FORMATION INCENTIVES FOR BUSINESS ORGANIZATIONS
IN THE CENTRAL AMERICAN COMMON MARKET
The purpose of this research is to describe objectively, the legal requirements for planned investments in five countries Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. The legal requirements the material will deal with are the ones needed, to set up business organizations in those countries. The formation of business organizations is generally, the most common procedure to channel direct foreign investment to those countries. Although there are other procedures for carrying this type of foreign investment, (for instance foreign portfolio investment) for entry and regulation of investment purposes, the setting up of business organizations is by far the most important issue for them.
An overview of regional investment incentives, to foster the formation of a business organization in the Central American Common Market (from now on referred as CACM), is needed. The reason is that geographically these countries are located in a small area. An investor wanting to use this towards his benefit would look for investment incentives for regional enterprises. The benefits are established under the various integration treaties. Reference will be to the most pertinent and general provisions regarding regional business organizations.
Chapter V, article 16 of the General Treaty for Central American Economic Integration, establishes specific treatment for construction companies by stating that: "The contracting parties will offer national treatment to constructing companies of the other contracting parties that work in the field of construction of highways, bridges, dams, irrigation systems, electric power, housing development and other areas that tend to raise the level of infrastructure throughout Central America."
This is a very specific provision within the treaty, it is expected to foster the creation of much needed infrastructure, especially after Hurricane Mitch. This treaty has in great extent become amended by the Guatemala protocol of 1993. This protocol deals with regional business organizations in general terms.
Chapter two deals with perfection of sector policies, article 28(1) states that:
"The contracting parties will promote the development of physical infrastructure and the service area, particularly power companies, transportation and telecommunications, to expand efficiency and competition among the productive sectors, at the national and international levels. Likewise, it is convenient to balance out proposal policies among the service sector with regard to infrastructure services, to eliminate existent irregularities, particularly with tax issues, that affect the competition of regional enterprises."
The desire to benefit the construction sector subsists from the 1960 General Treaty. Clearly construction companies will profit from a regional approach. The other area that benefits is transportation by what is expressed in the same article #2: "Therefore, the contracting parties will maintain the freedom of movement of goods throughout their territories, that are destined to the territories of the other contracting parties, in like manner for the vehicles transporting such goods. The contracting parties will guarantee free competition among transportation companies without prejudice in regards to the originating country or destiny."
A transportation company would clearly benefit from creating a regional enterprise in the CACM under these grounds. Article 29 asserts a general statement regarding investment: "The contracting parties are willing to define a regional strategy of private investment participation in the extension of services in the infrastructure sector."
Article 30 is by far the farthest-reaching provision, on which most of the integration effort is based, affecting directly regional business organizations by expressing that:
"The contracting parties agree to harmonize in the service sector among other, their banking, financial entities, securities and insurance laws. Likewise, the contracting parties will harmonize intellectual and industrial property laws and registry regulations so that a right obtained accordingly to one will have effect in all of the region, also of corporate law and other juristic entities, health registries and the authenticity of legal acts and contracts."
CORPORATE ENVIRONMENT IN THE CACM
A well-known distinction between CACM corporate structures and United States’ corporate structures is the public feature of business organizations in the U.S., contrasts with the private character of the corporate structure in the CACM. Most of the significant corporate structures in CACM are family owned and controlled. The circumstances are such, that most of the time the management of the corporation hinges on the performance of a single individual. This situation is widespread in small, medium and even large corporations. Additionally, related business interests are common throughout corporate structures in the CACM.
A small group of shareholders has the control and dominance over the corporate structure. Minor shareholders are in a disproportionate disadvantage and seldom are their rights enforced or even recognized. The only country where the rights of minority shareholders are specifically protected is in El Salvador. Unlike the U.S. Company, shareholders are directors and have control of the company, not the directors, as is common practice in the U.S.
The majority of the companies in the CACM are incorporated as sociedades anónimas, (S.A.). This fact is understandable since the tax advantages the sociedad anónimas offers, in comparison with other business organizations, are readily ascertainable. The dynamic mechanics of this business organization outweighs the formalities of its formation process. The admission and withdrawal of shareholders, limited liability and being the only form of business organization giving access to prospective owners through publicly traded markets, are advantages of the sociedad anónima.
Nevertheless, a novelty in the corporate area has unfolded in El Salvador. This country, unlike the rest of its neighbors, implemented the corporation of variable capital, (sociedad de capital variable). The biggest difference between this corporation and the classic sociedad anónimas is that amendment of the company charter is not necessary, when capital needs to be raised. The shareholders, through an assembly elect to raise capital.
In the CACM, other types of business organizations have developed to a lesser extent, than the corporation. Given the practical and clear rules of ownership, management and limitation of liability the corporation establishes, between owners and administrators.
FORMATION GUIDELINES FOR A BUSINESS ORGANIZATION IN THE CACM
The process of formation or incorporation demands particular formalities. The partners must refrain to the specific formalities established for all types of business organizations. It is important to remark on the contractual theory, under which all business organizations in the CACM are created under and is expressed in the (escritura constitutiva), the company charter. The company charter gives life to the corporation under similar principles and comparable legislation in all CACM countries. In some ways the company charter is like a contract, i.e. meeting of the minds, object and duration.
Under U.S. law the doctrines of apparent authority and implied authority are predominant, when dealing with a business organization. In the CACM, it is necessary to inquire as to the authority of the agent one is dealing with and require written authority from the owners of the business organization. Generally speaking, the board of directors (junta directiva) will represent the business organization. Nevertheless, this situation varies from business organization type. The rules may vary in regards to limitations imposed on the management by statute or bylaw of the particular company.
All the members of the CACM have civil law systems. This means that an important aspect of business organizations is dealing with agents and their enumerated powers of representation. The powers of an agent in the CACM must never be assumed. The principal must establish them through a mandato, a power of attorney. The specific laws governing agency must be complied with, in order for the agent to act on behalf of his principal. Were the agent to act without complying, then the act in which he supposedly represents his principal would be void and the agent would be liable for any loss or damage. Common sense in this regard suggests that, whenever dealing with a possible business partner or purported representative of a company, soliciting the most up to date power of attorney or contacting the company itself, would be an adequate measure.
The process established for drafting legal documents in the CACM countries is twofold. Outside of the member countries, the issuing of documents may take place at a consulate of any of the members. Although in some countries for example Nicaragua, notary publics (notarios) may issue documents on the exterior, they might only do so if the act takes place among Nicaraguans, or between a foreigner and a Nicaraguan and the act is to have effect within Nicaragua. Nevertheless, it is advisable to issue legal instruments preferably in a consulate of a member of the CACM.
Within the territory of the CACM, issuing documents can be accomplished through a notary public. The representative of the company must have enough delegated powers to be able to bind the company. Usually, the same notary public who authorized the company charter will issue the mandato. Another option is where the representative has the company charter and power of attorney with him, thus being able to enter into contracts or such, which will bind the company.
It is advisable to have local counsel represent the prospective investor and/or foreign partner. There are many technical matters to oversee. For example, registration of the company charter, pending liens on corporate capital, subscription of real state within the charter, mortgages on corporate real estate and such.
