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. When applying environmental regulations, the Costa Rican agency that reviews environmental impact statements has been slow in issuing its findings, causing delays for investors in completing projects. The Association of Engineers and Architect’s review of all building plans, Costa Rica’s most prominent example of a regulatory process managed by a nongovernmental organization or private sector association, has not been the subject of U.S. investor discrimination complaints. 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. Comments from the public received by regulators during the regulatory hearing process are generally made public.
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.
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.
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.
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.
The Ministry of Finance’s progressive introduction during 2017 of mandatory universal electronic invoicing (by companies, doctors, lawyers, contractors and similar) to improve tax collection is this year’s major reform affecting companies and individuals operating in Costa Rica. When combined with the ongoing introduction of enhanced monitoring by the financial regulator SUGEF of “Designated Non-Financial Businesses and Professions” (DNFBPs), Costa Rican regulatory and executive authorities are effectively enhancing their ability to understand the activities and financial flows of Costa Rica’s economic actors.
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.
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 appears to be notifying all draft technical regulations to the WTO Committee on Technical Barriers in Trade (TBT), notifying 11 technical regulations in 2017. Costa Rica is also a signatory to the WTO Trade Facilitation Agreement (TFA), ratifying the agreement May 1, 2017. On March 20, 2018, Costa Rica became the fourth country in Latin America to submit its transparency notification to the WTO, a top priority for TFA implementation. This notification will enable U.S. traders to review all import, export, and transit procedures, documents, and requirements on the internet at https://www.tfadatabase.org . U.S. businesses benefit from the increased transparency and streamlining of import and export rules under the TFA. Costa Rica’s Trade Facilitation Council, launched in September 2017 to comply with the TFA, has taken an important role in public-private sector policy coordination.
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 made up 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.
Investors must exercise caveat emptor (buyer beware) since many firms operate in the informal sector of the economy. Appropriate due diligence should include confirming a company’s registry and formal participation in the Costa Rican economy, such as paying taxes and registering all workers with the Social Security system.
Monetary judgments can be made in USD but paid in the local Costa Rican currency.
The legal process to resolve cases involving squatting on land can be especially cumbersome. Land registries are at times incomplete or even contradictory. The Public Registry of Costa Rica is very effective with nationwide information on-line and in real time. However, rural records or the Cadastral Plans (Planos Catastrados) can be outdated and create land and boundary conflicts. Potential buyers should confirm the validity of their land title. 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
While Costa Rica has no major new laws or judicial decisions affecting foreign direct investment, authorities did complete an update of regulations for Free Trade Zones, where most FDI is invested in Costa Rica. (See “Industrial Policy” #5 below). Costa Rican websites useful to help navigate laws, rules and procedures include 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.
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.
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 are 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 Resolucion de Controversias. Costa Rican Association of Engineers and Architects;
- Centro Internacional de Conciliacion y Arbitraje. Costa Rican American Chamber of Commerce (AMCHAM);
- Centro de Arbitraje y Mediacion/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.
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. Costa Rica is part of the New York Convention (1958) on Recognition of Arbitral Awards.
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.
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 World Bank’s “resolving insolvency” ranking within the 2017 “Doing Business” report, Costa Rica ranked #131 of 168 (http://www.doingbusiness.org/rankings ).
In Costa Rica, the function of a credit bureau has been partially supplanted by the Costa Rican Central Bank’s (BCCR) credit reporting system “Centro de Informacion Crediticia (CIC)” through which all members of the Costa Rican financial system both report and query credit history and current status of all borrowers in the system. Nevertheless, some private credit reporting agencies, including Equifax and TransUnion, compete in the Costa Rican market.