMexico, the government’s investment promotion agency, and is integrating its components into other ministries and offices.  PROMTEL, the government agency charged with encouraging investment in the telecom sector, is expected to continue operations with a more limited mandate. Its first director and four other senior staff recently left the agency.  In April 2019, the government sent robust participation to the 11th CEO Dialogue and Business Summit for Investment in Mexico sponsored by the U.S. Chamber of Commerce and its Mexican equivalent, CCE. Cabinet-level officials conveyed the Mexican government’s economic development and investment priorities to dozens of CEOs and business leaders.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mexico reserves certain sectors, in whole or in part, for the State including:  petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry.  Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals. See section six for restrictions on foreign ownership of certain real estate.

Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors.  While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate.

Hydrocarbons:  Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories:  competitive contracts, joint ventures, profit sharing agreements, and license contracts. All contracts must include a clause stating subsoil hydrocarbons are owned by the State.  The government has held four separate bid sessions allowing private companies to bid on exploration and development of oil and gas resources in blocks around the country. In 2017, Mexico successfully auctioned 70 land, shallow, and deep water blocks with significant interest from international oil companies.  The Lopez Obrador administration decided to suspend all future auctions until 2022.

Telecommunications:  Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum.

Aviation:  The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.

Under existing NAFTA provisions, U.S. and Canadian investors receive national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico.  Exceptions exist for investments restricted under NAFTA. Currently, the United States, Canada, and Mexico have the right to settle any dispute or claim under NAFTA through international arbitration.  Local Mexican governments must also accord national treatment to investors from NAFTA countries.

Approximately 95 percent of all foreign investment transactions do not require government approval.  Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.

The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward.  The Commission has 45 business days after submission of an investment request to make a decision. Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness.  The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.

Other Investment Policy Reviews

The World Trade Organization (WTO) completed a trade policy review of Mexico in February 2017 covering the period to year-end 2016.  The review noted the positive contributions of reforms implemented 2013-2016 and cited Mexico’s development of “Digital Windows” for clearing customs procedures as a significant new development since the last review.

The full review can be accessed via:  https://www.wto.org/english/tratop_e/tpr_e/tp452_e.htm  .

Business Facilitation

According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days.  In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS).  Owners of SASs will be able to register a new company online in 24 hours.  The Government of Mexico maintains a business registration website:  www.tuempresa.gob.mx  .  Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry.  Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.

Outward Investment

In the past, ProMexico was responsible for promoting Mexican outward investment and provided assistance to Mexican firms acquiring or establishing joint ventures with foreign firms, participating in international tenders, and establishing franchise operations, among other services.  Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs now handle these issues. Mexico does not restrict domestic investors from investing abroad.

Bilateral Investment Treaties

On November 30, 2018, leaders of the United States, Mexico, and Canada signed a trade agreement to replace and modernize NAFTA – the United States-Mexico-Canada Agreement.  The agreement is now pending ratification by all three countries’ legislatures. The agreement contains an investment chapter.

Mexico has signed 13 FTAs covering 50 countries and 32 Reciprocal Investment Promotion and Protection Agreements covering 33 countries.  Mexico is a member of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force December 30, 2018.  Mexico currently has 29 Bilateral Investment Treaties in force. Mexico and the European Union signed an agreement in principle to revise its FTA.

Bilateral Taxation Treaties

The United States-Mexico Income Tax Convention, which came into effect January 1, 1994, governs bilateral taxation between the two nations.  Mexico has negotiated double taxation agreements with 55 countries. Recent reductions in U.S. corporate tax rates may drive a future change to the Mexican fiscal code, but there is no formal legislation under consideration.

International Regulatory Considerations

Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms.  Still, the Lopez Obrador administration has publicly questioned the value of specific anti-trust and energy regulators. Furthermore, corruption continues to affect equal enforcement of some regulations.  The Lopez Obrador administration has an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies.  The administration estimates it can save up to USD 25 billion annually by consolidating government purchases in the Mexican Secretariat of Finance (Hacienda).  Under the current decentralized process, more than 70 percent of government contracts are sole-sourced, interagency consolidated purchases are uncommon, and the entire process is susceptible to corruption.  The Mexican government’s budget is published online and readily available.  The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.

The Federal Commission on Regulatory Improvement (COFEMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business.  Mexican law requires Secretariats and regulatory agencies to conduct impact assessments of proposed regulations. Assessments are made available for public comment via COFEMER’s website: www.cofemer.gob.mx  .  The official gazette of state and federal laws currently in force in Mexico is publicly available via:  http://www.ordenjuridico.gob.mx/  .

Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role protecting, promoting, and ensuring a competitive free market in Mexico.  COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.

In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technically-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors.  CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels. CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.

Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE.  The administration appointed four of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s political autonomy.  The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered the agencies’ ability to carry out its work, a key factor in investment decisions.

The Secretariat of Public Administration has made considerable strides in improving transparency in government, including government contracting and involvement of the private sector in enhancing transparency and fighting corruption.  The Mexican government has established four internet sites to increase transparency of government processes and to establish guidelines for the conduct of government officials: (1) Normateca (http://normatecainterna.sep.gob.mx  ) provides information on government regulations; (2) Compranet (https://compranet.funcionpublica.gob.mx  ) displays federal government procurement actions on-line; (3) Tramitanet (www.tramitanetmexico.com  ) permits electronic processing of transactions within the bureaucracy; and (4) Declaranet (https://declaranet.gob.mx/  ) allows federal employees to file income taxes online.

Legal System and Judicial Independence

Since the Spanish conquest in the 1500s, Mexico has had an inquisitorial system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view.  Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, while ensuring respect for the fundamental rights of both the victim and the accused.  An ensuing National Code of Criminal Procedure passed in 2014, and is applicable to all 32 states. The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process and other guarantees.  Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.

Mexico’s Commercial Code, which dates back to 1889, was most recently updated in 2014.  All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures.  Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.

The judicial branch is nominally independent from the executive.  Following a reform passed in February 2014, the Attorney General’s Office (Procuraduria General de la Republica or PGR) became autonomous of the executive branch, as the Prosecutor General’s Office (Fiscalia General de la Republica or FGR).  The Mexican Senate confirmed Mexico’s first Fiscal on January 18, 2019.  The Fiscal will serve a nine-year term, intended to insulate his office from the executive branch, whose members serve six-year terms.

Laws and Regulations on Foreign Direct Investment

Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country.  The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), Economy (SE), and Social Development (SEDESOL), establishes the criteria for administering investment rules.

Competition and Anti-Trust Laws

Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE).  IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors. For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx  .

Expropriation and Compensation

Mexico may not expropriate property under NAFTA, except for public purpose and on a non-discriminatory basis.  Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest.  Investors have the right to international arbitration for violations of this or any other rights included in the investment chapter of NAFTA.

Dispute Settlement

ICSID Convention and New York Convention

Mexico ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 1971 and has codified this into domestic law.  Mexico is also a signatory to the Inter-American Convention on International Commercial Arbitration (1975 Panama Convention) and the 1933 Montevideo Convention on the Rights and Duties of States.  Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), even though many of the investment agreements signed by Mexico include ICSID arbitration as a dispute settlement option.

Investor-State Dispute Settlement

Chapters 11, 19, and 20 of the existing NAFTA cover international dispute resolution.  Chapter 11 allows a NAFTA Party investor to seek monetary damages for violations of its provisions.  Investors may initiate arbitration against the NAFTA Party under the rules of the United Nations Commission on International Trade Law (UNCITRAL Model Law) or through the ICSID Convention.  A NAFTA investor may also choose to use the domestic court system to litigate their case. The USMCA contains revisions to these chapters, but will not enter into force until all three countries have ratified the agreement.

Since NAFTA’s inception, there have been 17 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations.  Details of the cases can be found at: https://www.state.gov/s/l/c3742.htm.

International Commercial Arbitration and Foreign Courts

The Arbitration Center of Mexico (CAM) is a specialized, private institution administering commercial arbitration as an alternative dispute resolution mechanism.  The average duration of an arbitration process conducted by CAM is 14 months. The Commercial Code dictates an arbitral award, regardless of the country where it originated, must be recognized as binding.  The award must be enforced after a formal written petition is presented to a judge.

The internal laws of both Pemex and CFE state all national disputes of any nature will have to be resolved by federal courts.  State-owned Enterprises (SOEs) and their productive subsidiaries may opt for alternative dispute settlement mechanisms under applicable commercial legislation and international treaties of which Mexico is a signatory.  When contracts are executed in a foreign country, Pemex and CFE have the option to follow procedures governed by non-Mexican law, to use foreign courts, or to participate in arbitration.

Bankruptcy Regulations

Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency.  Congress approved modifications in 2014 in order to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors.  Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner. Debtors, creditors, or the Attorney General can file a bankruptcy claim.  Mexico ranked 32 out of 190 countries for resolving insolvency in the World Bank’s 2019 Doing Business report. The average bankruptcy filing takes 1.8 years to be resolved and recovers 64.7 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 30.9 cents per USD.  “Buró de Crédito” is Mexico’s main credit bureau.  More information on credit reports and ratings can be found at:  http://www.burodecredito.com.mx/  .