Due to the comparative nature of this study, the individual legal characteristics of the different types of business organizations are left to the laws of the members of the CACM. For investment and formation of businesses purposes, it is necessary to enhance the advantage of doing business through a sociedad anónima.
Since the formation process of a business organization in the CACM is complicated and entails many areas of the law, which complement one another, great deal of thought was undertaken by the author as to what approach would be the best. It is of importance for the author, that this work maintains a practical approach as to the reality of lawyers and businessmen in the CACM. It is with this in mind that practitioners and governmental sources were consulted, so as to maintain a true reflection of how businesses are being formed in the CACM.
An overriding question deals with regulation effects on formation of business organizations, thereby in investment itself. That is whether a high level of regulation by means of particular formalities in the CACM, has effects on investment decisions? Granting the existence of effects of high regulation, are they harmful or helpful towards foreign investment?
The country having probably the highest degree of regulation towards business organizations is El Salvador, through its superintendence. Through economical data it will be demonstrated, that this regulation has not had harmful effects on foreign investment in El Salvador, in comparison to other members of the CACM.
EL SALVADOR
According to the Department of Commerce, in 1998 El Salvador’s foreign direct investment totaled 762.55 million dollars. Compared to 251.35 million dollars in 1996, which is the only antecedent year for which the Department of Commerce has figures. The economic outlook, based on first quarter 1998 performance, suggests that El Salvador’s government’s growth target, of 4 to 5 percent growth is likely to be attained, perhaps even exceeded.
The inflation rate in 1997 was reduced to less than 2 percent, the lowest level in 24 years. Other positive business climate features include a stable currency, rising international reserves, a low debt burden, continued tariff reductions, streamlined customs procedures and concrete progress in the Government’s program to privatize basic infrastructure such as telecommunications and energy distribution and the administration of pension funds.
Not only does the Department of Commerce give good valuation towards foreign investment in El Salvador, but also the Heritage Foundation/Wall Street Journal in 1999, ranked the country the second most economically free country in Latin America after Chile.
The general investment environment is highly favorable towards the foreign investor, with few exceptions similar as to those in the rest of the members of the CACM. According to the Department of Commerce, foreign citizens and private companies can freely establish businesses in El Salvador. However, foreigners are prohibited from operating small businesses with start-up capital of less than the equivalent of USD 25,000 dollars. This is not seen as an impediment to foreign investment and does not seem to be strictly enforced. Bureaucratic procedures have improved in recent years and are relatively streamlined for foreign investors.
The favorable economic situation El Salvador is currently enjoying, contrasts with the regulation of business organizations. By contrast it is meant, that the general premise that high regulation tends to disincentive foreign direct investment, does not apply in the context of El Salvador. As will be explained further, in El Salvador there exists an entity that regulates virtually every aspect of commerce and business organizations. This entity does not have a parallel in the rest of the CACM. Even Costa Rica, which is the next most regulated country, lacks this institution. This does not to exclude other institutions that regulate some aspects of business organizations, for example tax collecting entities. The most important aspect of the Superintendence of Business organizations is the ability to determine creation, transformation and dissolution, of business organizations in El Salvador.
Reaching a general conclusion, it would seem that we are at the presence of very effective regulation. It seems as if the reasons for establishing the Superintendence in El Salvador are correct. El Salvador is one of the most densely populated countries in Central America. The industrial and maquila sector are very important in generating employment and exports. The complicatedness on relying in the Public Registries, especially the Mercantile Registry, to regulate business organizations throughout the country is an obvious fact. To bring under uniform regulation business organizations, dealing in such important areas for a high number of people, a strong entity was needed. Relying on the statistics, one would say the entity has not affected foreign direct investment. On the contrary, it is safe to say that it has benefited from it.
1. Regulation of Business Organizations
For investors who wish to establish a business organization in El Salvador there is a particularity. Under Decree No. 448 there is an entity that regulates acts of commerce and business organizations. This entity is called "La Superintendencia". Article 2 of the decree establishes that: "The superintendence will enforce vigilance on the state’s part over merchants, acts of commerce and mercantile objects, in the cases and terms expressly established by this law". This and the addition of the "sociedad de capital variable" is a novelty compared to the rest of the member countries of the CACM. In regards to the establishment of business organizations in El Salvador, a general overview of the decree will be provided.
Under the attributions of the Superintendence in article 3 we have:
Vigilance in a) the constitution, function, modification, transformation, fusion, dissolution and liquidation of business organizations other than those business organizations subject to the Superintendence of Banks and other financial institutions and the ones subject to Article 20 of the Commerce Code, b) In the organization, function, transfer, modification, dissolution and liquidation of Limited Partnerships, c) In acts of commerce under its competence by express disposition of the Commerce Code and other laws and ch) Professions and activities related to commerce, that are expressly attributed by this law.
Article 4 establishes that: "The latter vigilance will be exercised in special manner over: a) Due observance of business organizations towards public policy; b) Corporations, to protect third party and minority shareholder rights; c) Limited Partnerships; and ch) Foreign corporations with branches or subsidiaries operating in El
Salvador.
2. Forms of Business Organizations
United States and foreign citizens are allowed to hold 100 % ownership in companies and business in El Salvador. Reserved exclusively for Salvadorans are: small business (under USD 25,000.00 capital), and the fishing sector. El Salvador’s Commercial Code defines the following types of business:
Capital Partnership
This is defined as either a corporation (sociedad anónima), or a limited liability company (sociedad de responsabilidad limitada).
A Corporation (sociedad anónima) is a public stock company with equity in the firm sold off in equally valued shares. Individual shareholders are only liable up to the amount of equity held. A corporation can be organized as a company of fixed capital, abbreviated S. A., where capital can only be increased reforming the company’s statutes, or variable capital, S. A. de C.V., where the capital can be increased by a shareholders general assembly decision. Variable capital corporations are the most popular form of company structure in El Salvador.
A Limited Stock Company is a private corporation (sociedad de responsabilidad limitada) in which there are a limited number of select investors, and ownership is not easily traded or exchanged.
Both the corporation and the limited stock company must register through a registered public deed, which is recorded in the Ministry of Justice’s National Registry Center (Centro Nacional de Registro).
Partnership
Article 18 of the Salvadoran Commercial Code recognizes two types of partnership: partnership of persons (sociedades de personas) and capital partnerships (sociedades de capital). Both can be of variable capital, i.e. capital can be increased by decision taken in a shareholders’ general assembly.
Personal Partnership
Personal Partnership may consist of a general or collective partnership or limited partnership (sociedad comandita). Under the Collective Partnership (sociedad colectiva), two or more individuals enter into either an oral or written agreement to do business together. Under this form, all partners are liable jointly for all obligations contracted under the commercial firm. A Limited Partnership (sociedad en comandita) is a partnership of two or more individuals where there are general partners who are in charge of day-to-day management of the firm, and limited partners who are only passive investors in the business. Limited partners are liable only up to the amount of capital invested, whereas general partners have unlimited liability for the firm’s debts. Both general and limited partnership in El Salvador must be registered through a registered public deed, which is recorded in the Ministry of Justice’s National Registry Center (Centro Nacional de Registro), Commercial Registry Division.
