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Foreign Investment in Costa Rica

 

Rechtsanwalt Dr.Dirk Roger Rissel
 

* * *

Part 1 (1. Legal bases for foreign investment, 2. Rights and protection of foreign investment)

1. Legal bases for foreign investment 

In Costa Rica there is no foreign investment law. Costa Rica, however, has signed several international agreements with the Federal Republic of Germany, the United Kingdom of Great Britain, Nortehrn Ireland and Mexico. These agreements iclude express definitions of foreign investment.

In the Bilateral Treaty on the Promotion and Reciprocal Protection of Investment with the Federal Republic of Germany[1] it has been established in Article 1 that the concept of "investments" includes all classes of goods, particularly:

a) The ownership of movable and immovable goods and other real rights such as mortgages and other securities;

b) Shares and other types of securities in companies; 

c) Rights to funds used to create an economic value or to benefits which have an economic value; 

d) Intellectual property rights, particularly copyrights, patents, utility models, industrial models and designs, trademarks, trade names, industrial and trade secrets, technical processes, know-how, and goodwill;

e) Concessions granted by public law agencies, including exploration and exploitation concessions;

A modification of the way the goods are invested does not affect their nature as invested capital. 

Similar definitions were inserted in the treaties signed with France and the United Kingdom of Great Britain and Northern Ireland. 

On the other hand, in the Chapter on Investment of the Free Trade Agreement with Mexico, investment is defined as "all types of goods and rights of any kind, acquired with resources transferred to the territory of one Party, or reinvested there, by the investors of the other Party, such as:

a) Shares and any other form of participation in the capital stock of companies established or organized in conformity with the legislation of the other Party;

b) Rights deriving from all types of investments made with the objective of creating economic value (or obligations, credit and rights to any benefit that have economic value);

c) Movable and immovable property, as well as other real rights such as mortgages, securities, usufruct and similar rights;

d) Intellectual property rights; and 

e) Rights to carry out economic and commercial activities authorized by legislation or by virtue of a contract."

In addition, this chapter includes a definition of "an investor’s investment on one Part", which is "the investor’s investment,

property, or low control on one Part executed on the other’s Part territory. In the case of an enterprise, an investor owns an investment on one Part if the investor owns the titles of more than 49% of its social capital. An investment is under an investor’s control on one Part if the investor is authorized to designate most of the directors or is authorized to manage the operations in any other way.

In Costa Rica no registered records or mechanisms exist to clearly identify both the foreign investor and the nature of the

investment.

Certain restrictions are imposed on the executive body or other staff of an enterprise in Costa Rica. Article 13 of the Labor Code prohibits all employers from employing in their companies, regardless of the kind of company, less than 90% Costa Rican workers.

This percentage may be increased or reduced by up to 10%, during a period not to exceed five years, when the Ministry of Labor and Social Security deems it indispensable. This percentage may also be modified in cases of immigration authorized and controlled by the Executive Power or contracted by the same when immigrants enter the country to work in charitable or educational institutions or other institutions of undoubtedly social interest; or in the case of Central American nationals or

foreigners born and established in the country.

When a company has no more than five workers, only four of them must be Costa Ricans. 

This rule, however, is not applicable to managers, directors, administrators, supervisors and general heads of companies, provided there are no more than two of each.

Notwithstanding the above, companies are free to enter into contracts for professional services without regard to nationality requirements, cases in which the labor laws are not applicable. On the other hand, these contracts are governed by ordinary civil law leaving the companies free to contract. 

Finally, with respect to the question of the conditions under which the executive or other staff contracted abroad may remit their earnings abroad, there is no restriction in Costa Rica on remittances of capital and profits. Executives and other staff may therefore use the facilities offered by the local financial system.

2. Rights and protection of foreign investment

2.1 Expropriation 

In the past the governmental expropriation of land (predominatly for the purposes of establishing or enlarging national parks or indigenous reserves) has been an unavoidable hazard. 

From the perspective of the interests of the foreign investor in Costa Rica, there are two constitutional provisions that limit the framework within which expropriation is regulated, namely, Articles 19 and 45 of the Political Constitution. Whereas Article 19 recognizes the principle of equality of nationals and foreigners with respect to the protection of their individual guarantees, Article 45 establishes the basis of the juridical regime regulating property in the country.

With respect to the constitutional basis for expropriation, Article 45 stipulates: 

"Property is inviolable; no one may be deprived of his property unless it is for legally proven public benefit after indemnity pursuant to the law. In case of war or internal unrest, the indemnity does not have to be paid in advance. Nevertheless, the corresponding payment shall be made at the latest two years after the state of emergency ended.

On grounds of public necessity, the Legislative Assembly may, by a vote of two thirds of its full membership, impose limitations of social interest on property."

The constitutional provision cited above distinguishes two fundamental requirements for expropriation to proceed:

a) There must exist a public interest, legally proved, that justifies the act of expropriation, and 

b) Prior to taking possession of the expropriated property, the State must indemnify the affected party on the terms established in the law.