Investment Incentives

Land grants or discounts, tax deductions, and technology, innovation, and workforce development funding are commonly used incentives.  Additional federal foreign trade incentives include: (1) IMMEX: a promotion which allows manufacturing sector companies to temporarily import inputs without paying general import tax and value added tax; (2) Import tax rebates on goods incorporated into products destined for export; and (3) Sectoral promotion programs allowing for preferential ad-valorem tariffs on imports of selected inputs.  Industries typically receiving sectoral promotion benefits are footwear, mining, chemicals, steel, textiles, apparel, and electronics.

Foreign Trade Zones/Free Ports/Trade Facilitation

The new administration launched a two-year program in January 2019 that established a border economic zone (BEZ) in 43 municipalities in six northern border states within 15.5 miles from the U.S. border.  The BEZ program entails: 1) a fiscal stimulus decree reducing the Value Added Tax (VAT) from 16 percent to 8 percent and the Income Tax (ISR) from 30 percent to 20 percent, 2) a minimum wage increase to MXN 176.72 (USD 8.75) per day, and 3) the gradual harmonization of gasoline, diesel, natural gas, and electricity rates with neighboring U.S. states.  The purpose of the BEZ program is to boost investment, promote productivity, and create more jobs in the region.  Interested businesses or individuals must apply to the government’s “Beneficiary Registry” by March 31 demonstrating income from border business activities comprise at least 90 percent of total income.  The company headquarters or branch must be located in the border region for at least 18 months prior to the application.  Sectors excluded from the preferential ISR rate include financial institutions, the agricultural sector, and export manufacturing companies (maquilas).

Separately, the administration announced plans to review and possibly end the Special Economic Zones (SEZs) program throughout the country.

Performance and Data Localization Requirements

Mexican labor law requires at least 90 percent of a company’s employees be Mexican nationals.  Employers can hire foreign workers in specialized positions as long as foreigners do not exceed 10 percent of all workers in that specialized category.  Mexico does not follow a “forced localization” policy—foreign investors are not required by law to use domestic content in goods or technology. However, investors intending to produce goods in Mexico for export to the United States should take note of the rules of origin prescriptions contained within NAFTA if they wish to benefit from NAFTA treatment.

Mexico does not have any policy of forced localization for data storage, nor must foreign information technology (IT) providers turn over source code or provide backdoors into hardware or software.  Within the constraints of the Federal Law on the Protection of Personal Data, Mexico does not impede companies from freely transmitting customer or other business-related data outside the country.

Real Property

Mexico ranked 103 out of 190 countries for ease of registering property in the World Bank’s 2019 Doing Business report, falling four places from its 2018 report.  Article 27 of the Mexican Constitution guarantees the inviolable right to private property. Expropriation can only occur for public use and with due compensation.  Mexico has four categories of land tenure: private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.

Mexico prohibits foreigners from acquiring title to residential real estate in so-called “restricted zones” within 50 kilometers (approximately 30 miles) of the nation’s coast and 100 kilometers (approximately 60 miles) of the borders.  “Restricted zones” cover roughly 40 percent of Mexico’s territory. Foreigners may acquire the effective use of residential property in “restricted zones” through the establishment of an extendable trust (fideicomiso) arranged through a Mexican financial institution.  Under this trust, the foreign investor obtains all property use rights, including the right to develop, sell, and transfer the property.  Real estate investors should be careful in performing due diligence to ensure that there are no other claimants to the property being purchased.  In some cases, fideicomiso arrangements have led to legal challenges.  U.S.-issued title insurance is available in Mexico and U.S. title insurers operate here.

Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico.  The Public Register for Business and Property (Registro Publico de la Propiedad y de Comercio) maintains publicly available information online regarding land ownership, liens, mortgages, restrictions, etc.

Tenants and squatters are protected under Mexican law.  Property owners who encounter problems with tenants or squatters are advised to seek professional legal advice, as the legal process of eviction is complex.

Mexico has a nascent but growing financial securitization market for real estate and infrastructure investments, which investors can access via the purchase/sale of Fideocomisos de Infraestructura y Bienes Raíces (FIBRAs) and Certificates of Capital Development (CKDs) listed on Mexico’s BMV stock exchange.

Intellectual Property Rights

Intellectual Property Rights in Mexico are covered by the Industrial Property Law (Ley de la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor).  Responsibility for the protection of IPR is spread across several government authorities.  The Office of the Attorney General (PGR) oversees a specialized unit that prosecutes IPR crimes.  The Mexican Institute of Industrial Property (IMPI), the equivalent to the U.S. Patent and Trademark Office, administers patent and trademark registrations, and handles administrative enforcement cases of IPR infringement.  The National Institute of Copyright (INDAUTOR) handles copyright registrations and mediates certain types of copyright disputes, while the Federal Commission for the Prevention from Sanitary Risks (COFEPRIS) regulates pharmaceuticals, medical devices, and processed foods.  The Mexican Customs Service’s mandate includes ensuring illegal goods do not cross Mexico’s borders.

The process for trademark registration in Mexico normally takes six to eight months.  The registration process begins by filing an application with IMPI, which is published in the Official Gazette.  IMPI first undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration.  Once the determination is made, IMPI then publishes the registration in the Official Gazette. A trademark registration in Mexico is valid for 10 years from the filing date, and is renewable for 10-year periods. Any party can challenge a trademark registration through the new opposition system, or post-grant through a cancellation proceeding.  IMPI employs the following administrative procedures: nullity, expiration, opposition, cancellation, trademark, patent and copyright (trade-based) infringement. Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial. An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision.  In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court of Justice.

The USPTO has a Patent Prosecution Highway (PPH) agreement with IMPI.  Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application.  The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently. The PPH permits USPTO and IMPI to benefit from work previously done by the other office, which reduces the examination workload and improves patent quality.

Mexico is plagued by widespread commercial-scale infringement that results in significant losses to Mexican, U.S., and other IPR owners.  There are many issues that have made it difficult to improve IPR enforcement in Mexico, including legislative loopholes; lack of coordination between federal, state, and municipal authorities; a cumbersome and lengthy judicial process; and widespread cultural acceptance of piracy and counterfeiting.  In addition, the involvement of transnational criminal organizations (TCOs), which control the piracy and counterfeiting markets in parts of Mexico, continue to impede federal government efforts to improve IPR enforcement. TCO involvement has further illustrated the link between IPR crimes and illicit trafficking of other contraband, including arms and drugs.

Mexico remained on the Watch List in the 2019 Special 301 report.  Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets.  The 2018 USTR Out-Of-Cycle Review of Notorious Markets listed two Mexican markets: Tepito in Mexico City and San Juan de Dios in Guadalajara.

Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.

Resources for Rights Holders

• Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean

U.S. Trade Center
Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189

• National Institute of Copyright (INDAUTOR)

Puebla No. 143
Col. Roma, Del. Cuauhtémoc
06700 México, D.F.
Tel: (52) 55 3601 8270
Fax: (52) 55 3601 8214
Web: http://www.indautor.gob.mx/  

• Mexican Institute of Industrial Property (IMPI)

Periférico Sur No. 3106
Piso 9, Col. Jardines del Pedregal
Mexico, D.F., C.P. 01900
Tel: (52 55) 56 24 04 01 / 04
(52 55) 53 34 07 00
Fax: (52 55) 56 24 04 06
Web: http://www.impi.gob.mx/  

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

Capital Markets and Portfolio Investment

The Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes.  Foreign entities may freely invest in federal government securities. The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law.  Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts. They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights. Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks.  Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies. The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances. However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt. Liquidity across asset classes is relatively deep.

Mexico established a fiscally transparent trust structure known as a FICAP in 2006 to allow venture and private equity funds to incorporate locally.  The Securities Market Law (Ley de Mercado de Valores) established the creation of three special investment vehicles which can provide more corporate and economic rights to shareholders than a normal corporation.  These categories are: (1) Investment Promotion Corporation (Sociedad Anonima de Promotora de Inversion or SAPI); (2) Stock Exchange Investment Promotion Corporation (Sociedad Anonima Promotora de Inversion Bursatil or SAPIB); and (3) Stock Exchange Corporation (Sociedad Anonima Bursatil or SAB).  Mexico also has a growing real estate investment trust market, locally referred to as Fideicomisos de Infraestructura y Bienes Raíces (FIBRAS) as well as FIBRAS-E, which allow for investment in non-real estate investment projects.  FIBRAS are regulated under Articles 187 and 188 of Mexican Federal Income Tax Law.

Money and Banking System

Financial sector reforms signed into law in 2014 have improved regulation and supervision of financial intermediaries and have fostered greater competition between financial services providers.  While access to financial services – particularly personal credit for formal sector workers – has expanded in the past four years, bank and credit penetration in Mexico remains low compared to OECD and emerging market peers.  Coupled with sound macroeconomic fundamentals, reforms have created a positive environment for the financial sector and capital markets. According to the National Banking Commission (CNBV), the banking system remains healthy and well capitalized.  Non-performing loans have fallen sixty percent since 2001 and now account for 2.1 percent of all loans.

Mexico’s banking sector is heavily concentrated and majority foreign-owned:  the seven largest banks control 85 percent of system assets and foreign-owned institutions control 70 percent of total assets.  Under NAFTA’s national treatment guarantee, U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.

