By Patrick Connelly

If you are in Costa Rica, don’t expect your pizza to be free if it isn’t delivered in 30 minutes or less. That’s because Pizza Huts in that country have recently laid off dozens of employees, a trend that has spread to all sectors of the Tico economy. There is no question that Costa Rica is feeling the current economic crisis, maybe more so than neighboring countries. Economic production is down, with the last quarter of 2008 recording a 9.3% decline. The GDP was down as well, falling 1.3% in the third quarter, its second straight quarterly drop. And in the past December and January, over 25,000 jobs were lost.

Costa Rica’s bread and butter, of course, is the tourism industry; the country’s economy rises and falls on the influx of foreign dollars. As North America and Europe slide deeper into recession, inevitably the tourism sector will be negatively affected. But to what degree will determine whether or not the economy sinks or floats. So far, the drop in tourists has been large, but not catastrophic. Between September 2008 and February 2009 82,000 less tourists visited the country than the same period in 2007-2008, a, 8% drop. With 54% of the country’s tourists coming from the U.S., it is understandable that the epicenter of the recession would be less willing to take foreign vacations. However, the 8% decrease is expected to drop in the rest of 2009 and level off in 2010.

There is little the Costa Rican government can do to fix the problem in the U.S., but the Arias administration has put together a comprehensive plan to ward off continued economic deterioration. Called the “Plan Escudo” (Shield Plan), it centers around the idea that to secure the economy, the middle class must remain a strong contributor financially. Surprisingly, little attention is paid directly to tourist/expat industry, although shoring up the middle class will certainly maintain the current strong tourism structure and increase investor confidence in the country. The main highlights of the plan are:

1. $117.5 million U.S. added into the government-controlled National Banking System

2. A 2% decrease in mortgage loans on loans of $100,000 or less. The government estimates that over 100,000 middle class small business owners will benefit.

3. Low income housing bonds within the Housing Development Agency

4. Costa Ricans with multiple debt obligations can consolidate all of them into a single mortgage loan with one payment

5. Increased financing for the Public Works office for construction projects (many large projects have stalled in the last nine months), and to the National Food Plan to stimulate agricultural development

6. Social Security pensions will be increased 15% for Costa Ricans

7. Start legislation that would extend the Free Trade Zone, allowing foreign companies to continue to operate there with current tax incentives

8. Provide added funding for small to medium businesses

9. This final highlight deals with the tourism/retiree/expat community more directly. The government wants to make syndicated loans easier to acquire. These loans are essential for large-scale developments aimed at foreigners, which have tapered off since the onset of the recession.

Its clear that the Costa Rican government fears a breakdown in the production and services sectors due to lower profits, and the Shield Plan is a proactive attempt to head off large-scale unemployment. Despite the economic crisis, Costa Rica still enjoys the most favorable reputation among foreign investors and retirees because of its good track record. Additionally, the sudden drop in fuel prices, coupled with an increase in allotted seats on flights from the U.S. to Costa Rica, has made air travel comparable to flying within the United States.

While the numbers will drop slightly in the next few quarters, tourists will still flock to the country and the number of foreigner investors, recognizing that a second home in Costa Rica is still a money-making investment and that the economy is well prepared to handle the recession, will continue to make Costa Rica an affordable, profitable destination.

Photo provided by Lydiat

1. Legal guidance – Buyers should use a real estate company or their own attorney to guide them through the legal process. Costa Rica’s legal system varies from most countries. Buyers must contract a trusted attorney to do the due diligence necessary. Make sure there is no impending tax burdens on the property, zoning, among other things that could affect title or future construction.

2. Get familiar with Costa Rica – Don’t get swallowed up by the beauty. Often times tourists fall in love with the incredible scenery and charming people, but forget that real life is not a permanent vacation. Don’t forget about bills, work, cultural differences. It is a good idea to live in an area before you make a purchase, even if it is for a couple weeks or a month.

3. Research the area thoroughly – Think about your needs. Do you want modern conveniences like Internet, cable TV and air conditioning? Or would you prefer to live in the middle of rain forest with wild animals looking in your window? Costa Rica has a wide variety of climates, from the more dry “pampas” of Guanacaste to the alpine forests of Heredia. Don’t forget about the tropical Caribbean coast. Once you decide the type of climate you like make sure you can find a place that has what’s important to you. Do you like to surf or shop in large malls? Is there a grocery store nearby? What about a bank? If you are looking to go into full immersion, maybe living in a place with very few foreigners is a good idea?

