Costa Rica: Legal Market Overview

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(Costa Rica, July 2020)

Costa Rica is the most stable country in Central America, not only because the economic growth it experienced during the past years but also because of its political stability through decades. Recently, in May 2020, the members of the Organization for Economic Co-operation and Development (OECD), unanimously decided to invite Costa Rica to become a member of the Organization. With this decision, the country will become the fourth nation in Latin America and the Caribbean to be a member, which will have a very positive impact in the country’s investment climate as it is a guarantee of transparency and stability for investors.

As most of Latin American countries, the pandemic has impacted Costa Rica, specially the tourism industry since the Government decided to close borders on March 18, 2020, just in the middle of the high season. However, the quick reaction of the Government also facilitated the control of the number of cases during the first months and has kept the mortality rate as one the lowest in Latin America. This will certainly put Costa Rica back on track when borders reopen, as a safe destination not only to vacation, but also to work, live or retire.

In addition, the sanitary measures taken by the authorities permitted the companies to continue operating during the pandemic regardless of the type of industry, as an example, 98% of the foreign companies operating in the country were able to shift to work from home in 1 week after the emergency declaration. The rapid response of the Costa Rican authorities guarantees business continuity and will definitely consolidate the path of Costa Rica as an excellent option for nearshoring business divisions, that before the pandemic were located in less convinient locations.

The response to the Covid-19 situation has also accelerated the approval of a significant group of laws and regulations, one of the most important is the possibility for employers to suspend labor contracts without salary payment and the reduction of work shifts. Also, an amendment made possible for the employees affected by these measures to withdraw a special worker’s fund as a relieve for the crisis effects. In the labor law area, there is also an initiative in the Legislative Assembly which pretends to implement flexible work shifts, a bill of law that has good possibilities of been approved in the ‘new normal’ context.

The pandemic has also accelerated the digitalization process of many Government institutions, improving the use of online platforms and electronic means to file applications and requests. Even the judiciary has implemented procedures for virtual hearings. All these changes will certainly be reflected in the country’s competitiveness and translated into better business environment for the companies operating in Costa Rica.

In the finance sector, an important number of financial institutions decided to provide to borrowers a three-month grace period on payment of credits at the beginning of the pandemic. More recently, a law to regulate the interest rate applicable to micro-credits was passed by the Legislative Assembly. From a tax perspective, the Legislative Assembly passed in April a law to postpone the payment of VAT and income tax, however, now that effects of the Covid-19 are hitting the economy, the Government is analyzing best alternatives to reduce the fiscal deficit which might mean a tax increase.

The crisis has also created business opportunities in different fields. Given the sanitary measures many of the existing retailers decided either to migrate their business or to add the e-commerce as an alternative for their customers, this type of structure represents a new challenge from a regulatory and legal perspective.

At this point of the economic situation created by Covid-19, the Costa Rican Government is working around a plan to reactivate the economy, which include infrastructure projects, promotion of hemp production, credits for small businesses and attraction of foreign direct investment for different type of projects.

Contributed by:

Adelina Villalobos, Partner, BLP

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