Banco de Mexico (Banxico), Mexico’s central bank, maintains independence in operations and management by constitutional mandate.  Its main function is to provide domestic currency to the Mexican economy and to safeguard the Mexican Peso’s purchasing power by gearing monetary policy toward meeting a 3 percent inflation target over the medium term.

Mexico’s Financial Technology (FinTech) law came into effect in March 2018, creating a broad rubric for the development and regulation of innovative financial technologies.  Although investors await important secondary regulations that will fully define the rules of the game for FinTech firms, the law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard.

Foreign Exchange and Remittances

Foreign Exchange

The Government of Mexico maintains a free-floating exchange rate.

Mexico maintains open conversion and transfer policies.  In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees, and travel expenses are handled at market-determined exchange rates.  Mexican Peso (MXN)/USD exchange is available on same day, 24- and 48-hour settlement bases. In order to prevent money-laundering transactions, Mexico imposes limits on USD cash deposits. Border- and tourist-area businesses may deposit more than USD 14,000 per month subject to reporting rules and providing justification for their need to conduct USD cash transactions.  Individuals are subject to a USD 4,000 per month USD cash deposit limit. In 2016, Banxico launched a central clearing house to allow for USD clearing services wholly within Mexico, which should improve clearing services significantly for domestic companies with USD income.

Remittance Policies

There have been no recent changes in Mexico’s remittance policies.  Mexico continues to maintain open conversion and transfer policies.

Sovereign Wealth Funds

The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms.  Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account. The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world.  Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund. Mexico is also a member of the International Working Group of Sovereign Wealth Funds. The Fund is expected to receive MXN 520.6 billion (approximately USD 26 billion) in income in 2019.  The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx  .

There are two main SOEs in Mexico, both of them in the energy sector.  Petroleos Mexicanos (Pemex) is in charge of running the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget, but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about eight percent.  The Federal Electricity Commission (CFE) is the other main state-owned company and is in charge of the electricity sector. While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

Pemex

As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses. Given Pemex frequently raises debt in international markets, its financial statements are regularly audited. The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil.  Pemex’s nine-person Board of Directors contains five government ministers and four independent councilors. The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.

CFE

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE will remain the sole provider of distribution services and will own all distribution assets. The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors.  Independent power generators were authorized to operate in 1992, but were required to sell their output to CFE or use it to self-supply. Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure. The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities. It has publicly called for private investors to “voluntarily renegotiate” gas supply contracts with CFE, which has raised significant concerns among investors about contract sanctity.

The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.

Privatization Program

Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state owned enterprises.

Mexico’s private and public sectors have worked to promote and develop corporate social responsibility (CSR) during the past decade.  CSR in Mexico began as a philanthropic effort. It has evolved gradually to a more holistic approach, trying to match international standards such as the OECD Guidelines for Multinational Enterprises and the United Nations Global Compact.

Responsible business conduct reporting has made progress in the last few years with more companies developing a corporate responsibility strategy.  The government has also made an effort to implement CSR in state owned companies such as Pemex, which has published corporate responsibility reports since 1999.  Recognizing the importance of CSR issues, the Mexican Stock Exchange (Bolsa Mexicana de Valores) launched a sustainable companies index, which allows investors to specifically invest in those companies deemed to meet internationally accepted criteria for good corporate governance.

In October 2017, Mexico became the 53rd member of the Extractive Industries Transparency Initiative (EITI), which represents an important milestone in its effort to establish transparency and public trust in its energy sector.

Corruption exists in many forms in Mexican government and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.  A key pillar of President Lopez Obrador’s presidential campaign was combatting corruption at all levels of government.

Still, a significant concern is the complicity of government and law enforcement officials with criminal elements.  While public and private sector corruption is found in many countries, the collaboration of government actors (often due to intimidation and threats) with criminal organizations poses serious challenges for the rule of law in Mexico.  Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts. The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors.  However, Mexican civil society assert that the government must take more effective and frequent action to address corruption.

As described in Section 4, Mexico adopted a constitutional reform in 2014 to transform the current Office of the Attorney General into an Independent Prosecutor General’s office in order to shore up its independence.  President Lopez Obrador’s choice for Prosecutor General was confirmed by the Mexican Senate January 18, 2019. In 2015, Mexico passed a constitutional reform creating the National Anti-Corruption System (SNA) with an anti-corruption prosecutor and a citizens’ participation committee to oversee efforts.  The system is designed to provide a comprehensive framework for the prevention, investigation, and prosecution of corruption cases, including delineating acts of corruption considered criminal acts under the law. The legal framework establishes a basis for holding private actors and private firms legally liable for acts of corruption involving public officials and encourages private firms to develop internal codes of conduct.  Implementation of the mandatory state-level anti-corruption legislation varies. .

The new laws mandate a redesign of the Secretariat of Public Administration to give it additional auditing and investigative functions and capacities in combatting public sector corruption.  The Mexican Congress approved legislation to change economic institutions, assigning new responsibilities and in some instances creating new entities.  Reforms to the federal government’s structure included the creation of a General Coordination of Development Programs to manage the newly created federal state coordinators (“superdelegates”) in charge of federal programs in each state.  The law also created the Secretariat of Public Security and Citizen Protection, and significantly expanded the power of the president’s Legal Advisory Office (Consejería Jurídica) to name and remove each federal agency’s legal advisor and clear all executive branch legal reforms before their submission to Congress.  The law eliminated financial units from ministries, with the exception of the Secretariat of Finance (SHCP), the army (SEDENA), and the navy (SEMAR), and transferred control of contracting offices in other ministries to the SHCP.  Separately, the law replaced the previous Secretariat of Social Development (SEDESOL) with a Welfare Secretariat in charge of coordinating social policies, including those developed by other agencies such as health, education, and culture.  The Labor Secretariat gained additional tools to foster collective bargaining, union democracy, and to meet International Labor Organization (ILO) obligations.

Four opposition parties filed a legal challenge with the Supreme Court, which agreed January 18 to hear constitutional challenges to the law.  The legal challenge contends the reforms infringe on state powers and violate the balance of powers stipulated in the constitution.

Mexico ratified the OECD Convention on Combating Bribery and passed its implementing legislation in May 1999.  The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the Organization of American States (OAS) Convention against Corruption and has signed and ratified the United Nations Convention against Corruption.  The government has enacted or proposed strict laws attacking corruption and bribery, with average penalties of five to 10 years in prison.

Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information.  Transparency in public administration at the federal level has noticeably improved, but access to information at the state and local level has been slow. According to Transparency International’s 2018 Corruption Perception Index, Mexico ranked 138 of 180 nations, and has fallen every year since 2012.  Civil society organizations focused on fighting corruption are increasingly influential at the federal level, but are few in number and less powerful at the state and local levels.

The World Economic Forum (WEF) Global Competitiveness Report for 2016-2017 found corruption is “the most problematic factor for doing business” in Mexico.  For example, the WEF notes bribes to facilitate procurement of necessary permits or government contracts can increase business costs by 10 percent. Business representatives, including from U.S. firms believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials.  The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.

The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement.  Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative. In addition, USAID is working with SFP and Transparency International to drive adoption of the internationally accepted Open Contracting Data Standard (OCDS), as well as technical assistance to upgrade the Mexican government procurement system, CompraNet, to be based on OCDS and international best practices.  (CompraNet is also described in the regulatory transparency portion of Section 3, above.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Mexico ratified the UN Convention Against Corruption in 2004.  It ratified the OECD Anti-Bribery Convention in 1999.

Resources to Report Corruption

Contact at government agency:

Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060

Contact at “watchdog” organization:

Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx

Mass demonstrations are common in the larger metropolitan areas and in the southern Mexican states of Guerrero and Oaxaca.  While political violence is rare, drug and organized crime-related violence has increased significantly in recent years.

The USD 2.7 billion Merida Initiative, launched by Presidents Calderon and Bush in 2008 and supported by bipartisan leaders in Congress, remains our primary mechanism to support Mexico in addressing significant security challenges at an institutional level.  Merida Initiative programs aim to strengthen Mexico’s security and judicial institutions by applying international standards of certification and accreditation to personnel and institutions across the criminal justice system, from the accreditation of police academies and corrections facilities to advanced training for judges, prosecutors, criminal analysts, and forensic lab technicians.  In addition, Merida Initiative programs have expanded over the past year in the areas of border security and counternarcotics, in line with new priorities set out by the Trump administration.

Companies have reported general security concerns remain an issue for companies looking to invest in the country.  The American Chamber of Commerce in Mexico estimates in a biannual report that security costs business as much as 5 percent of operating budgets.  Many companies choose to take extra precautions for the protection of their executives. They also report increasing security costs for shipments of goods.  The Overseas Security Advisory Council (OSAC) monitors and reports on regional security for U.S. businesses operating overseas. OSAC constituency is available to any U.S.-owned, not-for-profit organization, or any enterprise incorporated in the United States (parent company, not subsidiaries or divisions) doing business overseas (https://www.osac.gov/  ).

