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Foreign Subsidiaries: Costa Rica Best

Best rules for starting a foreign subsidiary: Costa Rica and Peru. Worst: Venezuela and Ecuador.


BY CHRONICLE STAFF

 

Costa Rica has Latin America’s best regulations for opening a foreign business, while Venezuela has the worst, according to a Latin Business Chronicle analysis of the World Bank’s new report Investing Across Borders 2010.

Countries in
Eastern Europe and Central Asia and Latin America and the Caribbean have fewer equity restrictions on [foreign direct investment] ownership than economies in the other regions,” the bank says.

 

The report includes data on 87 countries worldwide, including 14 in Latin America.  It looked at four policy areas of policy that impacts foreign direct investment in a country -- investing across sectors, starting a foreign business, accessing industrial land, and arbitrating commercial disputes. The report is based on a survey of over 2,350 expert respondents in the 87 economies between April and December 2009. Respondents include lawyers, accounting and consulting firms, investment promotion institutions, chambers of commerce, and law professors.

 

Costa Rica scores 73.7 on the bank’s Ease of establishment index, which measures the regulatory regime for establishing a foreign-owned subsidiary. Costa Rica’s score is the same as EU member Austria and almost as high as the average in high-income countries of the OECD (77.8) and in Eastern Europe and Central Asia (76.8).

Peru has the second-best regulations, with a score of 72.5, which was better than countries like Spain, Korea and Ireland.


Honduras ranks third in Latin America, with a score of 68.4, with Colombia closely behind at 68.4.  Meanwhile, Mexico and Argentina scored 65.8 and 65.0, respectively.  Brazil ranks as the fifth-worst country in Latin America.

 

Venezuela’s score – 42.5 – was the 8th-worst worldwide. The score is lower than the average in Sub-Sahara Africa and than the one for countries like Burkina Faso, Cambodia and Uganda.


When looking at the procedural burden that foreign companies face when entering a new market, The World Bank also looked at two other factors – number of procedures involved in establishing a wholly foreign-owned subsidiary and the number of days needed to go through each of the procedural steps for establishing a subsidiary of a foreign company.

In most cases, the three factors – ease of establishment index, procedures and time – are consistent. However, there are some major exceptions.
Haiti, for example, ranks as the worst country in Latin America and second-worst globally when it comes to the number of days needed days to establish a foreign-owned subsidiary – a whopping 212 days.

Yet, it gets a score of 63.2 on the Ease of establishment index, which is better than countries like Chile.  “Haiti is the only …country where the minimum capital requirement is more favorable for foreign than domestic companies,” The World Bank says.  And if a wholly foreign-owned company is registered, there is no specific minimum capital requirement and no requirement to have a Haitian shareholder on the board of directors.

 

Here is the report’s key findings for the two best countries on the Ease of establishment index, the two worst countries and other key markets like Brazil, Chile and Mexico:
 
COSTA RICA

 

It takes 14 procedures and 63 days to establish a foreign-owned limited liability company (LLC) in Costa Rica (San Jose). This is shorter than the regional average for Latin America and the Caribbean, but longer than the IAB global average. Full foreign ownership is allowed in Costa Rica. However, LLCs need a minimum of 2 shareholders. In addition to the steps required of a domestic company, a foreign company establishing a subsidiary in Costa Rica must provide an authenticated copy of the parent company’s documents. If it wishes to engage in international trade, it will also need to register with the Ministry of Foreign Relations and Foreign Trade in order

to receive an import and export identification number (this can be submitted online). Foreign companies do not need an investment approval and are free to open and maintain a bank account in foreign currency. There is no minimum capital requirement for foreign or domestic LLCs in Costa Rica. However, 20 percent of the capital stock of the company must be paid in full prior to establishment.

 

PERU

It takes 11 procedures and 43 days to establish a foreign-owned limited liability company (LLC) in
Peru (Lima), faster than the regional average for Latin America and the Caribbean and in line with the IAB global average. Although foreign ownership is allowed, a company needs a minimum of 2 shareholders and its legal representative must be a resident of Peru. In addition to the procedures required of a domestic company, a foreign company must translate and authenticate the parent company’s documents abroad. Foreign companies investing in Peru do not need an investment approval. However, it is mandatory to register a foreign investment with Peru’s investment promotion agency, Proinversion, in order to be able to repatriate funds at a later date. Companies in Peru are free to open and maintain a bank account in foreign currency. There is no minimum capital requirement for companies in Peru. However, 25 percent of the declared capital must be paid in at the time of establishment.

MEXICO

It takes 11 procedures and 31 days to establish a foreign-owned limited liability company (LLC) in
Mexico (Mexico City). This process is among the shortest of the IAB countries in Latin America and the Caribbean and is shorter than the IAB global average. All companies in Mexico require at least 2 partners, regardless of the amount of their participation. In addition to the procedures required of a domestic company, a foreign company must legalize any of the parent company’s documents that were issued abroad. A company engaging in international trade must also register with the Importer’s Registry (padron de importadores). There is no required investment approval. However, a foreign company must register with the National Registry of Foreign Investments (Registro Nacional de Inversiones Extranjeras) within 40 business days of incorporation. Regulations of the Public Registry of Commerce mandate that registration of the bylaws and articles of incorporation be completed within 2 business days when the filing is made through the electronic system (SIGER). Companies in Mexico are free to open and maintain a bank account in foreign currency. The minimum capital requirement for LLCs is MXN 3,000 (US$240), 50 percent of which must be subscribed and paid in at incorporation