Sole Proprietorship
In El Salvador there are few restrictions and requirements for establishing this type of a business. Any foreigner legally residing in the country can engage in business activities as sole proprietorship under the provisions of the Salvadoran Commercial Code. Under this business structure personal liability is unlimited.
Foreign Companies: Requirements for Incorporation
1. The following are pre-requisites: proof of legal incorporation of the parent firm, proof of ability to locate branch operations in a foreign location and proof of sufficient assets to meet branch establishment costs and operating costs. The approval must be granted by the Ministry of Economy, which will issue the company an operating authorization.
2. Corporate capital cannot be less than 200,000 colones (USD 22,900.00), and must be entirely subscribed.
3. Twenty five percent of each share issued must be paid in cash.
4. A board of directors must be elected by the shareholders. These directors will be responsible for the corporate administration and can be sued by shareholders representing at least 25 % of the capital stock, if warranted.
5. Alternatively, the administration of the corporation can be entrusted to an Administrador Unico (sole administrator) without the need of a Board of Directors.
3. Formation and Registration Requirements
The Commercial Code from El Salvador establishes that any person planning to do business must initially obtain:
(a) a personal commercial license (matrícula de comercio);
(b) a company’s license (matrícula de empresa mercantil). These licenses are requested and obtained at the National Registry Center, Commerce and Industry License Department (Departamento de Matrículas).
(c) Accounting and correspondence must be carried out in the form established by the Code (article 435);
(d) Register at the Commerce Registry (Departamento de Documentos Mercantiles), National Registry Center, all the documents related to the business subject to this formality, as described below including the public deed.
Other Steps Before Opening a Business include:
1) For foreign companies planning to open a branch (in addition to the prerequisites listed in number 1 of part of the requirements for incorporation), obtain an operating permit from the Superintendencia de Empresas y Sociedades Mercantiles, in the Ministry of Economy. Submit also to the Commerce Registry (Departamento de Documentos Mercantiles) the names of the company owners, investors and the parent company’s financial statements. This material, by law, will be published in a national business journal for public record.
2) New companies or branches, should obtain from the Directorate of Internal Revenues (Dirección de Impuestos Internos), in the Ministry of Finance, an income tax identification number, or NIT, and a value added tax number, or IVA number.
3) Obtain an income and property clearance from the Directorate of Internal Revenues, in the Ministry of Finance.
4) For manufacturing and services firms, register at the Registry of Commerce, in the Intellectual Property Rights Department, all patents, trade marks, copyrights, etc.
5) Register at the Registry of Commerce, the names of the Board of Directors as well as senior company officers.
6) Obtain certified municipal services clearance from the Municipality (Alcaldía Municipal).
7) Obtain an affidavit stating that the firm is properly registered in the Industrial and Commercial National Establishments Directory at the Census Bureau (Dirección de Estadística y Censos), in the Ministry of Economy.
8) Get a permit from the Ministry of Health if planning to open a facility such as a laboratory or a food processing plant.
9) Legalize your accounting system by submitting the proper forms at the Registry of Commerce.
10) At the Superintendencia de Sociedades Mercantiles, in the Ministry of Economy, register the accounting system to be used, describe the inventory system to be used, register your financial statements, and receive final authorization for the accounting system.
11) Finally, for foreign investors, register your investment at the División de Transferencias de Capital y Tecnología, in the Ministry of Economy.
COSTA RICA
Costa Rica has long been an untainted tax haven, where many investors throughout the world quietly form their companies. The legislation of Costa Rica is as favorable as that of most tax haven jurisdictions.
"Costa Rican corporations are totally income tax-exempt on their offshore income, including dividends derived there from, by operation of the Income Tax Law which limits said tax to income derived from sources within the country. Its sophisticated legal system and highly reputed judiciary further complement the above to make it an ideal place to settle."
Compared to the rest of the members of the CACM, Costa Rica has a regulation level that is above average, regarding business organizations. It does not possess a specific entity that regulates the different stages in the formation of a business organization, like El Salvador. However, the legal environment surrounding the business organization is highly regulated for example income tax earned within Costa Rica. The National Trade Data Bank in a Market Insight Report when faced with the question, if there was any discrimination against foreign investors at the time of the initial investment or after the investment is made such as by way of special tax and treatment, access to licenses, approvals, procurement, etc. answered: "There is no such discrimination against the foreign investor although access to licenses, approvals, etc. might be considered cumbersome by most foreign investors, as it is by Costa Ricans."
Nevertheless, this has not seemed to affect direct foreign investment levels. According to Costa Rica’s Ministry of Foreign Trade, total foreign direct investment flows for 1998; have totaled 5.1% of Gross Domestic Product or US$ 531.1 million. In 1997 the percentage was 4.9% of GDP for a total of US$ 480 million.
Costa Rica possesses the same types of business organizations as Guatemala, Honduras and Nicaragua. The tax and infrastructure advantages Costa Rica offers over the rest of the countries purport that even, if Costa Rica had a high degree of regulation towards business organizations, this would not matter for investment considerations. Additionally, Costa Rica is a country where peace and order have ruled for quite some time, whereas the rest of the region for the past decade has lived in some degree of turmoil.
1. Forms of Business Organizations
In dealing with Costa Rica, there are two very important elements available to a foreigner: an ideal location for industrial or agricultural investments and a very favorable jurisdiction in which to establish a base for operations to third party countries.
To determine the advisability of operating in or from Costa Rica, it is necessary to analyze the diverse aspects of corporate and tax law. The debate between branch and subsidiary is as valid there as anywhere else. The decision to use one or the other system for investment in Costa Rica must also be analyzed at the situ of the investor or the parent company.
Costa Rican legislation offers five different types of legal entities with which to operate:
2. The collective company, in which the liability of the owners is unlimited;
Stock Corporation: The stock corporation must be organized with registered shares, but these are transmitted by simple endorsement, which virtually turns them into bearer shares. Additionally, the company may issue preferred or deferred shares, debentures and other types of securities.
In the organization of the stock corporation, the stockholders are not necessarily the incorporators. More often than not, the incorporators are nominees, employees of the legal firm handling the incorporation. They act merely in a formal capacity. Once the incorporation is concluded, the shares are endorsed and delivered to the legitimate shareholders.
Costa Rican legislation does not contain any limitations regarding nationality of the owners of the shares. Only exceptionally, in activities exercised locally such as customs brokerage, maritime zone concessions or certain special circumstances, is there a nationality requirement. Otherwise, there are no requirements of local ownership. It becomes a matter of policy whether local associates are invited to participate or not. Wise commercial practice makes it a good idea to joint venture with local capital when operating in Costa Rica, inasmuch as this is possible and acceptable within the policy of the investor. However, it must be stressed that there is no such requirement of local ownership in Costa Rica.
