Banking & Finance 2019 Second Edition

Last Updated September 10, 2019

Costa Rica

Law and Practice


Zürcher Odio & Raven acts for a large number of banking and financial institutions, and has substantial experience in all forms of financial contracts, banking and brokerage, leasing, commodity and financial derivatives for hedging, speculation and arbitrage. The team benefits from a wealth of knowledge in contractual and regulatory matters, and their impact on exchange, tax and financial law. The lawyers are able to adapt their experience with complex structured financing techniques that have evolved in the bank lending and capital markets, providing innovative legal solutions for both domestic and international clients. It has extensive experience in government procurement, administrative regulations and constitutional law, providing expert legal advice on public work concessions, private and public sector partnership and joint ventures, public project finance and infrastructure development.

The government has focused on fiscal consolidation actions during 2019. The approval of the tax reform in 2018 and the introduction of the new VAT in July limited gains, caused liquidity concerns and bolstered fiscal revenue, while weak domestic consumer sentiment and weakness in the global economy dampened local activity.

Due to these adverse conditions, the government made some public policy adjustments with the purpose of promoting lending activity; however, the weak domestic consumer sentiment was stronger, and investment decisions were delayed within different economic sectors.

The high-yield market has not played a significant role. Even though small and medium enterprises are still receiving great government support with the purpose of encouraging internal production, challenges caused by the local fiscal deficit and the international money market trends are increasing the spreads and reducing the demand for credit. Other financing terms and structures remain similar.

Due to the slowing of the economic environment and the strength of the requirements to borrow money from the banking players, some alternative credit providers (other than banks) have seen significant growth in Costa Rica, including retail stores, private lenders, factoring companies and credit card issuers. This growth arises principally from the provision of credit facilities to a section of the population that lacks access to the formal financial system.

Banking continues to be the main source of financing for both domestic companies and individuals, so maintains a central role in the economy.

The regulatory authorities are making efforts to review the existing procedures in order to reduce costs. Under these efforts, the country implemented the International Bank Account Number (“IBAN”), which allows the easy identification of the country where the bank is located and the account number of the recipient of a money transfer. The IBAN also acts as a method of checking that the transaction details are correct, and makes it easier and faster to process cross-border payments, reducing the costs involved.

Additionally, in order to avoid the increase in costs and restrictions to access international loans that would occur if the country is eventually included on a list of nations that need to be supervised due to the lack of a process for implementing measures to prevent money laundering and the financing of terrorism, the government has worked hard to strength the legal, regulatory and institutional framework, with the adoption of norms aligned with international standards. These measures have been also promoted by the interest of the government to become a member of the OECD, and by its compliance with the requirements to achieve that goal. Therefore, a legal reform was approved in which all the legal entities and other legal structures settled in the country (regardless of their nature), the administrators of the resources of third parties, non-profit organisations, and private trusts, including foreign trusts undertaking activities in Costa Rica, must declare their final beneficial owners in the Register of Beneficial Owners.

A new act to regulate the factoring business was enacted and entered into effect, with the purpose of providing more standard and safer rules for all participants.

In addition, there is a bill at the final approval stage which intends to allow foreign banks to establish a branch office and conduct banking activities in the country without establishing a separate local entity, but subject to obtaining a licence from the regulatory authorities as per the requirements to be approved for such purpose. The branch office shall be subject to local regulation and supervision from the regulatory authorities. This reform intends to make it more accessible for foreign banks to compete in the local market, and to offer more financing options to borrowers.

There are no specific requirements or procedures in order for banks and non-banks to be authorised to provide financing to a company. However, domestic banks must comply with certain banking criteria in relation to their clients, such as financial solvency, credit score, and loan to value analysis, as determined by Regulation Sugef 1-05.

Foreign lenders are not restricted from granting loans in any way.

There are no restrictions on the granting of security or guarantees to foreign lenders. Foreign lenders receive the same treatment as local lenders, although foreign lenders must obtain a local identification number in the Public Registry in order to register their guarantees.