4. Compare and contrast – Once you’ve seen numerous properties, make a check list of the pros and cons of each one. Carefully consider all factors like the quality of the construction and surrounding neighborhoods.Make a list of must have things and other things that you desire, but can live without.

5. Once you’ve made a purchase, get involved with the culture – One of the most important aspects of living in another country is immersing yourself in the culture. Costa Ricans are generally very welcoming and like to teach others about their local culture and expressions. Spend time learning Spanish. It will help you a great deal. Live like a Tico!

Click on the link to view thousands of properties in Costa Rica

I have exchanged a few emails with Bret Dudl, property developer in Costa Rica. He recently gave me some insight into the tax ramifications when buying Costa Rica property.
Here is what he writes:

The advantages of buying property in a corporation in Costa Rica are many, but it’s very important to use the right kind of corporation and to know what the tax ramifications are for each.

• When you buy property in a corporation and subsequently sell it you can avoid the transfer tax

• Corporations in Costa Rica don’t pay income tax.  This can be a major advantage if the corporation is going to retain profits for a future investment

• There is a big difference between a SRL (similar to a U.S. LLC.) and a SA (similar to a C-Corporation).  You use a SRL if you are a US Citizen and want to receive the benefits of pass through losses to offset gains.  You use the SA if you have more than one officer of the corporation and want to sell shares of stock to others.

By Patrick Connelly

The Costa Rican government recently proposed several new measures in regards to immigration that could severely change the retiree and expat situation. Their aim, in theory, is to dually combat the large influx of mainly Nicaraguan migrant workers as well as the increasing stream of North American moving to the country. With the proposed increase in monetary qualifications for both prospective rentistas and pensioners, many would-be North American expats may be turned off by such a move, particularly in the current financial environment.

The Costa Rican immigration authority, Migracíon, has recently been quoted as saying that the immigration situation in the country is “out of control” and that stricter requirements are desperately needed. In response, the government has proposed to increase immigration requirements for pensioners from $600 a month to $2000 a month, while rentistas face an increase from $1000/month to $5000/month. Basically, to qualify for Costa Rican residency you will have be able to prove that your pension or monthly income equals or exceeds the amount for whichever category you fall into, rentista or pensioner.

In light of these astronomical increases, it is clearly evident that potential retirees and expats could get hosed on this one. According to the U.S. Social Security Administration, the average pensioner in the U.S. receives around $1100 a month, far below the prescribed requirement. And, as the U.S. has one of the highest pension averages in the world, these requirements would have a worldwide effect; for example, Canada – a major contributor to the Costa Rican expat and retiree scene – has an average of around $700 a month.

The government in San Jose continues to claim that these requirements are “easily attainable”, which, from their point of view, is understandable. Milk the cow. If a steady cash flow continues to arrive via North America, it is not surprising that a government would try to keep pressing to see what the ceiling is; that is merely good business. However, in this case it would appear as if the proposed requirements far and away exceed any rationality.

And therein lies the silver lining in this possible four car pileup of increased immigration requirements. This is not an isolated incident; in fact, as recently as 2004 a similar bill was introduced. Met with immediate uproar from the expat community, it failed to pass into law. Recently, when informed that the average U.S. pensioner receives $900 less than the desired requirement, a Costa Rican assembly member was unaware of these figures. Now, this could be a simple mistake on part of the Costa Rican government or an attempt to slide one past the North American community; either way, it poses potentially serious problems for would-be expats in Costa Rica. However, the government recognizes the importance of the expat and retiree communities and the income it brings in, and will certainly proceed with caution as to not disrupt such a vital part of the economy. Certainly a situation worth monitoring in the coming months.

Click on the link to read more analysis on how expats are affected by Costa Rican immigration laws

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The Coalition for Development Initiatives (Cinde) projects that multinational companies setting up shop in Costa Rica and those already operating in the country will generate less jobs and reduce their investment in 2009. Gabriela Llobet, Cinde director explained that the capital injection in 2009 will be around $300 million down from $428 million in 2008. Llobet added that in the coming 12 months there will be 5,500 jobs created about 800 jobs less than last year. The main reason for this decline is the economic struggle in the United States. “This year we will grow, but not at the same rate as 2008,” stated Llobet.