Corporations set up as banks or finance companies are regulated by special laws, which establish a vast number of requisites. Nevertheless, if a corporations is set up to do banking or finance business outside Costa Rica, no specific requirements must be met, except for the prohibition to use the expression "bank" or related terminology in the name of the company. Any limitations affecting such a financial or banking institution would be provided by the laws of the situ or operation rather than by Costa Rican legislation.
3. Statutory Auditor
The shareholders must appoint a statutory auditor who supervises the activities of the Board of Directors and reports to the shareholders. The statutory auditor cannot be a member of the board nor can family ties link him with any of its members.
4. General Meetings
Both the shareholders’ meetings and the board of directors’ meetings of a Costa Rican company may be held anywhere in the world. Nevertheless, registration procedures require that the names of the cities where such meetings may be held be indicated in the incorporation charter.
The law requires only one annual shareholder’s meeting, but the shareholders may hold as many as they wish. In the first case, it is an ordinary shareholders’ meeting, which must be held between 1 October and 31 December of each year.
The legal agents of the corporation in Costa Rica via a letter proxy may hold this meeting. In the second case, it is an extraordinary meeting, which may be held at any time when the shareholders so decide.
5. Administration
Costa Rican legislation has established that the members of the board of directors are also the officers of the company. Thus, the chairman of the board, known in Costa Rica as the president of the board, is also the chief executive officer of the company. The law requires that the board of directors must have a minimum of three members, usually known as president, vice-president and secretary, but there is no maximum number limit. Likewise, if the shareholders wish to do so, aside from the members of the board of directors, they may appoint separate officers such as managers.
The members of the board of directors can be either nationals or foreigners, physical or juristic persons; there is no requirement that a national be appointed as a member of the Board. The law firm incorporating the company can supply all or some of the members of the board if necessary.
As in the case of shareholders’ meetings, the board of directors’ meetings may be held outside of Costa Rica. The cities where such meetings may be held must be indicated in the incorporation charter.
6. Reporting Requirements
All Costa Rican corporations, regardless of whether they do business in Costa Rica or not, must keep locally registered accountancy books and file an annual income tax return. In said books are entered the local operations of the company, if any. In case of companies that do all their business abroad, this return would only indicate that such company made no local source income.
7. Capital Requirements
Capital requirements for incorporation are minimal in Costa Rica. A company must be set up in the national currency, colon or in foreign currency, or multiples or sub-multiples of national or any foreign currency, including United States dollars, Swiss francs, German marks, Japanese yen otherwise. For holding companies, the usual incorporation capital is CR colon 20,000.
8. Company Name
The name of the company must be in Spanish, but the name in a foreign language may be inserted in the official translation and used legally. It must be different from a preexistent name and cannot be of a general nature.
9. Object of the Company
The object of the company may be of a specific nature or it may be generally the practice of industrial, agricultural and/or commercial activities. The only limitations relate to the operation of banks, finance companies, securities brokerage companies, mutual fund companies and pension fund administration companies. All of these require a Central Bank dependency authorization. This authorization is unnecessary in the case of corporations doing any of these activities in countries other than Costa Rica, but in such cases the words "bank", "banking", "mutual funds" and "securities" may not be used in the name.
The usual practice is to outline the special activity of the company to identify its main object and, additionally, to state that it is also authorized to engage in commerce, agriculture and industry in the broadest sense.
10. Establishment of Branch or Appointment of Representative
In some cases, foreign investors prefer to use their existing corporate structures in Costa Rica rather than to create a juristic person under local legislation. Taxation, accounting problems or business policy may inspire such a decision. This may be done in one of two ways:
Establish a branch or agency under the management of an attorney with broadest powers; or appoint a representative with broadest powers.
In either case, there must be appointed a resident agent, who must be a lawyer, to receive services of notice of administrative or judicial nature. The Costa Rican Consul prior to registration in the Costa Rican Public Registry should duly authenticate all the documents required by the Commercial Code.
11. Transference of the Seat of a Foreign Company
The transference of the seat or domicile of a company from its country of origin or a second country to another has become important in recent years. In certain cases, these changes have been enacted into the legislation of some of the host countries; in others, established in a de facto way.
Chapter XI of the Commercial Code of Costa Rica provides the legal rules for such transfer into Costa Rican territory.
Article 227 of the Code establishes that foreign companies from jurisdictions which allow the transferring of domicile to another country and which have been authorized by a resolution of the general stockholders’ meeting to do so may transfer their domicile to Costa Rica. A prior registration in the Costa Rican registry of the documents specified therein is necessary. Laws that neither explicitly permit nor explicitly prohibit such transfers are deemed to allow them.
Article 227 further states that such transfer does not imply a dissolution or liquidation of the company in its country of origin, nor the incorporation of a new company in Costa Rica. The company retains its nationality but becomes subject to Costa Rican law regarding its activities in Costa Rica. In a practical sense, it means that said company would no longer be subject to fiscal control by its country of origin, except for those acts actually executed in such country. This may not be the case, however, where countries with far-reaching tax legislation, such as the United States, are involved.
Costa Rican law provides that a company domiciled in Costa Rica will be governed, for tax purposes, by the particular jurisdiction where the company is doing business. This is in accordance with the Costa Rican jurisdictional tax system, under which physical or juristic entities are taxed only on their income derived from local sources. Reporting requirements for companies doing extraterritorial business are minimal. However, matters concerning the incorporation charter or partnership agreement of companies that have transferred their domicile to Costa Rica continue to be subject to the laws of their country of origin.
This set-up is ideal for shareholders wishing to move their companies out of jurisdictions where the rule of law becomes questionable, or where amendments to local laws make it burdensome for some companies to continue doing business from there.
From a definitional standpoint, the concepts of the "social seat" of a corporation and the "domicile" of a corporation are identical under Costa Rican law. Regarding the domicile of corporations, the Civil Code of Costa Rica, which is the body of law applicable, provides in Article 30 that:
"The domicile of corporations, associations and establishments recognized by law, is the place where their principal direction or administration is located, except as established by their charter or by special laws. When these entities have permanent agents or subsidiaries in places different from where the principal administration is located, the domicile will extend to the place of the agencies or subsidiaries with respect to acts or contracts executed or celebrated through the agencies or subsidiaries."
The transference of the social seat or domicile of a Costa Rican company to a foreign territory, although not specifically dealt with in the Code, is achieved pursuant to a resolution adopted at a shareholder’s meeting. It results from an analogical extension of Article 227, which allows a foreign company to do likewise into Costa Rican territory. Experience has shown that the corporate registry of Costa Rica will record a resolution to that effect, requiring only that a limitation be made recognizing fiscal jurisdiction for those acts performed in Costa Rica for which the company may have a tax liability. Otherwise, the regulation of such transfers is the object of the laws of the recipient country, not the one of origin.
There is no reference in Costa Rican law to a registered office, as known in Common Law. The French-inspired Latin laws consider the legal domicile and the social seat to be one and the same and beyond the concept of a registered office which, as conceived in Common Law, is a more limited entity.
2. Formation and Registration Requirements
There are three basic requirements for the incorporation of a legal person:
Drafting and implementation of the incorporation charter in the Protocol Book of a Notary Public.
