Costa Rica is a dream destination for many entrepreneurs—imagine stunning beaches, lush rainforests, and a stable, growing economy. But when it comes to setting up shop here, there’s a big question: Should you open a formal business or hire contractors? Both options have their perks and pitfalls, and the right choice depends on your business model, goals, and budget. Let’s break it down.
The Case for Opening a Business in Costa Rica
The Upsides
- A Skilled, Bilingual Workforce
Costa Rica is known for its well-educated population, with a strong focus on bilingual education (Spanish and English). This makes it a great spot for businesses in tech, customer service, or tourism. - A New Business-Friendly Visa
Costa Rica recently introduced a 180-day visa for entrepreneurs, making it easier to stay in the country while exploring business opportunities. If you’re granted fewer days, no worries—a quick, affordable bus trip to a neighboring country (like Panama or Nicaragua) for a night can reset your visa. - Tax Perks for Foreign Investors
If you’re in industries like tech, manufacturing, or exports, you might qualify for tax incentives in Costa Rica’s free trade zones. These can include exemptions from income tax, import duties, and sales tax. - Tax Benefits for US Citizens
If you’re a US business owner, running your business from Costa Rica could qualify you for the Foreign Earned Income Exclusion. For 2024, this lets you exclude up to $126,500 for individuals and up to $253,000 for families.
The Downsides
- Employee Costs Can Add Up
Costa Rica’s labor laws are very employee-friendly, which can get expensive. Employers are required to pay Aguinaldo, a 13th-month bonus paid in December. On top of that, you’ll need to cover severance pay, vacation days, and other benefits. - Taxes and Healthcare Contributions
Employers must contribute to Costa Rica’s social security system (Caja Costarricense de Seguro Social), which covers healthcare, pensions, and disability insurance. The employer’s share is about 26% of the employee’s salary, while the employee chips in around 9%. There are also additional payroll taxes, like:- Work Risk Insurance: 1.5% of the employee’s salary.
- National Insurance Institute: 1% of the employee’s salary.
- Sales Tax for Local Businesses
If you’re selling goods or services within Costa Rica, you’ll need to charge a 13% sales tax (VAT). This means registering with the tax authorities, filing regular returns, and keeping detailed records.
The Case for Hiring Contractors
The Upsides
- Less Red Tape
Hiring contractors means you don’t have to deal with Costa Rica’s labor laws. No calculating severance pay, no Aguinaldo, and no payroll taxes. It’s a simpler, more flexible arrangement. - Cost Control and Flexibility
Contractors give you the freedom to scale your team up or down as needed. By paying them above market rate, you can ensure they cover their own taxes and healthcare, while still keeping costs lower than hiring full-time employees. - No Need for a Local Business Entity
If your business sells services to customers outside Costa Rica, you can operate without setting up a local entity. Payments can be sent directly to contractors from your home country, saving you the hassle of dealing with local tax authorities.
The Downsides
- Banking Fees
Sending payments to contractors from abroad might come with some banking fees. But compared to the costs of payroll taxes and employee benefits, these fees are usually minimal. - Less Control Over Work
Contractors work independently, which means you can’t dictate their hours or methods. This can be tricky if your business requires close collaboration or oversight. - Misclassification Risks
If contractors are treated too much like employees (e.g., setting fixed hours or providing equipment), the Costa Rican government might reclassify them as employees. That could mean penalties and back taxes.
Which Option Is Right for You?
Service-Based Businesses Selling Abroad: Go with Contractors
If your business provides services to customers outside Costa Rica, hiring contractors is usually the way to go. Pay them above market rate so they can handle their own taxes and healthcare, and you’ll avoid the headaches of Costa Rica’s labor laws.
Businesses Selling Locally: Consider a Formal Business
If you’re targeting the Costa Rican market, setting up a local entity might be your best bet. Yes, there’s more paperwork and higher costs, but you’ll gain access to a talented local workforce and a growing economy.
Final Thoughts: Costa Rica is Full of Potential
Costa Rica is more than just a beautiful place to visit—it’s a land of opportunity for entrepreneurs. Whether you choose to open a formal business or hire contractors, the key is to pick the option that aligns with your goals and budget.
For service-based businesses with international clients, contractors offer flexibility and cost savings. For those targeting the local market, setting up shop in Costa Rica can open doors to a thriving economy and a skilled workforce.
With its new business-friendly visa and the potential for tax advantages like the Foreign Earned Income Exclusion, Costa Rica is more accessible than ever for entrepreneurs. So, take the leap, weigh your options, and let your business thrive in this vibrant, welcoming country.
Costa Rica isn’t just a destination—it’s a place where your entrepreneurial dreams can come to life.
This article was created using DeepSeek and was prompted by Berthony Poux, Founder of the Better Business Group and Co-Founder of Chattertech AI.