There are no restrictions, controls or other concerns regarding foreign currency exchange. The Organic Law of the Central Bank of Costa Rica authorises entering into contracts using foreign currency, and even allows foreign lenders to enforce payment on such currency when obligations should be paid abroad, or if the origin of the resources is abroad.

Borrowers must comply with the use of proceeds approved by the lenders. There are no other restrictions.

Agents and trusts are recognised concepts. Guaranty trusts were commonly used to secure loan transactions in favour of foreign and local lenders due to their capacity to include assets of different natures, and for their low registration costs. Unfortunately, a tax bill was enacted in 2012 that eliminated the tax exemption for registration costs, except for those guaranty trusts that were created to secure the banking operations of local banks.

Assignment and assumption agreements are valid in Costa Rica. In order to transfer the associated security package, the principle that applies states that the accessory rights follow the principal. Therefore, when the loan is transferred, the security package must be transferred as well. Participation agreements are also valid, and are frequently used.

Even though it has been relatively unknown in Costa Rica, debt buy-back by the borrower or sponsor is permitted. Clearly, it is an important mechanism to enable borrowers to deleverage with a discount and, for financial sponsors, to mitigate eventual default in payment of their companies in a much less expensive way than providing equity to their companies.

It is important to confirm that there are no impediments or negative covenants that may prohibit the use of debt buy-backs. Also, there might be tax implications that should be taken into consideration, due to the income generated between the amount paid and the outstanding amount.

Unfortunately, the capital markets are not well developed in Costa Rica, and are seen mostly as debt markets. Almost all development comes from the excessive participation of the public sector as issuer, limiting the resources available for the private sector. For this reason, share transactions represent less than 1% of total transactions annually. Even though there are publicly held companies, an important number of them have been deregistered as authorised issuers, due to the high costs and the regulatory burdens.

In public acquisition transactions, it is mandatory in Costa Rica to carry out a public acquisition offer (“OPA”), which involves, among other things, a process of regulatory authorisation before the Securities Supervisory Agency (“Sugeval”), the shareholders’ approval, and guarantees covering 100% of the tender offer.

This leads to a problem when the buyer is financing the OPA due to the fact that lenders are not willing to finance before closing. In order to avoid this inconvenience, most publicly held companies execute deregistration processes prior to negotiating an acquisition.

The mechanisms are quite different when it comes to the acquisition of a private company, which involves mergers, stock purchases, asset purchases and recapitalisations. In these events, it becomes normal to negotiate long-form documentation for acquisition and financing agreements. It is common to incorporate provisions regarding the buyer’s financing representations, tending to confirm the existence of financial commitments for closing, as well as references about the enforceability of the financing, that there has been no event that would prevent the financing, and that the full amount of the financing will be funded at closing.

It is usual to observe provisions about the seller’s financing representations, such as using best efforts to achieve financing.

Finally, transactions that involve productive assets, or income that surpasses approximately USD15.5 million, require antitrust clearance from the Commission for the Promotion of Competition (“Coprocom”). It is important to mention that, in this procedure, it is quite normal for Coprocom to request a copy of the acquisition documents.

Interest, commission and other financial expenses charged to foreign lenders are subject to a withholding tax, which ranges from 5.5% to 15% (an exception is made in favour of multilateral development banks, or bilateral or multilateral nonprofit development organisations). Payments of principal are not subject to any withholding tax.

As part of the fiscal adjustments, Value Added Tax came into effect (known in Spanish as “IVA” or “VAT” in English), as an indirect tax levied on the consumption of all goods and services in the country by all individuals and entities, at a general rate of 13% and, in some events, at 4%, 2% or 1%.

Capital gains tax also came into effect, creating a new source of funds to solve the fiscal deficit problems of the government.

Even though it is a criminal offence for one person to take disproportionate advantage of another, such regulation does not specify the parameters that define whether or not it is usury, which makes it unenforceable.

It is important to highlight the existence of a bill currently in discussion in the Costa Rican Congress, which seeks to establish criteria that define a usurious credit limit based on the effective interest rates charged, and has faced much opposition from various formal and informal opposition.