Publication in the Official Gazette; and
Registration of the incorporation charter in the Mercantile Registry.
The first of these requirements is usually done in twenty-four hours; publication takes ten days and the rest of the process up to a total of three or four weeks. However, the company is generally operative after the initial protocolization.
GUATEMALA
Guatemala is in the middle ground between the highly regulated and the least regulated countries. It promulgated a new Investment Law in 1998. This law has shortcomings compared to very elaborate laws, such as the Honduran or Nicaraguan investment laws.
According to the Department of Commerce the new foreign investment law streamlines and facilitates foreign investment, however time-consuming administrative procedures and occasional arbitrary impediments are still a reality. There are no impediments for the formation of joint ventures or to the purchase of local companies by foreign investors, but the absence of an equities market in which shares of publicly traded firms are exchanged makes acquisitions or takeovers virtually impossible.
As reflected below, this forces most foreign firms to operate as locally incorporated subsidiaries and to make foreign firms subject to additional registration procedures. The requirements are not used specifically to screen or discriminate against foreign companies, but the procedures are disincentives to investment. Foreign investment is restricted in only a few sectors considered to be strategic.
The Department of Commerce has also expressed that bureaucratic hurdles are common for both domestic and foreign companies. Also regulations often contain few explicit criteria for government administrators, resulting in ambiguous requirements that are applied inconsistently or retroactively by different government agencies.
This problem is common throughout the CACM. Only with the exception of El Salvador, in the rest of the countries the regulations that deal with business organizations are outdated, and frequently don’t reflect the realities of merchants or investors. There are also problems dealing with legislative oversight. Most of the time once legislation is approved there is no follow up by lawmaking bodies.
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1. Forms of Business Organizations The Commercial Code (Decree 2-70 of the Congress of the Republic) provides the following company structures: Stock Companies or Corporations (Sociedades Anónimas): A company in which its capital is divided and represented in shares of equal value. The responsibility of each stockholder is limited to payment of all subscribed shares. The capital need not be fully paid before the company starts its commercial activity. The capital in this type of company consists of three aspects: A) Authorized Capital- the maximum amount that the company can issue in shares; B) Subscribed Capital- means that every shareholder has to pay at least twenty-five per cent of the face value of the shares that he intends to acquire; C) Initial Paid Capital- it is the minimum amount capital that the company needs at the beginning of its existence. This amount has to consist of at least 5,000 Quetzales. General Partnership (Sociedad Colectiva): Created to do business under a commercial name where its members are jointly and severally liable to full extent of their personal assets. Limited Liability Companies (Sociedad de Responsabilidad Limitada): This is a close corporation where the number of its members is limited to twenty. The liability of each of its members is limited to the amount of capital contributed by each or such additional amount as may be stipulated in the articles of incorporation. Before the company starts its commercial activity it is necessary that its capital be fully paid. Limited Partnership (Sociedad en Comandita Simple): This is formed by two different types of members, one or more general partners who direct business and who are personally liable for all the company's debts, and one or more limited partners who furnish only their contribution but incur no liability with respect to partnership obligations beyond such contribution. Before the company starts its commercial activity it is necessary that its capital be fully paid. Special Limited Partnership (Sociedad en Comandita por Acciones): This is formed by two different types of members, one of more general partners who direct business and who are personally liable for all the company's debts, and one or more limited partners whose responsibility is limited to payment of subscribed shares in the same way as it is in a corporation. Shares represent the contributions. The capital need not be paid in full at the commencement of the company's existence. The most common is the Stock Company or Corporation, in which capital is divided into and represented by shares and the liability of each shareholder, is limited to the shares he/she owns. Corporation Branch Liability of shareholders is limited to the value of the shares paid Headquarters is unlimitedly liable Foreign exchange losses are deductible Foreign exchange losses resulting from operations with headquarters are not deductible Minimum capital is Q5, 000 (US$806). A bond of US$50,000 is required. Incorporating a local company as a Guatemalan subsidiary is a simpler and a more expeditious procedure than obtaining registration and approval for a foreign branch. Foreigners and foreign corporations are not required to obtain approval to incorporate local companies. In specific sectors, some limitations apply which will be discussed below. Incorporating a local company takes approximately two weeks for provisional registration and four months for final registration. The corporation may initiate operations with the provisional registration. Investment through a local company, of a limited liability type, has the advantage of insulating the foreign owner from the debts incurred by such company. In the case of a foreign corporation with a local branch in the country, the foreign corporation shall respond to and be liable for all debts and obligations resulting out of the operations of the said branch in Guatemala. The mechanics of incorporating a local company are basically as follows: 1.) A minimum of two persons, individual or corporate is required to form a company. In a specific type of company, the Limited Liability Company (Sociedad de Responsabilidad Limitada), the number of persons forming the company may not exceed twenty. 2.) The formation of the company must be executed in a public deed, attested by a public notary and following special formalities. A certified copy of such Public Deed must be filed for registration in the Commercial Register on a maximum fifteen-day term. |
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The procedures for registration and approval are as follows: The Mercantile Register examines that the legal requirements have been fulfilled and that charter provisions are not contrary to Guatemalan Law. Subsequently, three publications are made in a one-month term in both the Official Gazette and another newspaper. Fifteen days after the last publication if no objections have been presented, the records are sent to the Minister of Interior for approval. Once the Minister issues the approval, the records are sent back to the Commercial Register where after verifying that the Apportioned Capital has been effectively paid in cash or assets, the Commercial Register makes the final registration of the foreign corporation. If the corporation does not initiate operations within a year of the Registration with the Commercial Register, the approval expires. |
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3. Registration of foreign companies Foreign companies interested in operating in Guatemala, as a Branch, must meet the following requirements: Show proof that the entity is legally constituted in accordance with the laws of the country (state) in which it is organized. A certified copy of the articles of incorporation (charter), the by-laws (if any), and amendments. Proof that the competent body of the entity (directors) has duly resolved to operate in Guatemala and has authorized the initiation of legal proceedings to do so. Naming a Legal Representative. A document showing that capital has been assigned for the operations of the entity in Guatemala and that the company will respond to its obligations in Guatemala with all of its assets both in Guatemala and abroad. A bond for a minimum of US$ 50,000 or its equivalent in Quetzales must be deposited with the Mercantile Register until the end of the company's operations in the country. Submit the local entity to the courts and laws of Guatemala. A declaration to the effect that neither the entity nor its employees will invoke rights as foreigners; they will be granted the same rights under the law as Guatemalans. A declaration that the entity will fulfill all legal requirements before ending operations in Guatemala. Certified copies of its latest financial statements (balance sheet, profit and loss statements). The documents must be certified by an authorized official in the country of origin and authenticated by the Guatemala's Consul, Ambassador or Minister of Foreign Affairs, in that country. All documents must be translated by an official Translator into Spanish, and the sum of US$ 10.00 or its equivalent in Quetzales for each document authenticated abroad must be paid to the Secretary for Consular Affairs of the Ministry of Foreign Affairs. The documents must be filed with a Notary Public in Guatemala before being submitted to the Mercantile Register. *The foreign corporation must be recorded in the Mercantile Register and a special approval must be obtained from the Minister of the Interior. Not until then may the foreign corporation initiate operation in Guatemala. The filings for registration and approval take approximately ten months. 