The Department of State maintains a Travel Advisory for U.S. citizens traveling and living in Mexico, available at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/mexico-travel-advisory.html

Mexico’s 57.4 percent rate of informality remains higher than countries with similar GDP per capita levels.  High informality, defined as those working in unregistered firms or without social security protection, distorts labor market dynamics, contributes to persistent wage depression, drags overall productivity, and slows economic growth.  Mexico’s efforts to increase formality over the past four years reduced the rate by 2.4 percentage points, a modest decrease given the scope of the problem. In the formal economy, there is a general surplus of labor but a shortage of technically skilled workers and engineers.  Manufacturing companies, particularly along the U.S.-Mexico border and in the states of Aguascalientes, Guanajuato, Jalisco, and Querétaro, report labor shortages and an inability to retain staff.

Mexico’s labor relations system has been widely criticized as skewed to represent the interests of employers and the government at the expense of workers.  Mexico’s legal framework governing collective bargaining created the possibility of negotiation and registration of initial collective bargaining agreements without the support or knowledge of the covered workers.  These agreements are commonly known as protection contracts and constitute a gap in practice with international labor standards regarding freedom of association. The percentage of the economy covered by collective bargaining agreements is between five and 10 percent.

The first element of a labor justice reform package was passed into law February 24, 2017, replacing biased tripartite dispute resolution entities (Conciliation and Arbitration Boards) with independent judicial bodies.  In terms of labor dispute resolution mechanisms, the Conciliation and Arbitration Boards (CABs) previously adjudicated all individual and collective labor conflicts. The constitutional labor reform requires complementary revisions to the existing labor law.  The lower house of the Mexican Congress approved a bill with the requisite revisions in April 2019. Full congressional approval is expected once the Senate has also considered the bill.

Labor experts predict approval and implementation of the labor reform legislation, as required under the United States-Mexico-Canada Agreement (USMCA), will likely result in a greater level of labor actionas well as inter-union and intra-union competition.  Employer association and organized labor representatives agree, but differ on how much and how quickly labor actions will spread. The increasingly friendly political and legal environment for independent unions is already changing the way established unions manage disputes with employers, prompting more authentic collective bargaining.  As independent unions compete with corporatist unions to represent worker interests, workers are likely to be further emboldened in demanding higher wages.

According to the International Labor Organization (ILO), government enforcement was reasonably effective in enforcing labor laws in large and medium-sized companies, especially in factories run by U.S. companies and in other industries under federal jurisdiction.  Enforcement was inadequate in many small companies and in the agriculture and construction sectors, and it was nearly absent in the informal sector. Workers organizations have made numerous complaints of poor working conditions in maquiladoras and in the agricultural production industry.  Low wages, poor labor conditions, long work hours, unjustified dismissals, lack of social security benefits and safety in the workplace, and lack of freedom of association were among the most common complaints.

Mexico and Overseas Private Investment Corporation (OPIC) finalized in 2004 the agreement enabling OPIC programs and services within the country.  Since then, OPIC has provided over USD 1 billion in financing and political risk insurance to support to more than 22 projects in Mexico. OPIC has announced a drive to catalyze an additional USD 1 billion in investments in Mexico and Central America by 2021.  In December 2018 OPIC announced the possibility of expanding its funding opportunities in Mexico to upwards of USD 5 billion. For more information on OPIC’s projects in Mexico, please consult OPIC’s website at https://www.opic.gov .

Table 2:  Key Macroeconomic Data, U.S. FDI in Host Country/Economy

*Mexico does not report total FDI stock, only flows of FDI.  https://datos.gob.mx/busca/organization/se  

Table 3:  Sources and Destination of FDI

The data included in the IMF’s Coordinated Direct Investment Survey is consistent with Mexican government data.

Table 4:  Sources of Portfolio Investment

The data included in the IMF’s Coordinated Portfolio Investment Survey (CPIS) is consistent with Mexican government data.

Economic Section
Paseo de la Reforma 305, Colonia Cuauhtémoc, Mexico, D.F.  06500
Mexico City
Email: EconDL@state.gov
+52 55 5080 2000

Policies Towards Foreign Direct Investment

Foreign direct investment has all but stopped since the onset of Nicaragua’s political crisis began in April 2018.  The Government of Nicaragua nevertheless continues to seek foreign direct investment.  Investment incentives target export-focused companies that require large amounts of unskilled or low-skilled labor.

The Government of Nicaragua encourages investors to work through ProNicaragua, the country’s investment and export promotion agency.  ProNicaragua provides a range of services, including information packages, investment facilitation, and prospecting services to interested investors.  Its reputation for professionalism has deteriorated over the past few years, becoming increasingly politicized after President Ortega installed his son as the organization’s figurehead.  For more information, see http://www.pronicaragua.org .

Personal connections and affiliation with industry associations and chambers of commerce are critical for foreigners investing in Nicaragua.  Prior to the crisis, the Superior Council of Private Enterprise (COSEP) had functioned as the main private sector interlocutor with the Government of Nicaragua through a series of roundtable and regular meetings with the government.  These roundtables have ceased since the onset of Nicaragua’s crisis in April 2018 as has collaboration between the Government, private sector, and unions.  Though municipal and ministerial authorities may enact decisions relevant to foreign businesses, all actions are subject to de facto approval by the Presidency.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity.  Any individual or entity may make investments of any kind.  In general, Nicaraguan law provides equal treatment for domestic and foreign investment.  There are a few exceptions imposed by specific laws, such as the Border Law (2010/749), which prohibits foreigners from owning land in certain border areas.  Domestic air transportation and television broadcasting also has certain limits on foreign ownership.  In practice, the government also requires that all investments in the energy sector include the state owned enterprise Petronic as a partner.  Other sectors, such as electricity transmission and port and airport operation also have de facto rules to inhibit foreign investment.

Nicaragua allows foreigners to be shareholders of local companies, but a company representative must be a national or a foreigner with legal residence in the country.  Many companies satisfy this requirement by using their local legal counsel as a representative.  Legal residency procedures for foreign investors can take up to eighteen months and require in-person interviews in Managua.

The Government of Nicaragua does not formally screen, review, or approve foreign direct investments.  However, President Daniel Ortega and the executive branch maintain de facto review authority over any foreign direct investment.  This review process remains unclear and opaque.

Other Investment Policy Reviews

In the past three years, the Government of Nicaragua has not undergone any third-party investment policy reviews through multilateral organizations such as the Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO), or the United Nations Conference on Trade and Development (UNCTAD).

Business Facilitation

Nicaragua does not have an online business registration system.  At a minimum, a company must typically register with the national tax administration, social security administration, and local municipality.  According to the Ministry of Industrial Development and Trade (MIFIC), the process to register a business takes a minimum of 14 days.  In practice, registration usually takes more time.  Establishing a foreign-owned limited liability company (LLC) takes eight procedures and 42 days.  One of the legal representatives of the company must be a resident of Nicaragua.  There is no process for simplified business creation without a notary.  MIFIC has established single window offices (Ventanilla Unica) in several cities in Nicaragua to assist with business registration.

Outward Investment

The Government of Nicaragua does not promote or incentivize outward investment and does not restrict domestic investors from investing abroad.

Nicaragua has signed and ratified bilateral investment treaties with Argentina, Chile, the Czech Republic, Denmark, France, Germany, Italy, the Netherlands, the Russian Federation, South Korea, Spain, Switzerland, and the United Kingdom.  Nicaragua also has treaties with investment provisions with Canada, Mexico, Panama, Taiwan, and CAFTA-DR member states as part of free trade agreements.

In November 2016, Nicaragua and four other Central American countries signed a free trade agreement with South Korea.  The agreement eliminates tariffs on about 95 percent of goods within ten years of implementation.  The treaty has not yet entered into force.

Nicaragua does not have a bilateral income tax treaty with the United States or any other country.  The country’s taxation authority increased audits of foreign investors in 2017 and has become more aggressive in collection and enforcement procedures against foreign investors.  On February 27, 2019 the Government of Nicaragua approved new tax reforms.  Previously, the government collected one percent of gross revenue as an alternative minimum tax.  A new law triples this alternative minimum tax rate for “large businesses” – the approximately 600 companies that earn more than five million dollars in gross annual revenue – and doubling it for “medium businesses” with incomes between USD 1.9 and five million in gross revenue.  The law also increases the number of items subject to value added taxes and increases taxes on investment income, among other changes. Industry executives assert that the reform will cause loss of competitiveness with Central American neighbors and steep drops in consumption due to higher prices and unemployment.

Transparency of the Regulatory System

Investors regularly complain that regulatory authorities are arbitrary, negligent, or slow to apply existing laws, at times in an apparent effort to favor one competitor over another.  Lack of a reliable means to resolve disputes with government administrative authorities or business associates quickly results in some disputes becoming intractable.  Few companies in Nicaragua adhere to internationally accepted accounting standards.  The Government of Nicaragua does not have transparent policies to establish clear “rules of the game.”  Additional regulatory hindrances can occur in the Autonomous Caribbean Region where regional government and territorial authorities exist in addition to central government and municipal authorities.

Prior to the crisis, the Superior Council of Private Enterprise (COSEP) provided the Government of Nicaragua with input to proposed regulations and laws.  These channels had become increasingly centralized and tended to disfavor smaller investors and businesses who may have more difficulty placing items on the agenda.  These roundtables have ceased since the onset of Nicaragua’s crisis in April 2018.  The Executive Branch retains ultimate rule making and regulatory authority, and they have used that power to make unilateral economic decisions related to taxation, minimum wage, and social security — subjects that were previously areas of collaboration between the Government, private sector, and unions.

