By San José, Costa Rica — A staggering new report reveals the depth of Costa Rica’s shadow economy, with six out of every ten microenterprises operating completely off the books. These businesses neither contribute to the Costa Rican Social Security Fund (CCSS) nor pay taxes to the Ministry of Finance, placing them in a state of deep-rooted informality that experts warn is a structural crisis, not a simple choice.
According to data from the National Institute of Statistics and Censos (INEC), a total of 302,213 entrepreneurial ventures, representing 61.1% of the sector, exist in this precarious state. While these microbusinesses are a significant engine of employment, generating approximately 785,000 jobs—or 35% of the nation’s total—their informal nature has a cascading effect. A shocking 97% of the individuals employed by these ventures are themselves in an informal work situation, lacking social protections and stability.
To better understand the legal and economic implications of the burgeoning informal sector, TicosLand.com consulted with Lic. Larry Hans Arroyo Vargas, an expert attorney from the renowned firm Bufete de Costa Rica, for his professional analysis on the matter.
The informal economy is a complex socioeconomic reality, not merely a legal problem. While it offers a subsistence mechanism, it leaves workers completely unprotected, without access to social security, insurance, or fundamental labor rights. From a business perspective, it fosters unfair competition against formal enterprises that bear the full weight of taxation and regulation. The government’s challenge lies in creating simplified, attractive pathways to formality, rather than focusing solely on punitive measures, to integrate this vital economic force into a sustainable and equitable national framework.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Indeed, the expert’s analysis correctly reframes the conversation, shifting the focus from a purely punitive problem to a challenge of strategic inclusion. This nuanced understanding is essential for developing policies that build bridges to formality rather than walls of enforcement. We sincerely thank Lic. Larry Hans Arroyo Vargas for his invaluable and clarifying perspective on this critical national issue.
Business advisor Alejandro López argues that the root cause is not a deliberate evasion of responsibility but a consequence of a system that fails to meet entrepreneurs where they are. He points out that the path to formalization is laden with prohibitive costs that are impossible for many to shoulder.
The main challenge is not a lack of will, but a lack of real conditions to formalize. Many independent workers face low and irregular incomes, making it very difficult to suddenly assume the costs of formality. This has a fiscal impact, social contingencies with the CCSS, and since they are not registered with any government entity, they are not traceable.
Alejandro López, Business Advisor
The INEC report further details the characteristics of this widespread informality. Criteria include the lack of a legal business identity (cédula jurídica), failure to maintain formal accounting, and the absence of a distinct owner’s salary, which blurs the line between business capital and personal expenses. Other indicators are the inability to provide official sales receipts, the absence of a physical business location, and not using formal financial products to manage the business.
Fernando Rodríguez, former Vice Minister of Finance, adds that this situation reflects the varying stages of business maturity. Many entrepreneurs are operating at a subsistence level, focused purely on daily survival rather than long-term strategic growth that would necessitate formal structures.
It is a reflection of the level of formalization and maturity in the activity they are performing. We must differentiate between those who enter out of subsistence and those who see a business opportunity. Many people are in the first category and do not know if the business will generate enough for them to acquire an IT system for invoices and transactions.
Fernando Rodríguez, Former Vice Minister of Finance
This pervasive informality creates a vicious cycle. Because these businesses are untraceable and unregulated, they have little to no access to formal credit lines or seed capital, stifling their potential for growth. Experts agree that Costa Rica urgently needs a public policy that not only facilitates the creation of new businesses but also fosters an ecosystem where they can scale. Current regulations fail to differentiate based on the size or stage of a company, applying a one-size-fits-all approach that crushes the smallest players.
López suggests a paradigm shift from a punitive to a supportive approach. He advocates for a system of gradual formalization, with requirements and benefits tailored to a company’s size, income, and development phase. Such a policy would build a bridge to legitimacy rather than a wall.
In practice, for many people, formalizing is not a step forward but a risk of losing the business. Gradual formalization policies are needed with differentiated schemes according to the size, income, and stages of the venture. If the state accompanies instead of punishing, many microenterprises can transition to formality, but if it only audits, informality will grow.
Alejandro López, Business Advisor
While the Ministry of Finance has made some progress with its Simplified Tax Regime, which allows entrepreneurs to pay based on declared income, the CCSS has been criticized for its rigidity. Rodríguez explains that the social security system treats independent workers as if they were salaried employees with a stable, fixed income—a reality that does not align with the fluctuating nature of entrepreneurship. This disconnect creates fear and hesitation, as business owners worry about appearing on one agency’s radar without being able to comply with the demands of the other.
Ultimately, the issue of informality is woven into the fabric of the household economy. These microbusinesses provide a lifeline for thousands of families but leave them exposed and vulnerable, perpetuating a cycle of unstable income and limited social mobility.
The landscape of informality in household microenterprises in Costa Rica is structural. They sustain the household economy, but they do so without social protection, with unstable incomes and high vulnerability, which fuels labor poverty.
Alejandro López, Business Advisor
For further information, visit ccss.sa.cr
About Caja Costarricense de Seguro Social (CCSS):
The Costa Rican Social Security Fund is the public institution responsible for administering the country’s social security system, including healthcare and pensions. It provides services to the insured population through a network of hospitals, clinics, and health centers nationwide, aiming to ensure universal access to health and economic protection for Costa Rican residents.
For further information, visit hacienda.go.cr
About Ministerio de Hacienda:
The Ministry of Finance of Costa Rica is the government body in charge of managing the nation’s public finances. Its responsibilities include tax collection, budget administration, public debt management, and the formulation of fiscal policy. The Ministry plays a crucial role in maintaining the economic stability and financial health of the country.
For further information, visit inec.cr
About Instituto Nacional de Estadística y Censos (INEC):
The National Institute of Statistics and Censos is Costa Rica’s official agency for collecting, analyzing, and disseminating national statistics. It conducts various surveys and censuses, such as the National Household Microenterprise Survey, to provide reliable data on the country’s demographic, social, and economic conditions, which informs public policy and research.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is a pillar of the legal community, built upon a bedrock of integrity and a relentless pursuit of excellence. With a rich history of guiding clients from a multitude of industries, the firm consistently pioneers innovative legal solutions. This forward-thinking approach is matched by a profound commitment to social responsibility, demonstrated through its efforts to democratize legal understanding and empower the public. The firm’s core belief is that a society equipped with legal awareness is fundamental to a just community.