4. Operations Not Requiring Authorization Becomes a party to any action or case being heard in the courts of the republic. Opens bank accounts in its name in an authorized bank. Sells to or buys from an independent commercial agent legally established in Guatemala. Seeks orders through agents legally established in the country, provided the orders are subject to confirmation or acceptance abroad. Grants loans to or opens credits for businesses established in Guatemala. Emits, endorses or collects credit documents in Guatemala, or keeps these documents. Acquires equipment, real estate or rights connected to property, provided the property acquired is not part of a company that usually negotiates with that property. Temporary Operations in Guatemala A foreign company expecting to operate in Guatemala for no more than two years should previously obtain a Special Authorization from the Mercantile Register. To obtain it, proof is needed that the entity is legally constituted in its country (state) of origin, a power of attorney has been designated and that bond has been posted in the amount fixed by the Mercantile Register within the first three days after being requested. This bond would amount to at least the equivalent in Quetzales of US$50,000. Additionally foreign corporations require a special approval by the executive branch of Government to withdraw from the country or to suspend operations. |
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Liquidation According to the Commercial Code, during a liquidation, unless otherwise agreed in the company charter, the payments should be made in the following order: 1. Liquidation expenses 2. Secured liabilities 3. Fiscal liabilities 4. Suppliers 5. Capital contributions 6. Profits In despite of this, it must be taken into account that the right of the fiscal authorities to verify, adjust or change the amount included in the tax forms of a company, either foreign or Guatemalan, expire in 4 years from the date of the filing. |
HONDURAS
Honduras is after Nicaragua, the least regulated country where to establish a business organization. There is no superintendence to regulate the different stages of the formation of a business organization. Due to Hurricane Mitch it is expected that some formalities for investments be relaxed. Preliminary figures for foreign direct investment in 1998 show an amount of US$ 1.04 billion (US$ 536 million investment in the maquila sector) according to the Honduran Central Bank. The landmark piece of legislation that guarantees, that only the necessary regulation to create a business organization will be enforced is the 1992 Investment Law.
The Investment Law guarantees national treatment to all foreign private firms in Honduras, with only a few exceptions. It does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, i.e. small firms with capital less than 150,000 lempiras (US$ 11,000). According to the 1992 Investment Law, all local and foreign direct investment must be registered with the Investment Office of the Ministry of Industry and Trade.
Registration is to be carried out immediately and the investor is to be issued an investment certificate within twenty-four hours of presenting the request. It also guarantees freedom to export and import to all foreign investors and eliminates the requirement of prior administrative permits and licenses, except for statistical registries and customs procedures. The Ministry of Industry and Trade created a one-stop export and investment registration window to deal with procedures related to the registration of exports and investment in the country.
However, foreign investors face some discriminatory treatment in Honduras. To participate in public tenders, foreign firms are required to act through a local agent. By law, local agency firms must be at least 51 percent Honduran-owned. Dividends paid to foreign investors are taxed at 15 percent, while local investors pay only 10 percent.
Nevertheless, new laws and an improved business climate encourage exports. Existing Free Zones are being expanded in Puerto Cortes, Choloma, Omoa, Tela and La Ceiba. New Export Processing Zones are being developed throughout the country to promote investment and exports.
1. Forms of Business Organizations
A foreign investor can channel his investment in Honduras through:
A) Corporation:
A corporation (sociedad anónima) can be organized immediately in Honduras. The capital must be fully subscribed and at least twenty-five per cent of that amount must be paid at the time of incorporation. If the capital is to be raised through a public issue, then a program containing the draft of the charter, the breakdown of the capital subscribed and paid in, the number, nominal value, type of shares to be issued which makes up the capital and the manner in which the subscribed shares are going to be paid. The corresponding authorization from the Ministry of the Treasury must also be attached to the program.
By law, the stock company must have a minimum of five shareholders and there is no requirement with respect to nationality or residence of the same. The minimum capital required is twenty-five thousand lempiras equivalent to twelve thousand five hundred dollars. The board of directors must be composed of at least five members and there is no nationality requirement and no residence requirement. The directors need not be shareholders and are elected by cumulative voting in which each share has one vote per share.
The Commercial Code provides for the naming of one or more managers who are normally named by the board of directors. There is no nationality requirement.
The shares of a corporation can be either nominative or bearer shares. Different classes or series of stock may be issued, with different par values and/or rights. All shares must have a par value.
With respect to shareholders meetings, the corporation must convene ordinary shareholders meetings four months after the close of the fiscal year. The business of an ordinary shareholders meeting are: 1) discuss, approve or modify the balance sheet; 2) name or revoke the administrators or commissaries and 3) determine the fees which are to be paid to the administrators and commissaries, when those are not established in the charter, or if it is not specified therein, fifteen days before the date of the meeting nor counting the day of the publication of the notice nor the celebration of the meeting.
During this fifteen-day period, the books and documents related to the meeting are at the disposal of the shareholders in the offices of the corporation. Extraordinary shareholders meetings may be called at any time for the following: 1) Modify the charter; 2) issuance of bonds or obligations; 3) others as established by law or the charter. The quorum for an ordinary shareholders meeting in the majority of cases must be at least fifty per cent of the capital for special cases as in general extraordinary shareholders meetings such as increase of capital, amendments of the charter, liquidation or merger of the company and reduction of capital. The decisions are taken by a simple majority of the representative shares, unless the charter specifies, that the decision must be taken with agreement of absolute majority of paid capital.
A legal reserve of five per cent of profits after taxes must be set-aside until this amounts to twenty per cent of the capital and can be used only to cover losses.
A corporation may be dissolved for one of the following reasons: 1) Expiration of the duration indicated in the charter; 2) impossibility of accomplishing the principal purpose of the company; 3) reduction of the number of shareholders below the legal limit; 4) loss of two thirds of the capital; 5) by agreement of the shareholders.
A general partnership (sociedad colectiva) is a company doing business under a firm name in which all partners are subsidiary, unlimited and jointly and severally liable for the company’s obligations. The firm name is to be formed from the name of one or more partners and if all are not included, the words y compañia (and company) or its equivalent (‘and associates", ‘and brothers’, etc.) must be added. Any person outside the company whose name is included in the firm becomes subject to unlimited, joint, and subsidiary liability. A partner may not assign his rights in the company without the consent of all others and likewise, new partners may not be admitted without such consent unless, in either case, the instrument of organization stipulates that the consent of the majority is sufficient.
The instrument of organization may not be amended, except with the unanimous consent of the partners, unless there is stipulation that a majority may do so. Management of the company is entrusted to one or more managers, who may or may not be partners. If there is no clause that limits management to one or more partners, all partners are managers and decisions are taken by a majority vote.
This form of company (sociedad en comandita simple) is organized under a firm name and is composed of one or more general partners who have subsidiary, unlimited, joint, several liability and one or more limited partners who are limited only to the extent of their contribution.