Currently there are 162 multinational companies that employ 42,300 people. According to Llobet the manufacturing sector (electronics and automobiles) will be most affected by the economic crisis. These types of companies that start manufacturing plants in Costa Rica and export to the United States are slowing due to the recession. In 2008 half the multinational companies began manufacturing compared to 2007. “After the second quarter of 2008, representatives from these companies pulled back on their visits to the country. We started getting notices that they were putting a hold on projects,” stated Llobet. The United States has bought less products from Costa Rica during the second half of 2008, according to Azofras (Asociación de Empresas de Zonas Francas). Despite the challenging panorama for 2009, Cinde predicts that there is still attraction for service firms. Last year there were 21 new companies starting call centers and interactive marketing companies.

Quotes taken from LaNacion.com
Photo used on this entry taken from flickr, provided by user dan.messing.  http://www.flickr.com/photos/danmessing/1638572407/

By Patrick Connelly

Recently, legislation proposed by the Costa Rican government to dramatically increase the income requirements to become a CR resident have caused quite a stir within the expat and retiree population, and rightfully so. This is no miniscule rise by a few percentage points to boost the bottom line; these increases, including a five hundred percent increase in rentista income requirements, are not only unfeasible but also send out the wrong message. Has Costa Rica, the longtime destination for North American retirees and expats, hit the crest of the wave and no longer wants its gringo neighbors to keep moving southward?

Of course not. It is unrealistic that the government would – or could – sacrifice such a vital stream of revenue. For better or worse, the Costa Rican economy is largely based on the influx of outside dollars; to suddenly pass regulations that significantly inhibit this flow of money would be economic suicide. But that is what these new regulations would seemingly do. Pensioner requirements for residency are slated to increase from six hundred dollars to two thousand, or a mere nine hundred dollars more than the average U.S. pension. Those falling into the rentista category face similar changes, with requirements increasing from one thousand dollars a month to five thousand.

So what has caused this sudden shift in immigration policy? The government in San Jose says that the main reason is national security; with an ever increasing population of Nicaraguan migrant workers, Costa Rica is desperate to get the immigration situation under control before significant social problems arise. Which is a completely understandable goal, given the increased attention both Costa Rica and the U.S. have given to the drug trade on the coasts.

But if security is really the issue here, the government seems to be targeting the wrong crowd, and at the same time sending a negative message to established expats and retirees. If foreigners who cannot meet the proposed requirements – which, according to the U.S. Social Security Administration, would be most people outside of the super-rich – are deemed security risks by the Costa Rican government, what does that make those who made the move to the Central American country under the existing requirements? Are they a perceived security risk? Intentional or not, it is certainly a strange message coming from an usually meek-sounding government.

Costa Rica, of course, is a sovereign country and free to create and tinker with its policies as it sees fit. But the manner in which the government is trying to pass this legislature is flawed. First of all, the requirement increases are simply too great to be feasible, especially in today’s economic climate and with favorable living conditions developing in other countries in the region. If the core reason is money, then slight residency requirement increases would be met with far less opposition and still garner the same outcome: increased revenue.

Additionally, the Costa Rican government has been surprisingly blind to the long term economic consequences of hiked-up residency requirements. Regardless of their status, from expat to retiree, foreigners living abroad inevitably create job opportunity and revenue for the local population. It is similar to what the Detroit automakers are experiencing; close down a Ford factory, and the damage trickles down far past the auto factory workers, all the way to the company that supplies the nuts that go on the wheels. Significantly interrupting the expat and retiree flow will have the same negative effects, from construction labor to lumber and concrete to housekeeping jobs to the small local businesses where North Americans spend their hard earned dollars.

Foreign investments, another major vein of cash flow into Costa Rica, will also be pinched if these requirements are put into practice. Many in the expat community claim that outside investments will all but dry up; however, this seems a bit extreme. Nevertheless, a negative perception of the country stemming from an immigration policy that is practically impossible to obtain for the average retiree would inevitably have adverse effects on foreign investments.

There is nothing wrong, xenophobic, or mean-spirited about a country wanting to control its borders with a tight fist. It is simply good, responsible governing. But there are better ways to handle such a situation, ones that ruffle less feathers yet still accomplish the initial goals. Hopefully for the Costa Rican government, known for its centralism and level-headedness, a revamped version of the proposed legislation will come about that can satisfy both the Costa Rican people and the valuable expat and retiree community, all of which together have a strong and long-lasting relationship.

Read more about the state of Costa Rican immigration here