The maximum late interest rate that can be charged by financial institutions is up to 200 basis points of the applicable interest rate; any other lender can charge up to 30% of the applicable interest rate.

Real estate, vehicles, inventory, stock shares, certificates of deposit, accounts receivable and other movable assets are among the most common assets typically available as collateral. Guarantee agreements are required to grant priority rights.

Regarding real estate, vehicles and other movable property, guarantee agreements must be granted before a notary public and stated in a public deed, which will then be duly filed and registered before the Public Registry.

Such registration procedure takes up to two weeks. Costs are approximately 0.50% for mortgages and 0.15% for pledges, based on the loan amounts. However, trusts are exempt from stamp duties and transfer taxes, as long as they secure banking operations in favour of local banks.

Non-possessory movable guarantees require the completion of an electronic form, which must be filed at the Movable Guarantees System. This procedure may take a few minutes, and its registration cost is approximately USD10. Possessory movable guarantees do not require this procedure.

Non-compliance with the aforementioned requirements will lead to the loss of priority rights.

The Law of Movable Guarantees allows the creation of floating charges and universal security interests over present and future movable property. Unless otherwise agreed, the movable guarantees extend automatically to all derivatives or attributable movable property. Derivative movable property is understood as that which can be identified physically from the original encumbered property, including but not limited to the proceeds of crop products, while attributable movable property is that which comes from the sale, exchange or pledging of the original encumbered property, such as cash, money deposits in financial institutions and investment accounts, and also new inventory, equipment or appliances resulting from the encumbrance, transformation or substitution of movable property of the original obligation, independently from the amount or sequence of these encumbrances, transformations or substitutions. It also includes the proceeds received from insurance policies, as well as any other right of compensation given by loss, damage caused to the property and dividend payments.

Intercorporate guarantees are valid in Costa Rica. Typically, cross-stream guarantees are a very common way to acquire adequate credit support for economic groups, allowing them to obtain less restrictive financing at lower costs.

The only way for a target to acquire its own shares is to purchase them from profits deriving from a legally approved balance, meaning they shall be paid for from outstanding profits, and not from guarantees or securities given for such purpose. Any disposition taken stating the opposite shall be taken to be invalid. An authorisation from the shareholders' assembly is also required to enable the acquisition of own shares of stock, and the law restricts any purchase surpassing 50% of the total amount of stock capital of the company.

The target is not restricted from granting guarantees or security, nor from providing financial assistance when it is acquired by a third party.

Domestic companies and individuals are not restricted from granting security or providing guarantees to lenders.

The board of directors or shareholders of companies, as applicable, must approve all transactions related to the constitution of mortgages or securities when the assets are equal to or above 10% of the company's total assets. The law requires this approval in order to protect the minority partners.

Lenders are required to execute release agreements, which should comply with the same formalities and procedures as the ones used to create and perfect the security packages.

The first to file and perfect rule prevails in Costa Rica, so a perfected security interest has priority rights over an unperfected security interest. When there is more than one perfected security interest over the same security package, the security interest is ranked according to priority in time of filing and perfection, which entails its registration before the National Public Registry. Subordination agreements are valid, and the priority over a security interest can be contractually varied. Notwithstanding the above, subordination provisions that could adversely affect other creditors will not survive the insolvency procedures of borrowers incorporated in Costa Rica.

Security interests are typically obtained from mortgages, guaranty trusts, pledges and movable guarantees. The perfection of the security interest is achieved by recordation at the Public Registry.

In order to enforce a security interest against other creditors, the security interest must be properly created and perfected. Lenders can enforce the collateral in the event of a borrower’s default under the loan agreements, with failure of payment being the most common and reasonable event of default accepted by the courts. The enforcement of collateral by other events of default could face some obstacles, such as a review by the courts in order to determine the substance of the enforcement.

The appropriation by the lenders of the collateral (“pactum commissorium”) is prohibited. Upon the occurrence of an event of default, lenders can request a public sale of the collateral by filing a foreclosure claim before the courts (for example, in the case of mortgages), or before a notary public, sworn broker or trustee if it has been agreed and accepted by the debtor in the guarantee deed (for example, in the case of guaranty trusts, pledges or movable guarantees).