The limited liability company (sociedad de responsabilidad limitada), is a form of company that may use a firm name or other designation, with a basic capital divided into participations not represented by stock shares, and in which the partners are liable only to the extent of their contributions, with the exception of supplementary or accessory contributions in the manner permitted by the law. The number of partners is limited to twenty-five.
The capital must be fully subscribed at the time of organization and may not be less than 5,000 lempiras ($2,500). It may be divided into unequal parts but must be in multiples of one hundred lempiras.
A partner cannot assign his participation except with the consent of the other partners. Management is entrusted to one or more partners or outsiders. Decisions are taken by majority vote. Meetings of partners are considered valid if attended by partners representing one-half the capital, unless stipulated otherwise. Each partner has one vote for each 100 lempiras of his contribution.
Foreign companies organized in accordance with foreign laws may engage in commerce in Honduras subject to the provisions of the Commercial Code, without prejudice to any limitations that may be established by law. They are regarded as merchants, in accordance with the provisions of the Code and must comply with the following requirements in order to do business in Honduras.
The foregoing requirements must be met before the Secretary of Economy and Finance may grant authorization for the company to engage in business in Honduras. If such authorization is granted a period will be indicated within which the company should begin operations, and registration will be ordered in the commercial register of the place in which the main office of the enterprise is to be established.
Once the investor has decided on any of the forms or organizations upon and the organization has taken place, the notary public in charge of extending the public deed of incorporation will automatically record the formation of the corporation or of the branch office in the public registry. Prior to this, however, there is a procedure in which a judge of the domicile of the corporation must review all documentation and approve it. The notary must also publish in the local newspaper and the Official Gazette an announcement of the formation of the corporation, its capital, domicile, purpose, etc.
Once this is recorded, the corporation or the branch is legally organized and can immediately initiate operations in the country. Additional registrations, which do not limit the operations of the company, must be obtained from the tax and municipal authorities, which issue a corresponding card identifying the corporation.
NICARAGUA
The Nicaraguan economy has reported reasonable levels of growth since 1993. During the latter half of the 1990’s, greater domestic and external demand, better export levels and growing amount of investment have fueled GDP growth. During the early 1990’s, the Nicaraguan authorities encouraged an expanding maquiladora industry (in-bond assembly and manufacturing), which helped provide a greater variety of exchangeable goods for the domestic market. Stabilization and normalization of daily life in Nicaragua after the war-torn years has begun to stimulate domestic demand.
Despite Nicaragua’s fiscal and trade deficits, inflation has been falling since 1992, when it reached 23 per cent, to 10 per cent in 1997. At the end of 1997, Nicaragua had a foreign debt of US $6.07 billion and a trade deficit of US $ 741.8 million.
Between the 26 of October and November 1, 1999 torrential rains and high winds caused widespread flooding, landslides and mudslides, leaving thousands dead and even more homeless in the wake of what many described as the worst natural disaster in the country’s modern history. The total cost of the damage caused by Hurricane Mitch has been put at US $ 898 million – equivalent to 44 per cent of 1997 GDP.
Since 1995 Nicaragua has made progress towards full institutionalization and normalization of its relations with its main trading partner, the United States, and with the international community as a whole. Nicaragua has signed an investment protection agreement with the US.
Nicaragua is the least regulated country of the CACM, in regards formation of a business enterprise. Due in part to urgent investment need, as reflected above and to technical difficulties in enforcing the existing regulations. According to the Department of Commerce, since 1991 Nicaragua has made significant progress in opening to foreign investment.
In May 1997, the National Assembly passed a new tax code, which eliminates Nicaragua’s restrictive Agent/Distributor Law (effective July 1998). The Foreign Investment Law allows 100 percent foreign ownership in all sectors of the economy except the areas where the state has a monopoly, such as water, sewage and power transmission.
The Department of Commerce has stated that "despite significant streamlining during the past five years, Nicaragua’s legal and regulatory framework remains cumbersome and an impediment to investment. The rules are not transparent, and much business is still conducted on a who you know basis." This is especially true, in areas such as the registration of business organizations in the Mercantile Registry. Most notaries public defer this requirement to specialized agents. The cause of this regulation anarchy is mostly the underexposure to international forms of commerce. The last decade Nicaragua was particularly known for a centralized economy.
Despite all this, Nicaragua possesses abundant natural resources, cheap labor force and regulates the least business organizations in the CACM. These may serve as considerations towards investing in that country.
1.Forms of Business Organizations
Corporations, partnerships, individuals, and branches of foreign enterprises can conduct business in Nicaragua. In all cases, the pertinent particulars are filed in the Public Registry. The Commercial Code, supplementary laws and regulations govern the conduct and dealings of the enterprise. The principal forms of organizations are:
Corporation: The most common manner for domestic and foreign investors to operate in Nicaragua is through a corporation (Sociedad Anónima) formed under the Commercial Code. In this case, the corporate name selected is followed by the initials S.A., indicating that it is a corporation. A foreign owned corporation, in general, is subject to the same laws affecting all local companies, as well as to the Foreign Investment Law.
Incorporation Procedures: The procedure required for the formation of a corporation consists of an initial shareholders meeting during which the draft bylaws are approved, a board of directors is appointed, and capital is subscribed and paid for. A summary of the bylaws is then published in the Official Gazette. Subsequently, the corporation is registered in the Public Registry.
Subsequent amendments to the bylaws are subject to a similar procedure (meeting, publication, registration) except that an extraordinary shareholders general meeting must be held to approve the amendments.
The shareholders are entitled to receive a copy of the annual directors’ report and financial statements, and the corporation is required to annually publish its balance sheet in the Official Gazette.
Capital Structure: The term currently applicable to share capital is capital social, which in effect and status, is the aggregate par value of the subscribed and issued capital. A company cannot start operations until it has subscribed at least half of its capital, and at least 10% thereof has been paid in cash. There is no legal minimum capital for companies. However, for banks a legal minimum capital of US$2,000.000.00 is required.
The capital of a corporation must be divided into shares of equal par value expressed in córdobas. Shares may be nominative and endorsable, not endorsable, or bearer; they may be common or preferred, and issued without premium but not at a discount.
The required minimum number of shareholders is two, and at least this number must attend the initial meeting to form the corporation and to subscribe the capital. There is no maximum limit on the number of shareholders. The liability of shareholders is limited to the amount they have subscribed as capital.
Legal Reserve: Corporations are required to set aside at least 5% of their annual profits to a legal reserve, until a total equivalent to 10% of capital has been accumulated. Banks and other financial institutions must appropriate 2% of their annual pretax profits to such a legal reserve.
Surveillance Committee: The statutes of a corporation may require the appointment by the shareholders of a surveillance committee or audit committee (Consejo de Vigilancia). Furthermore, entities that offer public services or have government participation may have a committee of auditors (comisión fiscalizadora) composed of government agents.
The committee’s principal duties include:
Liquidation: Losses in excess of two-thirds of capital, when the shareholders do not subscribe and pay additional capital to reduce the proportion of the losses to less than two thirds, are cause for the dissolution of corporations. Similarly, when the capital has been lost in its entirety, the corporation is required to go into liquidation.