Draft legislation is ostensibly made available for public comment through meetings with associations that will be affected by the proposed regulations; however, in most cases consultations are limited to pro-government groups.  Not all information is published on official websites and the legislature is not required by law to give notice.  Draft texts may be distributed directly to stakeholders the government deems impacted by the legislation.  The ruling Sandinista party has a supermajority in the National Assembly; in practice the legislative branch seldom modifies legislation proposed by the Executive.

Key regulatory actions are published in La Gaceta, the official journal of government actions in Nicaragua, including official summaries and the full text of all legislation.  There are limited oversight or enforcement mechanisms to ensure the government follows administrative processes.

International Regulatory Considerations

All CAFTA-DR provisions are fully incorporated into Nicaragua’s national regulatory system.  Nicaragua is a member of the WTO and notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Nicaragua is a signatory to the Trade Facilitation Agreement and reported in July 2017 that it had implemented 77 percent of its commitments to date; however, this self-reported figure likely overstates trade facilitation progress, which remains beset with bureaucratic inefficiency and lack of transparency.

Legal System and Judicial Independence

Nicaragua is a civil law country in which legislation is the primary source of law.  The legislative process is found in Articles 140 to 143 of the Constitution.  Difficulty in resolving commercial disputes, particularly the enforcement of contracts, remains one of the most serious drawbacks to investment in Nicaragua.  The legal system is weak and cumbersome.  Members of the judiciary, including those at senior levels, are widely believed to be corrupt and are subject to significant political pressure, especially from the executive branch.  A commercial code and bankruptcy law exist, but both are outdated and rarely used.  While regulations and enforcement actions are technically subject judicial review, appeals procedures are not viewed as reliable.

Laws and Regulations on Foreign Direct Investment

CAFTA-DR entered into force on April 1, 2006, for the United States and Nicaragua.  The CAFTA-DR Investment Chapter establishes a secure, predictable legal framework for U.S. investors in Central America and the Dominican Republic.  The agreement provides six basic protections: (1) nondiscriminatory treatment relative to domestic investors and investors from third countries; (2) limits on performance requirements; (3) the free transfer of funds related to an investment; (4) protection from expropriation other than in conformity with customary international law; (5) a minimum standard of treatment in conformity with customary international law; and (6) the ability to hire key managerial personnel without regard to nationality.  The full text of CAFTA-DR is available at http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text .

In addition to CAFTA-DR, Nicaragua’s Foreign Investment Law (2000/344) defines the legal framework for foreign investment.  The law allows for 100 percent foreign ownership in most industries. (See Limits on Foreign Control and Right to Private Ownership and Establishment for exceptions.)  It also establishes the principle of national treatment for investors, guarantees foreign exchange conversion and profit repatriation, clarifies foreigners’ access to local financing, and reaffirms respect for private property.

In June 2017, the Government of Nicaragua passed Law 953  to establish a state-owned mining enterprise (ENIMINAS) operating under the authority of the Ministry of Energy and Mines (MEM).  The law requires ENIMINAS participation in the exploitation of mineral resources from national mining reserves, which necessitates that the state mining company shall have some level of commercial interest in new mining concessions.

MIFIC maintains an information portal regarding applicable laws and regulations for trade and investment at http://www.tramitesnicaragua.gob.ni .  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.  The site is available only in Spanish.

Competition and Anti-Trust Laws

The Competition Promotion Law (2007/601) established the Institute for the Promotion of Competition (Procompetencia), to investigate and discipline businesses engaged in anticompetitive business practices, including price fixing, dividing territories, exclusive dealing, and product tying.  Procompetencia does competent research but has no effective power.

Expropriation and Compensation

Considerable uncertainty remains in securing property rights in Nicaragua.  The World Bank reported in February 2018 that an estimated one-third of land parcels in rural areas were still held without a clear title and stated that land tenure insecurity has hindered potential investments and land market transactions in Nicaragua.  Recent changes to public property registry policy prohibit the disclosure of ownership information to most outside parties, making the verification of ownership claims even more difficult.  Police often refuse to intervene in property invasion cases or assist in the enforcement of court orders to remove illegal occupants.  U.S. citizens have also encountered challenges executing and enforcing final court orders, even under orders from the Supreme Court of Nicaragua.  Conflicting land title claims are abundant and judicial appeal in these cases is very challenging.

During the civil unrest of 2018, US Embassy Managua received numerous reports of land invasions.  Some U.S. citizens report difficulties exercising property rights due to lack of government action, such as failure by local authorities to remove illegal occupants or long unexplained delays in government authorities’ performing basic duties such as cadastral surveys or issuance of documents needed by property owners.  President Ortega declared on numerous occasions that the government would not act to evict those who had illegally taken possession of private property.

Dispute Settlement

ICSID Convention and New York Convention

Nicaragua is a member of the Convention of the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).  The Government of Nicaragua signed the 1958 New York Convention on the recognition and enforcement of foreign arbitration awards in 2003. There is no specific domestic legislation providing for enforcement under the 1958 New York Convention or for the enforcement of awards under the ICSID Convention.

Investor-State Dispute Settlement

CAFTA-DR establishes an investor-state dispute settlement mechanism.  An investor who believes the government has breached a substantive obligation under CAFTA-DR or that the government has breached an investment agreement may request binding international arbitration in a forum defined by the Investment Chapter in the Agreement.

International Commercial Arbitration and Foreign Courts

The Mediation and Arbitration Law (2005/540) establishes the legal framework for alternative dispute resolution.  The Nicaraguan Chamber of Commerce and Services founded Nicaragua’s Mediation and Arbitration Center.  Arbitration clauses should be included in business contracts, but legal experts are uncertain whether local courts would enforce awards resulting from international or local proceedings.

Enforcement of court orders is frequently subject to non-judicial considerations.  Courts routinely grant injunctions (“amparos”) to protect citizen rights by enjoining official investigatory and enforcement actions indefinitely.  Foreign investors are at a disadvantage in disputes against Nicaraguans with political or personal connections.  Misuse of the criminal justice system sometimes results in individuals being charged with crimes arising out of civil disputes, often to pressure the accused into accepting a civil settlement.

Dispute resolution is even more difficult in the Northern and Southern Caribbean Autonomous Regions, where most of the country’s fishery, timber, and mineral resources are located.  These large regions, which share a Caribbean history and culture, comprise more than one-third of Nicaragua’s land mass, much of which is controlled by territorial collective systems of both Afro-Caribbean and indigenous populations.  The division of authority between the central government and regional authorities is complex and ambiguous.  Local officials may act without effective central government oversight, and industry-wide regulations, like those of timber, mining, and fishing, often contradict autonomous recognition of the region.

Bankruptcy Regulations

Although bankruptcy provisions are included in the Civil and Commercial Codes, there is no tradition or culture of bankruptcy in Nicaragua.  More often than not, companies simply choose to close their operations and set up a new entity without going through a formal bankruptcy procedure, effectively leaving their creditors unprotected.  For their part, creditors typically avoid a judicial procedure fraught with uncertainty and instead attempt to collect as much as they can directly from the debtor, or they simply give up on any potential claims they may have. Nicaragua’s rules on bankruptcy focus on the liquidation of business entities rather than on reorganization.  They do not provide for an equitable treatment of creditors, to the detriment of creditors located in foreign jurisdictions.

Investment Incentives

The Social Housing Construction Law (2009/ 677) provides incentives for the construction of housing units 36–60m² in size with construction costs less than USD 30,000 per unit.  Developers are exempt from paying local taxes on the construction, purchase of materials, equipment or tools. Additional tax breaks are also available.

The Hydroelectric Promotion Law (amended 2005/531) and the Law to Promote Renewable Resource Electricity Generation (2005/532) provide incentives to invest in electricity generation, including duty free imports of capital goods and income and property tax exemptions. Regulatory concerns limit investment despite these incentives (see Transparency of the Regulatory System).  In particular, private investment in hydroelectric dams is banned from the Asturias, Apanás, and Río Viejo Rivers, and the approval of the National Assembly is required for projects larger than 30 megawatts on all other rivers.

The Tourism Incentive Law (amended 2005/575) includes the following basic incentives for investments of USD 30,000 or more outside Managua and USD 100,000 or more within Managua: income tax exemption of 80 percent to 90 percent for up to 10 years; property tax exemption for up to 10 years; exoneration from import duties on vehicles; and value added tax exemption on the purchase of equipment and construction materials.  The General Tourism Law (amended 2010/724) stipulates that hotel owners pay a tax of USD 0.50 per customer and two percent of the rental rate per room for tourism promotion.  It also imposes anti-discrimination, public health, and environmental regulations on tourism-oriented businesses.

The Fishing and Fish Farming Law (2004/489) exempts gasoline used in fishing and fish farming from taxes.  This law’s Article 111 was amended (2012/797) to allow individuals or companies to request a temporary permit to take advantage of unexploited or underexploited aquatic resources during closed season.  Environmental regulations also apply (see Transparency of the Regulatory System).

The Forestry Sector Law (2003/462) provides income, property and municipal tax incentives for plantation investments and tax exemptions on importing wood processing machinery and equipment.