The law sets forth a priority list that specifies the order in which different creditors with a security interest on the same asset must be paid from the proceeds gained from the foreclosure. This list is also applicable in the event of bankruptcy and insolvency.

Loan agreements with provisions relating to the governing law of the contract will be upheld in Costa Rica. However, security packages over property located in Costa Rica must be governed by local law, in which case such provisions are not acceptable. Consequently, claims related to such security packages must be filed before the Costa Rican courts and resolved pursuant to local law.

A judgment validly obtained under the laws of a foreign court or an arbitral award will be enforced by a Costa Rican court without a review of the merits thereof, following the exequatur procedure provided in the Civil Procedure Code. The exequatur petition must be filed at the Supreme Court and shall comply with the following requirements:

  • an authenticated copy of the judgment/award and a translation into Spanish must be provided;
  • the defendant must have been notified and summoned according to the laws of the jurisdiction where the judgment/award was issued, and the defendant must have received proper notice about such judgment/award;
  • the matter resolved must not be under the exclusive competence of the Costa Rican jurisdiction;
  • there must not be an ongoing trial in respect of the same matter, and no final judgment/award may have been passed in respect to the same matter in a Costa Rican court/arbitral;
  • the judgment/award must also be executable in the jurisdiction where the resolution was issued; and
  • the judgment/award and its effects must not violate Costa Rican public order.

Foreign and local lenders receive the same protection under the law. Bankruptcy/insolvency proceedings usually affect the ability of any lender to enforce its rights under a loan or security agreement, given that such enforcement might be attracted by the bankruptcy/insolvency process together with other creditors. Additionally, the enforcement of certain events of default – other than the lack of payment – could affect the lender’s ability to enforce its rights and the collateral when such events do not adversely affect the creditor’s interest in a real and tangible manner. In such case, the importance of such event could be subject to a review by the courts in order to determine the merit of the enforcement.

There are two legal procedures in place to rescue or reorganise a company with financial problems.

Firstly, the Judicial Procedure for Administration and Reorganisation for Judicial Intervention is a pre-emptive procedure for companies that are in a surmountable financial crisis, where closure would cause harmful social effects. A specialised court of justice determines the admissibility of this procedure, which is requested by the debtor or any creditor.

Secondly, under the Judicial Procedure for Pre-Emptive Agreements, the debtor proposes a payment agreement to its creditors. A specialised court will decide whether the company is suitable for such agreement, or if bankruptcy must be declared.

There is also a special administrative procedure established only for financial entities, handled by Sugef. This Administrative Procedure in Case of Financial Instability Situations is also a pre-emptive procedure, and is imposed when a financial institution exhibits an instability as provided for by Sugef. Sugef appoints a comptroller that will take charge of the financial institution, according to the rules of the Organic Law of the Central Bank of Costa Rica. This intervention is temporary and cannot exceed a one-year term.

The impact of insolvency takes two major forms. First, any collection procedure must be brought to the same court where the bankruptcy proceeding is being held, which is known as Jurisdiction Attraction (“Fuero de Atracción”), unless it is a procedure with a privilege over a specific collateral, and its public sale has been duly set. This could also delay the collection process. The second major impact is that a new appraisal of the security package must be made, even though both parties may have agreed a different base amount in the loan agreements. This aspect may result in the security package being less desirable for public sale. Other impacts that may be experienced include the obligation to legalise all credits before the bankruptcy court; early termination of the obligations; suspension of interest charges on the obligations, except for procedures with privilege over a specific collateral; and the impossibility of compensation. The period that applies to the processes in question also has to be taken into consideration, being three months before the request for bankruptcy, which may be extended to six months if there is enough evidence of prior bankruptcy. This means that every act made by the debtor during this period may be considered to be defrauding the creditor.