Prior to 1995, no single law governed expropriation matters in Costa Rica. On June 8, 1995, the Law on Exproriation  (Nueva Ley

de Expropiación) was signed into law (Law No. 7495 of May 3, 1995). The new law aims primarily at ensuring that

expropriations take place only after full and adequate payment is made, regardless of the nationality of the holder of such

property.

2.2  Determination, value and settlement of compensation in case of expropriation

With respect to indemnity to be paid by the State, the new Law on Expropriation uses the concept of "fair price."

Article 1 of said Law establishes: 

"This law regulates forced expropriation on grounds of legally proven public interest. Expropriation is based on the exercise of the right of jurisdiction of the Public Administration and includes any form of alienation of private property or rights or legitimate patrimonial interests, whoever their owners may be, by the prior payment of an indemnity that represents the fair price of the expropriated goods." (Article 1, Law on Expropriation No. 7495 of May 3, 1995).

Fair price will be determined by an appraisal that the administration requests from the respective specialized dependency or, if there is none, from the General Bureau of Direct Taxation.

(Article 21) The appraisal in question shall indicate in detail the criteria on which the value assigned to the expropriated property is based as well as the methodology used. In addition, said appraisal shall contain:

a) In the case of real property: "the independent appraisal of the land, crops, construction, leases, commercial rights, right to exploitation of deposits, and any other goods or rights susceptible to indemnity; and (Article 22)

b) In the case of movable property: "each one will be separately appraised indicating the features that had a bearing on itsappraisal." (Article 22).

It is important to indicate that appraisals only take into account permanent real damages, excluding future acts and expectations of a right that may affect the property and the increased values derived from the project that is grounds for the expropriation (Article 22).

It must also be mentioned that the amount of the administrative appraisal may be challenged in the judicial chamber, during the special expropriation process established in Chapter III of the new Law on Expropriation.

With respect to the form of payment, the new Law clarifies one of the points that had formerly been most controversial. In

relation to this point, and on the possibility of the indemnity being paid in bonds as jurisprudence had previously admitted, Article 47 expressly stipulates:

"Fair price shall be paid in cash, unless the condemnee accepts payment in bonds. In this case, these bonds shall be for their real value, which the National Stock Exchange will certify through its agent, or, in his absence, by a sworn broker." (Article 47).

With regard to the question if the authorities can take possession of expropriated assets prior to paying compensation, Costa Rican jurisprudence has traditionally considered that the prior indemnity stipulated in the Constitution referred to the fact that the same "is only due from the moment of alienation. The prior feature in this case must be understood as before taking possession of the expropriated property." (APUY SIRIAS [Luis Arnaldo], Analysis and comments on legal texts on expropiations proceedings in Costa Rica [Análisis y comentarios de los textos legales sobre diligencias expropriatorias en Costa Rica], University of Costa Rica, Law School, Thesis to receive the degree of Bachelor of Arts, San José, 1976, p. 25.) The new Law on Expropriation in Article 31 incorporates the old jurisprudential principle in the letter of the law. That provision stipulates that, in the initial resolution of the expropriation proceeding in the judicial chamber, the judge "shall grant the condemnee a period of two months to vacate the property, provided the administration has deposited the amount of the administrative appraisal...." (Article 31, Law on Expropriation).

Thus there can be no eviction without prior deposit of the administrative appraisal. If the condemnee considers that the deposit does not correspond to the fair price, the administrative appraisal may be challenged by judicial process. In that case, there could be eviction since the amount of the appraisal had already been deposited. Nevertheless, once fair price has been determined in court, if such price should be greater than the administrative appraisal, the condemnee shall not only be granted the difference between the fair price and the appraisal, but also the interest on the appraised value. In this regard, Article 11 of the Law on Expropriation establishes: "The administration is obliged to recognize interest to the condemnee, at the existing legal rate, from the date of appropriation of the property until the date of payment..." (Article 11).

3. Recent expropriation cases in Costa Rica

An expropriation case involving Costa Rica has recently been solved by the International Center for Settlement of Investment Disputes (ICSID). On February 17, 2000, Costa Rica has been ordered to pay US$ 16 million for the expropriation of the farm ´Santa Elena´ in the Guanacaste region. The farm has been expropriated in 1978 on the basis of the then valid Decree 8550-G.

The parties of the dispute had agreed in November 1994 to submit the dispute to arbitration. On March 1995, Costa Rica has initiated arbitration proceedings with the ICSID to solve its dispute with the owner of the land, the company Desarollos de Santa Elena S.A. In the arbitral award of the ICSID Costa Rica has not only been ordered to pay the above-mentioned indemnity, but also to bear the costs of litigation which amount to US$ 4 million plus the cost of international litigation. This amount includes the fees of the attorneys hired in Washington for the defence and half of the fees that incurred to ICSID for the arbitration proceedings including the payment of the three judges.

 


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