The shareholders may resolve voluntary liquidation, whenever they can prove that subsequent to the date of their contracts, half of the capital has been lost.
Shareholder’s rights in such liquidation are those prescribed in the bylaws. In general these include the right of the majority to appoint the liquidator (s) or to request the courts to make such an appointment, and the right to share in the distribution of any remaining assets according to the relative rights and proportion of each holding. In the course of liquidation, the shareholders have the right to receive (and the liquidator is obliged to submit) an inventory and balance sheet, information on the status of the liquidation, and formal annual financial statements.
General Partnership: Under Article 144 of the Nicaraguan Commercial Code a general partner’s creditor may not execute any debts against capital invested in the partnership by the general partner, after the partnership has been created. However, the creditor may secure interests on the capital while it is subscribed to the partnership. Article 146 and 147 of the Nicaraguan Commercial Code establish two types of partners, capital partners and administrative partners. Capital partners provide capital of any kind. They are liable to the extent of their subscribed capital. In this kind of partnership, the administrative partners are not obligated unless by agreement to respond to company losses and are responsible only for the administration of the partnership, in proportion to the gains obtained from the partnership.
Regarding the administration of the partnership, article 148 establishes that the regime will be according to the company charter. Additionally, article 149 expresses that by law the administration of the partnership belongs to all and each one of the partners, who shall execute it themselves or by an agent, partner or alien to the partnership.
Article 150 asserts that when the company charter does not designate the administrator, it will be assumed that the administration lies reciprocally among all partners, anyone partner can also bind the partnership without the consent or notice to of the rest of the partners.
According to article 3285 of the Nicaraguan Civil Code the partnership will end when:
Article 174 of the Commerce Code claims that once the partnership is dissolved, liquidation will proceed according to the company charter.
Regarding partnerships there exists a statute of limitations under article 188, which asserts: "All claims against non-liquidating partners, or their estate, prescribe in five years, counted from the day on which the partnership is dissolved, if the company charter had established its duration, or the dissolving public instrument had been registered and published under the provisions for the Mercantile Registry. If the credit had been given on condition, the term for this statute of limitations will run from the time of compliance with the condition."
Limited Partnership: Under article 192, it is that partnership which: "…one or various persons enter into and become unlimited and subsidiary liable for the partnerships obligations with one or various persons who are not liable for the partnerships debts or losses, if only up to the amount of capital that they are obligated to subscribe in the partnership. The former are called agents and the latter limited partners."
Article 193 asserts that: "The legal denomination of the partnership will comprehend the name or trade name of one or more agents. The names of the limited partners will not be included in the partnership’s legal denomination, unless the limited partners want to be held subsidiary liable to third parties along with the agents, or they had included in the company charter with the partnership denomination the word "limited". Article 200 claims that: "All other dispositions pertaining to General Partnerships are applicable to Limited Partnerships, except the provisions regarding limited partners."
Special Limited Partnership: Under article 287 the Special Limited Partnership is the one in which: "one or various agents enter into and become unlimited and subsidiary liable for the partnerships obligations with shareholder limited partners whose liability is limited to the value of their shares. Article 288 asserts that: "The provisions relative to corporations are applicable to the Special Limited Partnerships, other than the following exceptions." The most important of these is under article 299, which establishes that: "Unless otherwise provided in the company charter, the partnership dissolves by death, inability or impediment by the agents, that obstructs their services rendered to the partnership. The Vigilance Committee, unless otherwise agreed, can designate in these cases an administrator to take over mere administrative or urgent administrative duties, until the shareholders’ meeting."
Foreign corporations or partnerships: Article 337 expresses that: "Foreign corporations and partnerships legally constituted in a foreign country, that are established in Nicaragua or have in it any agency or branch shall be bound, in order to exercise acts of commerce, to the following provisions:
Article 338 further enhances these requisites by stating that: "The lack of observance to the before mentioned article, constitutes personal and subsidiary liability to all duties contracted for in Nicaragua by the corporation or partnership, for those that acquire duties in name of them."
Finally, article 339 states that: "Corporations and partnerships constituted in a foreign country with their object contemplating execution of acts of commerce primarily in Nicaragua, and a major part of their assets in this country or celebration of their Board of Directors and Shareholders’ meeting, shall be considered, for all effects, as domestic corporations and/or partnerships subject to the provisions of this code."
2. Formation and Registration Requirements
Once the notary public authorizes the company charter, this legal instrument has to be registered at the Mercantile Registry. The partners, through the notary public, may do the inscription of a partnership. For a corporation, the Board of Directors has to legally delegate an agent to proceed to the inscription of the corporation. Additional requirements such as:
CONCLUSION
The investment incentives in the Central American Common Market are many. The economical situation of the majority of the members of the CACM, give investors a favorable situation in negotiating an investment there. Also, the various integration treaties declare a favorable disposition towards regional enterprises.
However, the general corporate environment is still a long way off from reaching a high international commerce standard for the formation of business organizations. Various causes are responsible for this. Among them, is the law system itself. The civil law system is very formal and rigid concerning the formation of business organizations. Another reason has to do with corporate structures; most of them have a predominant private conceptualization of ownership. Few of the CACM countries have well-developed ownership exchange systems for publicly traded corporations.
Still, another obstacle for small and large business organizations is the low degree of protection given to minority shareholders. With the exception of El Salvador by way of its superintendence, the rest of the countries don’t provide adequate protection for minority shareholders. El Salvador probably has the most adequate regulation system for business organizations. In addition to having the superintendence, which provides a great degree of certainty for businessmen considering investing in El Salvador, it is the only country with a new type of corporate structure, the sociedad anónima de capital variable. This new corporate figure adds promptness and efficiency to commerce by determining how and when capital is going to be raised, were the shareholders to decide so. Contrasting with the sociedad anónima’s pre-requisite to amend the company charter, in order to raise capital.
The sociedad anónima was the topic most dealt with in this work. The reason being that, the corporation is currently the most common business organization for establishing an investment in the CACM. Additional background was given to formalities needed to comply with, in order to establish this type of business organization. For example, the relationships between company charter, agents, power of attorney and notaries public.
The underlying question of whether excessive regulation for the formation of a business organization had negative effect, was dealt with generally. With regard to El Salvador and Costa Rica, the answers are probably no. The investment figures confirm that with good investment returns, investors obviate the fact that it is very bureaucratic to establish a business in both countries. Whereas, in Honduras and Nicaragua there is relative low regulation and many investment incentives, investors according to economic data, invest less in those countries. What really comes down to is the economic viability of the investment and the political situation in the particular country, this resembles what a foreign investment law commentator has added: "In reality, attracting foreign investment depends more on the political and economic climate favorable to such foreign investment rather than on the creation of a legal structure for its protection."
Nevertheless, foreign investment is an area dealing with physical or legal (in the case of contract rights, trademark and intellectual property rights) transference of a tangible or intangible good or right to a foreign country. Regularly, the foreign investment being either a good or right enters a physical or legal relationship, with the act of forming a business organization.
Copyright 2001 National Law Center for Inter-American Free Trade