Creditors are paid in the following order:

  • creditors with privilege over a specific collateral;
  • tax and municipal authorities for taxes that precede the bankruptcy declaration by one year, over the value of the assets subject to those taxes;
  • the mortgage creditor for the value of the real estate property;
  • the movable guarantee creditors for the value of the movable property;
  • creditors who applied their right of retention of the asset, for the value of the asset retained;
  • the landlord of a rustic or urban property, for the value of the amount owed for the lease;
  • alimonies;
  • workers’ credits;
  • landlords’ and tenants’ credits;
  • credits derived from the bankruptcy procedure; and
  • common credits.

There is no concept of equitable subordination or similar in Costa Rica.

There are various risk areas. First, a collection process has to be filed before the bankruptcy court in order to be initiated, causing a probable delay in the collection process and in all the other procedures against the debtor that have already been filed in other courts.

In addition, as noted above, a new appraisal of the security package must be made, even though both parties may have agreed a different base amount in the loan agreements.

Other risks could include the suspension of interest charges on the obligations, entailing that any interest charge shall cease at the time the bankruptcy is declared, with the exception of creditors with privilege over a specific collateral, and depending on the outstanding balance left from the public sale.

Finally, the principle known as “par conditio creditorum” is also applied for creditors that do not have a privilege over a specific collateral (also known as common creditors), which depends on the liquidation of the remaining assets, in order to distribute the outstanding amount between them, and may suffer a loss if the cash is insufficient. All losses are proportional between all common creditors.

The concept of project finance has been known in Costa Rica for more than 20 years, particularly after the enactment of the Concessions for Public Works and Utilities Law, and has been used in the public sector for transportation infrastructure (roads, ports and airports) and power generation. It has also been used in the private sector for large real estate development projects, particularly in the commercial and tourism markets. Despite not being a well-known or frequently applied concept, the urgent need for financial and administrative instruments to undertake large public infrastructure projects in Costa Rica has led to an increasing amount of project finance in the country.

Public-private partnerships (PPP) are known, but are not used as frequently in Costa Rica as they should be. Although there are no legal obstacles for these types of contracts to be executed under regular existing contract-related legislation, Costa Rica has no specific legislation regulating these types of contracts, with the exception of some regulations at a level lower than the law. However, there are exceptions in some sectors for special types of contracts, such as the power generation sector, which is regulated by a special law, or the public works and services concessions law that even permits private initiatives or unsolicited proposals for contracts where concession type contracts are used.

Despite this, Costa Rica has significant experience in public-private co-operation contracts with a clear distribution of risks between the contractor and the State, primarily in the roads, ports and airports sectors, and there is a current project of this type in the railroad sector. In addition, we are beginning to see cases of public buildings, particularly hospitals, where, along with construction, there are tenders opened for equipment, maintenance and, in some cases, the operation of the units.

In Costa Rica, government permission is not required to undertake a project finance transaction, nor is any special administrative registration.

However, for the administration must prepare and hold bidding rounds for public works projects and public works with utilities.

The terms of reference for the bidding round or the contract between the administration and the contractor usually regulate the kind of financing required for the construction and operation of the works, and that is where project finance is structured.

Except in PPP projects, the nature of which mean alternatives may be possible, the structuring of the project – including matters related to financing – is developed by the public administration, while the private subjects interested in the contract only intervene through objections to the terms of reference by which, in some cases, it is possible to suggest other sources of financing for consideration under the tender documents.

Projects developed under the concept of “project finance” are found in the public works and utilities sector in Costa Rica.

In the power generation sector, the Costa Rican Electrical Institute (“ICE”) is responsible for undertaking such projects.

In the transportation sector, including roads, ports and airports, the Ministry of Public Works and Transportation is the regulator, although other State bodies also participate in these types of projects, including the National Concession Council, the Atlantic Coast Port Authority (“JAPDEVA”), the Costa Rican Institute for Pacific Ports (“INCOP”) and the Civil Aviation Technical Council (“CETAC”).

Recently, the development of these projects has begun in the public buildings sector for State Universities and some Costa Rican Social Security Administration (CCSS) hospitals and health centres.

