Choosing a Corporate Structure to do Business and/or invest in Real Estate in Costa Rica

Now that Costa Rica has become the hub of investment opportunities, many foreigners now jubilant of the fact that they can invest in business ventures by means of ownership of a corporation. This is a technique that we suggest as well since owning real estate by way of a corporation suggests that the proprietor will be in a flexible position when it comes to areas like estate planning and tax management. Ownership through a corporation means that the investor, in case of a share ownership, can assist his heirs to avoid a long standing probate procedure when it comes to estate planning. Factors like tax management and representation also become more fluid because, in case of the former rules in relation to corporate expenses are comparatively flexible and when it comes to the latter, shareholders meetings can give foreign investors the power of authorization so that local presence is not required.

A question that is often asked by our clients is whether they should use a Costa Rican corporate entity or one that is currently controlled by individuals abroad. In most cases, it is advisable to use of a local entity. This is because registration procedures may become troublesome when it comes to foreign corporate entities owning land and businesses in the country. Clients will find the use of local entities more suitable since negotiation of contracts involving private parties in such cases pose the least number of problems. In case a foreign entity is being used, it must be noted that registering with the Costa Rican Commercial Register is a must and the least that should be done is to register specific powers of attorney with the Costa Rican Commercial Register. In both cases, the procedure is formal and may require several weeks.

To avoid unnecessary delays and problematic procedures, it is suggested that clients make use of a local corporate entity. Despite the fact that Costa Rican commercial law has a variety of corporate formations, only two give foreign investors the flexibility of having structures similar to that of limited liability companies to which they are used in their countries of origin. These two corporate forms are known as the “Sociedad de Responsabilidad Limitada” and the “Sociedad Anónima”. Both forms require shareholders to be responsible only for their participation in the company’s social capital while their personal assets remain protected from potential creditors that the company may have.

The “Sociedad de Responsabilidad Limitada” is also known as “S.R.L.”, “Limitada” or “Ltda” and is supposed to be much simpler a form compared to “Sociedad Anónima”. The regulations in case of the former are more comfortable to follow and hence are more attractive to potential investors. There are certain special features of S.R.L which appeal to every probable investor and they are as follows:

- Shares cannot be transferred to non-shareholders without prior consent from other shareholders, who have the right to refuse the purchase of such shares initially and accordingly these shares may be sold to non- shareholders.

- These companies require, for their administration, no more than one individual (Manager). Consequently, this is regarded to be appealing in case the investor does not want to use and register (making public) the names of additional individuals to form part of what in case of “Sociedad Anónima” would be called Board of Directors.

 

The most widely used corporate structure in Costa Rica is the “Sociedad Anónima”, also referred to as S.A. This has been created in a way so as to afford ample amount of flexibility to its users. Generally, “Sociedad Anónima” can have any type of social capital and this capital can be divided into any amount of shares the investor wants. “Sociedad Anónima” has numerous features among which the ones given below are the most important:

 

- Since the positions of President, Secretary and Treasurer are legally mandatory and must be occupied by three different individuals, this structure must have a Board of Directors of at least three members. A Comptroller must also be a part of the functioning team as well as one Comptroller, who must not hold any powers of attorney on behalf of the company.

- Shares are represented by physical documents and more than one of them can be included in a certificate. They can be transferred to any non-shareholder without approval of the other shareholders. Transfer is made through a combination of a transfer contract, the endorsement of share certificate(s) and an entry in the company’s Shareholders Registry Book.

_ Its By-Laws can be changed at any time, as well as any powers of attorney existing for the company, by means of a Shareholders Meeting. Such meetings can be held in the presence of all the shareholders or with individuals appointed by a proxy issued by them.

- It is possible to establish special features for the protection of minorities and their voting rights.

- Their legal representatives (holding powers of attorney to act on behalf of the company) are liable for any actions taken against the interest of the company and/or its shareholders.

- They must have three corporate books (shareholders meetings, shareholders registry book and board of directors meeting book) and three accounting books. These books must be authorized by the local tax authorities and are required if any changes are need to be incorporated in the company’s By-Laws or in its power of attorney structure since no shareholders meeting can be held without being recorded in the specific book authorized for such purposes.

 

If a company has to operate in Costa Rica, it has to additionally register with the Tax authorities. In case a company is not involved in any business activity in a certain fiscal year (this happens when a company is treated solely as a vehicle to hold assets), no formal registration is needed, though a year end declaration is required from the organization. This declaration ensures that the company doesn’t have to pay a hefty penalty.

 

In Costa Rica companies declaring taxes, maintain a fiscal year ranging from October 1 to September 30 every year, though filings can be made till the end of the year. Companies related to foreign entities can have the privilege of working according to a fiscal year decided by their countries of registration.

 

As a concluding advice it may be said that the choice of a corporate structure should be made ideally at the time of investment in a business or the creation of a project. This decision directly affects the possibility of the said business to become a success or failure.