The Special Law on Mining, Prospecting and Exploitation (2001/387) exempts mining concessionaires from import duties on capital inputs (see Transparency of the Regulatory System for additional information on the mining sector).

Foreign Trade Zones/Free Ports/Trade Facilitation

The National Free Trade Zone (FTZ) Commission, a government agency, regulates FTZ activities.  As of 2018, 225 companies operate with FTZ status in Nicaragua and employ 118,087 people.  The Nicaraguan Customs Agency monitors all FTZ imports and exports.  Most free zones are in Managua and approximately 40 percent belong to the textile and apparel sector.

The Tax Equity Law (amended 2009/712) allows firms to claim an income tax credit of 1.5 percent of the free-on-board (FOB) value of exports.  The Law of Temporary Admission for Export Promotion (2001/382) exempts businesses from value-added tax (VAT) for the purchase of machinery, equipment, raw materials, and supplies if used in export processing.  Businesses must export 25 percent of their production to take advantage of these tax benefits.

In addition to export incentives and duty free capital imports granted by the Tax Concertation Law and the Temporary Admission Law for Export Promotion, the Free Trade Zones for Industrial Exports Decree (1991/46 and amendments) provides a 10-year income tax exemption for Nicaragua and foreign investments in FTZs.  The National Free Trade Zone Commission of Nicaragua (CNFZ) administers the FTZ regime. The CNFZ requires a deposit to guarantee that final salaries and other expenses be paid if a company goes out of business.  Free trade zone salaries are negotiated separately from other wage negotiations and are set for five-year periods.

The Government of Nicaragua focus on pragmatic collaboration with large companies comes at the expense of small and medium size enterprises (SMEs), which are mostly sidelined from policy dialogue. As a result, SMEs are left to bear the same fiscal and bureaucratic responsibilities as large companies but without the incentives and benefits received by large companies, putting them at a strategic disadvantage. In the agricultural sector, where cooperative structures are promoted with generous tax benefits, SMEs are particularly disadvantaged.

Performance and Data Localization Requirements

Article 14 of the Nicaraguan Labor Code states that 90 percent of any company’s employees must be Nicaraguan. The Ministry of Labor may make exceptions when justified for technical reasons.

Although visas and work permit procedures are not excessively onerous for foreign investors and their employees, Nicaraguan authorities have denied entry to or expelled foreigners, including U.S. government officials, NGO workers, academics, journalists, and others for reasons not clearly defined.  Residency permit applications can take 18 months or longer to receive final approval.

Foreign investors in Nicaragua are not required to purchase from local sources or to export a specific percentage of output, nor are their access to foreign exchange limited in proportion to their exports.  Likewise, Nicaraguan tax and customs incentives apply equally to foreign and domestic investors.

There are no requirements for foreign IT providers to turn over source code or provide access to surveillance.  The Government of Nicaragua does not require forced localization nor are there other measures that prevent or unduly impede freely transmitting customer or other business-related data outside the country.

Real Property

Many investors in Nicaragua experience difficulties defending their property rights. The government regularly failed to enforce court decisions with respect to seizure, restitution, or compensation of private property. Enforcement of court orders was frequently subject to non-judicial considerations.  Members of the judiciary, including those at senior levels, were widely believed to be corrupt or subject to political pressure. The government failed to evict those who illegally took possession of private property.  Within the context of social upheaval starting on April 19, members of the FSLN illegally took over privately owned lands, with implicit and explicit support by municipal and national government officials. Some land seizures were politically targeted and directed against specific individuals, such as businessmen traditionally considered independent or against the ruling party.  As of August 24, the private sector contended that approximately 15,000 acres remained seized.

Previously during the 1980s, the expropriation of 28,000 properties in Nicaragua from both Nicaraguans and foreign investors resulted in a large number of claims and counter claims involving real estate.  Property registries suffer from years of poor recordkeeping, making it difficult to establish a title history, although some improvements have ensued from World Bank-financed projects to modernize the land administration systems in certain regions.

The Embassy recommends extensive due diligence and extreme caution before investing in property.  Unscrupulous individuals have engaged in protracted confrontations with U.S. investors to wrest control of beachfront properties along the Pacific coast in the departments of Carazo, Rivas, and Chinandega, as well as prime real estate in the cities of Managua, Granada, and Leon.  Judges and municipal authorities have been known to collude with such individuals, and a cottage industry supplies false titles and other documents to those who scheme to steal land.

Additional constraints can occur with property in the Autonomous Caribbean Region in which communal land cannot be legally purchased.  However, unscrupulous individuals sell communal land and lawyers and notaries will knowingly extend the apparent correct paperwork, only to have property buyers be stripped from their property by communal authorities.

Those interested in purchasing property in Nicaragua should seek experienced legal counsel very early in the process.

The Capital Markets Law (2006/587) provides a legal framework for securitization of movable and real property.  The banking system is expanding its loan programs for housing purchases and car purchases, but there is currently only a limited secondary market for mortgages.

Intellectual Property Rights

Nicaragua established standards for the protection and enforcement of intellectual property rights (IPR) through CAFTA-DR implementing legislation consistent with U.S. and international intellectual property standards.  While the legal regime for protection of IPR in Nicaragua is adequate, enforcement has been limited. Piracy of optical media and trademark violations are common.  The United States also has concerns about the implementation of Nicaragua’s patent obligations under CAFTA-DR, including the mechanism through which patent owners receive notice of submissions from third parties, how the public can access lists of protected patents, and the treatment of undisclosed test data.  The country does not publicly report on seizures of counterfeit goods.  Nicaragua is not listed in the Office of the U.S. Trade Representative’s Special 301 Report or the Notorious Market report.

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

Capital Markets and Portfolio Investment

New policies have restricted the free flow of financial resources into the product and factor markets, as well as foreign currency convertibility.  Banks must now request foreign currency purchases in writing, 48 hours in advance.  In an effort to shore up liquidity, banks have sharply restricted lending, increased interest rates, and implemented stricter collateral standards.  The overall size and depth of the country’s financial markets and portfolio positions are very limited.

Money and Banking System

The modern banking system in Nicaragua is relatively young, small, and undercapitalized. The Central Bank of Nicaragua was established in 1961, as the state regulator of the monetary system with the sole right to issue of the national currency, the córdoba.  In the 1980s, all domestic banks were nationalized and foreign banks were not permitted to accept local deposits, though they could continue to provide loans.  In 1990, the National Assembly reestablished private banking in the country.  During a banking crisis from 2000–2001, four banks went into bankruptcy and were dissolved.

The Superintendent of Banks and other Financial Institutions (SIBOIF) regulates banks, insurance companies, stock markets, and other financial intermediaries.  SIBOIF requires that supervised entities provide audited financial statements, prepared according to international accounting standards, on a regular schedule.  The Deposit Guarantee System Law (2005/551) established the Financial Institution Deposit Guarantee Fund (FOGADE) to guarantee bank deposits up to USD 10,000 per depositor, per institution.  SIBOIF dependence on commercial banks limits its transparency and independence.

Although the banking system has grown and developed in the past two decades, Nicaragua remains underbanked relative to other countries in the region.  Only 19 percent of Nicaraguans aged 15 or older have bank accounts, and only 8 percent have any savings in such accounts, approximately half the rate of other countries in the region, according to World Bank data.  One-third of Nicaraguans continue to save their money in their home or other location while 49 percent have no savings.  Nicaragua also has one of the lowest mobile banking rates in Central America.

Due to the ongoing socio-political crisis, Nicaragua’s private banks have faced many serious challenges.  In an attempt to secure their liquidity, banks cut off most new lending immediately after the crisis began as banks have limited resources to cover withdrawals.  Although the Nicaraguan Central Bank (BCN) supported the banks at the beginning of the crisis, since June 2018 the BCN cut financing to banks and unilaterally modified regulations governing Financial Assistance Lines (LAF), making them all but inaccessible.  The reduction in lending has reduced the banks revenue, which has had a 29 percent reduction in 2018.

The banking industry remains conservative and highly concentrated, with four banks (BANPRO, Lafise, BANCENTRO, BAC, and FICOHSA) constituting 77 percent of the country’s market share.  The ongoing crisis that began on April 18 sparked large withdrawals of deposits from the banking system in the following months.  As of December 2018, the four banks had total assets worth USD USD 3.9 billion, a 28.3 percent drop from the 5.5 billion held in March 2018. Due to an increasingly high country risk and a relatively small business volume, the number of correspondent banking relationships with the United States has come under risk in 2018.  In December, Wells Fargo Bank informed the four banks that it would withdraw from the country and would not continue to provide correspondent services.  Bank of America has also withdrawn correspondent services from a local bank.

BANCORP, a subsidiary of ALBA de Nicaragua (ALBANISA), a joint venture between the State-owned oil companies of Nicaragua (49 percent) and Venezuela (51 percent) began accepting deposits in 2015.   Because of its ownership structure, U.S. sanctions against the Venezuelan petroleum firm PDVSA apply to Bancorp.  On March 7, 2019, in an attempt to circumvent sanctions, the National Assembly of Nicaragua approved the sale of BANCORP to the state of Nicaragua through the creation of a new National Bank, which has yet to be signed into law.