Regarding the project company, the companies that participate in project finance projects are typically created and used exclusively to execute and administer the project, but this aspect is usually regulated through the terms of reference for the contracts and therein lies the importance of participating at this point in order for the State to be able to adequately structure these businesses.

In these cases, the administration holds bidding rounds for the project and the tenders are awarded according to subjective bidder criteria, such as their experience and their technical, financial and environmental capability in projects similar to the project under tender. Accordingly, it is important to review these criteria to ensure that single purpose companies in the project will prove their experience and the technical and financial capacity of their parent companies.

In other cases, the parent companies use a subsidiary to participate in the tender, which bids directly or through a group of companies. The Costa Rican Administrative Contracts Law refers to such a group of companies as a “consortium", and the different companies comprising the consortium are jointly and severally liable for the administration. Consequently, this figure must be studied from the moment the administration writes the terms of reference, because the joint and several liability of the parent companies will generate issues for some of these parent companies. 

In addition, in some cases, the terms of reference require the company thus created to have a minimum amount of capital duly subscribed and paid and, in other cases, single purpose companies have been requested to provide guarantees from their parent companies. This has primarily occurred in contracts for public works concessions.

In the case of private power generation for sale to ICE, the law stipulates that at least 35% of the capital stock subscribed and paid must be owned by Costa Rican individuals. There is no restriction on bank financing with regard to nationality.

Finally, the vast majority of project finance projects relate to public works and utilities involving assets within the public domain. Since they are affected by this regime, neither the public works nor the real property on which they are built may be used as guarantees in favour of banks or other creditors. Therein lies the importance of structuring them as project finance projects, whereby it is possible to use the contractor’s future income flows as a guarantee, and even allow the use of project company shares as guarantees, which is usually done through guarantee trusts.

Banking loans and project bonds are the typical financing sources for project financings, and trusts are mainly used to structure the project and to secure such financings, as collateral. In some cases, there have been attempts to use pension funds and mutual funds through the stock market, but they have not been successful, especially for the pre-construction stage and during construction, although it is legally possible to do this during the exploitation stage.

The use and exploitation of natural resources is highly restricted under the constitution, requiring special legal authorisation. The use and exploitation of natural resources is usually undertaken by concessions granted under a legal framework.

Companies must comply with a broad spectrum of regulations regarding natural resources, public health, social security and occupational safety.

Because of their size and impact, the majority of project finance projects require the preparation and approval of an environmental impact study. The Technical Environmental Secretariat (SETENA), under the Ministry of the Environment and Energy, is the authority that confers environmental approval upon these types of projects.

Article 75 of the Costa Rican Constitution states that the official religion of the country shall be the Catholic Religion. However, people are allowed to practise other religions insofar as they do not stand against universal morality or good manners. However, Islamic finance principles and policy have not developed in Costa Rica.

There is no regulation of the regulatory and tax framework related to the issuance of sukuk in Costa Rica.

There is no regulation regarding Shari'a-compliant products in Costa Rica.

Sukuk instruments are not regulated, so sukuk holders will be treated as common creditors in insolvency or restructuring proceedings.

There are no cases on jurisdictional issues, the applicability of Shari'a or the conflict of Shari'a with the local law that are relevant to the banking and finance sector.

Zürcher Odio & Raven

Plaza Roble Corporate Center
Los Balcones Building
Escazú, San José
Costa Rica

+2201 3800
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Law and Practice


Zürcher Odio & Raven acts for a large number of banking and financial institutions, and has substantial experience in all forms of financial contracts, banking and brokerage, leasing, commodity and financial derivatives for hedging, speculation and arbitrage. The team benefits from a wealth of knowledge in contractual and regulatory matters, and their impact on exchange, tax and financial law. The lawyers are able to adapt their experience with complex structured financing techniques that have evolved in the bank lending and capital markets, providing innovative legal solutions for both domestic and international clients. It has extensive experience in government procurement, administrative regulations and constitutional law, providing expert legal advice on public work concessions, private and public sector partnership and joint ventures, public project finance and infrastructure development.

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