 

BRAZIL

Foreign companies establishing subsidiaries in
Brazil (Sao Paulo) must have at least 2 shareholders. Executive officers of Brazilian companies (companies incorporated in Brazil, regardless of the origin of its capital stock) must be either Brazilian citizens or foreigners who hold a Brazilian permanent visa. The permanent visa may be issued to the statutory manager of a Brazilian company. In this case, however, the company must have at least: (a) $200,000 of its capital stock directly invested by the foreign company; or (b) $50,000 (in cash or assets) of its capital stock directly invested by the foreign company as long as the company commits itself to create 10 new positions for Brazilians in the following 2 years. To file with the Commercial Registry, the company may pay an additional fee and register through SIMPI (Sindicato da Micro e Pequena Industria do Estado de Sao Paulo), which offers an expedited registration process. Forms for registration with the National Corporate Taxpayers’ Registry of the Ministry of Finance may be downloaded and registration may be monitored online. While government approval is not required, foreign investments must be registered with the Brazilian Central Bank. According to the Rules for the Exchange Market and Foreign Capital (Regulamento do Mercado de Cambio e Capitais Internacionais) issued by the Central Bank of Brazil, only a few entities are entitled to hold a foreign currency bank account in Brazil.

CHILE

 

It takes 11 procedures and 29 days to establish a foreign-owned limited liability company (LLC) in Chile (Santiago). This is one of the shortest processes among the IAB Latin America and the Caribbean countries. Full foreign ownership is allowed in Chile. LLCs need a minimum of 2 shareholders. In addition to the steps required of a domestic company, a foreign company establishing a subsidiary in Chile must authenticate the parent company’s documents abroad and register the incoming capital with the Central Bank. This procedure, established under Chapter XIV of the Foreign Exchange Regulations, requires a notice of conversion of foreign currency into Chilean pesos when the investment exceeds $10,000. The registration process at the Registry of

Commerce of Santiago is available online. Companies in Chile are free to open and maintain bank accounts in foreign currency. There is no minimum capital requirement for foreign or domestic companies.

 

ECUADOR

It takes 16 procedures and 68 days to start a foreign-owned limited liability company (LLC) in Ecuador (Quito). The process is slightly shorter than the regional average for Latin America and the Caribbean and longer than the IAB global average. The law allows 100% foreign ownership, but mandates that at least 80% of the employees must be Ecuadorian. In addition to the steps required of a domestic company, a foreign company establishing a subsidiary in Ecuador must provide notarized and translated documents pertaining to the parent company, such as a certificate of good standing and a list of shareholders. It must also declare its capital with the Central Bank and, if it wants to engage in international trade, register as an importer with the customs office. There is no investment approval required for foreign companies in Ecuador. Companies are free to open and maintain a bank account in foreign currency—most typically U.S. dollars and euros. The minimum capital requirement for LLCs is $400, 50 percent of which must be paid in at the time of incorporation

 


VENEZUELA

 

It takes 19 procedures and 179 days to establish a foreign-owned limited liability company (LLC) that wants to engage in international trade in Republica Bolivariana de Venezuela (Caracas). This process is slower than the averages in both Latin America and the Caribbean and the IAB countries globally. Companies in Republica Bolivariana de Venezuela must be incorporated with a minimum of 2 shareholders (although, once incorporated, the law does not prohibit the shares being owned by 1 shareholder). Republica Bolivariana de Venezuela has limitations on hiring foreign personnel: only 10% of a company’s staff can be foreign and payments to foreign workers cannot exceed 20% of total payroll, unless the Ministry of Labor authorizes a temporary exception. In addition to the procedures required of a domestic firm, a foreign company establishing itself in Republica Bolivariana de Venezuela must authenticate the parent company’s documents in its country of origin. A foreign company does not need an investment approval. However, the investment must be registered with SIEX (Superintendencia de Inversiones  extranjeras) in order to be authorized to purchase foreign currency at the official exchange rate and repatriate capital and dividends. A company can purchase foreign currency from the central bank at the official exchange rate, if (i) it has registered with RUSAD (Registro de Usuarios del Sistema de Administracion de Divisas), and (ii) it has received foreign-exchange approvals from the currency administration CADIVI (Comision de Administracion de Divisas) for each transaction. The issuance of the approvals is subject to the discretion of CADIVI and the availability of foreign currency. Companies in Republica Bolivariana de Venezuela cannot hold a bank account in foreign currency. There is no minimum capital requirement, although 20 percent of the subscribed capital must be paid in at registration.

 


Starting a Foreign Business

Best and worst countries in Latin America

 

Country

Ease of establishment index

Procedures

Time

Costa Rica

73.7

14

63.0

Peru

72.5

11

43.0

Honduras

68.4

15

35.0

Colombia

68.4

13

27.0

Mexico

65.8

11

31.0

Argentina

65.0

18

50.0

Haiti

63.2

13.0

212.0

Chile

63.2

11.0

29.0

Bolivia

63.2

18.0

54.0

Brazil

62.5

17.0

166.0

Nicaragua

57.9

8.0

42.0

Guatemala

57.9

12.0

30.0

Ecuador

55.3

16.0

68.0

Venezuela

42.5

19.0

179.0

Latin America

62.8

14

74

High-income OECD

77.8

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