Foreigners are still allowed to open bank accounts as long as they are legal residents in the country.  Due to capital flight, Central Bank data show that in 2018 the credit portfolio of Nicaraguan commercial banks fell by 14.8 percent from May to December.  Loans to industry plummeted by 17.9 percent, to consumers by 18.2 percent and to the commerce sector by 15.3 percent.  Despite considerable restructuring, as a result of the Establishment of Special Conditions for the Renegotiation of Debts by the SIBOIF (which expired in December 2018), non-performing loan ratios increased as a result of the economic recession.  Loans in default at the end of December increased from 1 percent to 2.5 percent of total loans, while those at risk of entering default rose to 8.3 percent, up from 2.7 percent prior to the crisis.

The Foreign Investment Law allows foreign investors residing in the country to access local credit and local banks have no restriction in accepting property located abroad as collateral. However, many investors find lower cost financing and more product variety from offshore banks.  Short-term government and Central Bank bonds, issued in Córdobas, dominate Nicaragua’s infant but growing capital market, and some limited stock issuances have become more prominent.  Foreign banks have acquired a presence in Nicaragua through the purchase of local banks, many acting as second floor banks.

On October 3, 2018 President Ortega issued a decree that granted the UAF direct access to the private information of individuals and organizations collected by the following government institutions: Customs, the Supreme Electoral Council, Tax Authority, Social Security Institute, General Directorate for Migration and Foreigner Service, National Police, the Judiciary, and the Superintendency of Banks and Other Financial Institutions.  The new regulation would give the UAF access to vital records that include salaries, travel information, police records, gun permits, vehicle registration, companies’ exports and imports, bank and insurance information, and tax payments.  Further, the new regulation broadens the entities subject to UAF supervision, previously limited to financial institutions like banks and insurance companies and now including nonprofits, payment companies, car dealerships, accountants, real estate firms, jewelry stores, and fiduciary services providers.  Entities under UAF supervision must comply with invasive UAF audits or face fines or the suspension of business operations.  The repeated failure to provide information can result in permanent closure. With the passage of the new regulations, there will be no institutional barriers between UAF investigators and troves of personal data.

Nicaragua has not explored or announced that it intends to implement or allow the implementation of blockchain technologies in its banking transactions, though there are some consumer driven efforts to mainstream blockchain technologies.

Foreign Exchange and Remittances

Foreign Exchange Policies

Nicaragua is a highly dollarized economy.  The Foreign Investment Law (2000/344) and the Banking, Nonbank Intermediary, and Financial Conglomerate Law (2005/561) allow investors to convert freely and transfer funds associated with an investment.  CAFTA-DR ensures the free transfer of funds related to a covered investment.  Local financial institutions freely exchange U.S. dollars and other foreign currencies.  The Superintendent of Banks and other Financial Institutions (SIBOIF) monitors financial transactions for illicit activity, and the Financial Intelligence Unit (UAF) enforces anti-money laundering legislation.  Transfers of funds over USD 10,000 requires additional paperwork and due diligence.

The Nicaraguan Central Bank adjusts the official exchange rate daily according to a crawling peg that devalues the Cordoba against the U.S. dollar at an annual rate of five percent. However, on August 24, the Nicaraguan Central Bank Board of Directors amended regulations to enable the Bank’s President to determine discretionarily the amount it will charge local banks for the sale of U.S. dollars, Euros and other foreign currencies.  Currently, the Central Bank charges one percent higher than the official exchange rate, covering operating costs and anchoring exchange rate expectations.  With the new regulation, the Central Bank’s President can charge more than the one percent, implicitly devaluing the currency as local banks would likely pass on the additional cost to consumers seeking to purchase foreign currency.  It is unclear whether the revisions remain valid.

On October 19th, BCN officials notified Nicaragua’s private banks that in place of an on-line automated clearing house, banks must now request foreign currency purchases in writing, 48 hours in advance, and provide the BCN with the names of savers who want to withdraw their foreign currency deposits, as well as the amounts each individual requests.  The BCN has not formally asserted the right to deny requests to purchase dollars implication.

The official exchange rate as of December 31, 2018, was 32.3 Córdobas to one U.S. dollar.  The daily exchange rate can be found on the Central Bank’s website .  According to the BCN, the accumulated rate of inflation for 2018 was 3.9 percent.

Remittance Policies

The Foreign Investment Law (2000/344) allows foreign investors to transfer funds abroad, whether dividends, interest or principal on private foreign debt, as well as royalties, and from compensation payments for declarations of eminent domain.  Foreign investors also enjoy foreign currency convertibility through the local banking system.  There are no limitations on the inflow or outflow of funds for remittances of profits or revenue.

Sovereign Wealth Funds

Nicaragua does not have a sovereign wealth fund.

President Ortega has used funds provided by Venezuela through the Bolivarian Alliance for the Americas (ALBA) to increase the role of the state and quasi-state actors in the economy. Through Petronic, Nicaragua’s state-owned oil company, the government owns a 49 percent share in ALBA de Nicaragua (ALBANISA), the company that imports and monetizes Venezuelan petroleum products through the ALBA Energy Agreement.  The other 51 percent of ALBANISA is owned by the Venezuelan state-owned oil company PDVSA.  President Ortega and the Sandinista Party (FSLN) have used ALBANISA funds to purchase television and radio stations, hotels, cattle ranches, electricity generation plants, and pharmaceutical laboratories.  ALBANISA’s large presence in the Nicaraguan economy and its ties to the Government of Nicaragua government put companies trying to compete in industries dominated by ALBANISA or government-managed entities at a disadvantage.

On January 28, 2019 the Office of Foreign Assets Control (OFAC) designated PDVSA and as a result all assets and subsidiary companies of PDVSA operating in Nicaragua have been subjected to the same restrictions as those in Venezuela.  This includes ALBANISA and all of its subsidiaries, including Bancorp.  For years, President Daniel Ortega and Vice President Rosario Murillo have engaged in corrupt deals via PDVSA that have pilfered the public resources of Nicaragua for private gain.

In October 2018, the National Assembly approved a law that would grant the forty-year-old Nicaraguan Import Company (ENIMPORT) a new mandate as the “discretionary importer and exporter of the State,” as well as a new name. The law creates a state-owned Nicaraguan Import and Export Company (ENIMEX), raising concerns in the business community that the regime plans to supplant private exporters in an effort to access foreign currency. This state-owned enterprise (SOE) would be empowered to act as the agent of the government of Nicaragua in import and export transactions, form joint enterprises with the private sector, transport, store, and sell goods and services to the public, and participate in unrestricted commercial activities.  ENIMEX is to be exempt from most taxes and duties, putting any private competitors at a sharp disadvantage.

The government owns and operates the National Sewer and Water Company (ENACAL), National Port Authority (EPN), National Lottery, and National Electricity Transmission Company (ENATREL).  Private sector investment is not permitted in these sectors.  In sectors where competition is allowed, the government owns and operates the Nicaraguan Insurance Institute (INISER), Nicaraguan Electricity Company (ENEL), Las Mercedes Industrial Park, Nicaraguan Food Staple Company (ENABAS), the Nicaraguan Post Office, the International Airport Authority (EAAI), the Nicaraguan Mining Company (ENIMINAS) and Nicaraguan Petroleum Company (Petronic).  Through the Nicaraguan Social Security Institute (INSS), the government owns a pharmaceutical manufacturing company, and other companies and real estate holdings.  The Military Institute of Social Security (IPSM) also has a controlling interest in companies in the construction, manufacturing, and services sectors.  Other companies have unclear ownership structures that likely include at least a minority ownership by the Government of Nicaragua or government officials.

Total assets of all SOEs in Nicaragua are unknown as not all SOEs have publicly available or audited accounts.  There are few mechanisms to ensure the transparency and accountability of state business decisions.  The U.S. Department of State’s Fiscal Transparency report cites the need for Nicaragua to improve reporting on allocation to and from state-owned enterprises. Nicaragua is not a signatory to the WTO Agreement on Government Procurement.

Many large businesses have active Responsible Business Conduct (RBC) programs that include improvements to the workplace environment, business ethics, and community development initiatives.  The Nicaraguan Union for Corporate Social Responsibility (UniRSE), which includes 102 companies, is working to create more awareness for Corporate Social Responsibility (CSR) in Nicaragua.  UniRSE organizes events and studies best practices throughout the region.  Increasingly, both Nicaraguan and foreign businesses recognize that CSR and RBC programs must go beyond compliance with environmental or labor law, but more work is needed in this area.

The Government of Nicaragua does not factor RBC policies or practices into its procurement decisions nor explicitly encourage generally accepted RBC principles.  The government does not participate in the Extractive Industries Transparency Initiative or the Voluntary Principles on Security and Human Rights.  There are no domestic transparency measures requiring the disclosure of payments made to governments.

Nicaragua has a well-developed legislative framework criminalizing acts of corruption, but it is unevenly enforced.  The Penal Code (amended 2007/641) and the Special Law on Bribery and Crimes Against International Trade and Foreign Investment (2006/581) define corruption offenses and establish sanctions.  Offering or accepting a bribe is a criminal act punishable by a fine and a minimum three years in prison.  Legislation similar to the U.S. Foreign Corrupt Practices Act makes bribery by a Nicaraguan company of a foreign official a criminal act punishable by a minimum five years in prison.  The Attorney General and the Controller General share responsibility for investigating and prosecuting corruption cases.  The anticorruption provisions of CAFTA-DR require each participating government ensure under its domestic law that bribery in matters affecting trade and investment is treated as a criminal offense or subject to comparable penalties.

Corruption and impunity remain rampant among government officials, including in the police, the CSE, CSJ, customs and tax authorities, which continues to pose a major challenge for U.S. firms operating in Nicaragua.  A general state of permissiveness continues to hinder the possibility of addressing the problem effectively.  A lack of strong institutions, a system of checks and balances, and the overbearing political control of government institutions allowed for corruption to remain.  The CSJ and lower-level courts remained particularly susceptible to bribes, manipulation, and political influence, especially by the FSLN.  Companies reported that bribery of public officials, unlawful seizures, and arbitrary assessments by customs and tax authorities were common.  In a 2016 survey of 2,500 Nicaraguan companies, one-third of all respondents reported arbitrariness and illegal actions by government offices that regulate property rights and business establishment.

Executive branch officials continued to be involved in businesses financed by economic and developmental assistance funds lent by the Venezuelan-led Bolivarian Alliance for the Peoples of Our America (ALBA), all of it outside the normal budgetary process controlled by the legislature. Media reported ALBA-funded contracts were awarded to companies with ties to the president’s family and noted the funds from Venezuela served as a separate budget tightly controlled by the FSLN, with little public oversight. Cases of mismanagement of these funds by public officials were reportedly handled personally by FSLN members and President Ortega’s immediate family, rather than by the government entities in charge of public funds.

In 2017, Transparency International ranked Nicaragua as one of the most corrupt countries in the region and more corrupt then its neighbors, scoring worse than Honduras and Guatemala and on par with authoritarian regimes like Cuba and Venezuela.

On December 21, 2017, the U.S. Department of Treasury sanctioned Roberto Rivas, President of the Supreme Electoral Council, for corruption under the Global Magnitsky Act.  On January 16, 2018, the President of the Nicaraguan Contraloría General de la República (CGR), Nicaragua’s audit authority said it would not investigate Mr. Rivas as it was not the competent entity.  On February 7, 2018, the National Assembly reaffirmed Rivas’ leadership of the CSE and preserved his immunity from prosecution for corruption.

Nicaragua ratified the United Nations Convention against Corruption (UNCAC) in 2006 and the Inter-American Convention Against Corruption in 1999.  The country is not party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Nicaragua’s supreme audit institution is the Contraloria General de la Republica de Nicaragua (CGR).  The CGR can be reached at +505 2265-2072 and more information is available at its website www.cgr.gob.ni 

Nicaragua has a highly centralized, authoritarian political system dominated by President Daniel Ortega Saavedra and his wife, Vice President Rosario Murillo Zambrana.  Ortega’s Sandinista National Liberation Front (FSLN) party exercises total control over the executive, legislative, judicial, and electoral functions despite the country’s official status as a multiparty constitutional republic.  President Ortega was inaugurated to a third term in office in January 2017 following a deeply flawed electoral process.  The 2016 elections expanded the ruling party’s supermajority in the National Assembly, which previously allowed for changes in the constitution that extended the reach of executive branch power and the elimination of restrictions on re-election for executive branch officials and mayors.  Observers have noted serious flaws in municipal, regional, and national elections since 2008.  Civil society groups, international electoral experts, business leaders, and religious leaders identified persistent flaws in the 2017 municipal elections and noted the need for comprehensive electoral reform.

In April 2018, President Ortega and Vice President Murillo ordered police and parapolice forces to violently repress peaceful protests that began over discontent with a government decision to reduce social security benefits.  The government’s disproportionate response included the use of live ammunition, snipers, fire as a weapon, and armed civilians.  Protesters built makeshift roadblocks and confronted NNP and parapolice with rocks and homemade mortars.  The ensuing conflict left over 325 dead, thousands injured, and more than 52,000 exiled in neighboring countries.  Hundreds were illegally detained and tortured.  Beginning in August, the Ortega government instituted a policy of “exile, jail, or death” for anyone perceived as regime opponents.  Terrorism laws were amended to include prodemocracy activities, and the legislature and justice system were used to characterize civil society actors as terrorists, assassins, and coup-mongers.  Political risk has increased dramatically as a result, and the future of the country’s political institutions remains very uncertain.

The Department of State’s Bureau of Consular Affairs advises that travelers reconsider travel to Nicaragua due to civil unrest, crime, limited healthcare availability, and arbitrary enforcement of laws.  Political rallies and demonstrations can occur with little notice or predictability; some have resulted in injuries and deaths.  The presence of ruling party affiliated members and counter-demonstrators, often directed by the government can lead to an escalation in tension and violence.  Typically, protests in Managua take place at malls, shopping centers, and major intersections or rotundas, impeding traffic flows.  Outside the capital, they often take place in the form of road/highway blockages.  Protests have included the use of tear gas, fireworks, rock throwing, tire/vehicle burning, and roadblocks.

The U.S. government continues to press the Government of Nicaragua to uphold democratic practices including press freedom and respect for universal human rights in Nicaragua, consistent with our countries’ shared obligations under the Inter-American Democratic Charter.

The unreliable government-provided unemployment rate from before the crisis was 3.8 percent in 2017, but think tanks contended that 55 percent of the working population is underemployed and nearly three-quarters of all employment is in the informal economy.  According to think tank FUNIDES, the political crisis and resulting economic contraction has thrown hundreds of thousands of additional Nicaraguans into poverty and intensified the hardships faced by the already-poor.  This is driven primarily by job losses and secondarily by a steep decline in domestic consumption, which has left business owners and commission-based employees with a fraction of their expected income.  According to the National Social Security Institute (INSS), 142,760 jobs in the formal sector disappeared between April and October, a decline of 16 percent.  A joint study with the Nicaraguan Foundation for Economic and Social Development (FUNIDES) and umbrella private sector organization COSEP calculated that 453,000 individuals were laid off or suspended from their jobs between April and December, leaving 127,000 unemployed at the end of the year as a result of the political crisis.

Nicaragua lacks skilled and technical labor and often employers import administrative or managerial employees from outside of the country.  Recent studies show a particular need for technical level workers.  The minimum wage is low and was historically revised every six months through a dialogue process between the private sector, labor unions, and the government. Due to the crisis and the private sector’s participation in the opposition led movement, they were not invited by the government to participate in such discussions.  Due to an impasse, the Ministry of Labor announced that the sectoral minimum wages will remain unchanged until August of 2019.  However, the ministry will continue to review wages monthly to determine whether changing conditions warrant wage rises.  As of March 2018, the monthly minimum wage was between USD USD 134 and USD USD 299, depending on the industry.  Wages in Free Trade Zones are negotiated separately for five-year time periods.

Per Nicaraguan labor law, at year-end employers must pay an equivalent of an extra month’s salary.  Upon termination of an employee, the employer must pay a month’s salary for each year worked, up to five months’ salary.  Some business groups say this provides an incentive for workers to seek dismissal once they have completed five years with a firm.  There are no special laws or exemptions from regular labor laws in the free trade zones.  The CAFTA-DR Labor Chapter establishes commitments to ensure effective labor law enforcement within the country and comply with commitments made to the International Labor Organization.

The law provides for the right of all public and private sector workers, with the exception of those in the military and police, to form and join independent unions of their choice without prior authorization and to bargain collectively.  Workers can exercise this right in practice, though unofficial roadblocks exist for unions not affiliated with the ruling Sandinista party.  The law provides the right to collective bargaining.  A collective bargaining agreement cannot exceed two years and is automatically renewed if neither party requests its revision.  Prior to the socio-political crisis in Nicaragua, strikes were legal but rare due to the government’s alliance with the private sector and control over unions.  Since the political crisis began in April, the private sector has broken its relationship of convenience with the Ortega regime.

While not the result of union activity, three one-day national strikes to express support for democracy paralyzed up to 90 percent of the country’s economic activity in 2018.  However, in a September 21, 2018 speech, President Ortega railed against the “economic terrorism” represented by the three national strikes called by the private sector to protest government violence and repression.  He stated that the next time a strike was called he would send police to force businesses to remain open, and called on party loyalists to stand against enterprises that participate in a future work stoppage.  Political pressure on private enterprise have only accelerated the flight of capital out of the country and the country’s continuing economic decline.

For more information regarding labor conditions in Nicaragua, please see the annual Human Rights Report and the Department of Labor Child Labor report at https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/

The U.S. Overseas Private Investment Corporation (OPIC) offers financing and insurance against political risk, expropriation, and inconvertibility to U.S. investments in Nicaragua. Nicaragua is a member of the World Bank’s Multilateral Investment Guarantee Agency.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

*Source: Central Bank of Nicaragua, ProNicaragua

Note: The IMF’s CDIS site does not have the data available for Nicaragua, nor is such data available from publicly available Government of Nicaragua sources.

Table 4: Sources of Portfolio Investment

Note: The IMF’s CDIS site does not have the data available for Nicaragua, nor is such data available from publicly available Government of Nicaragua sources.

Embassy Managua – Economic Section
Km 5½ Carretera Sur, Managua, Nicaragua
+505 2252-7100
ManaguaEcon@state.gov