TAX EXEMPTIONS AND REDUCTIONS
Once regarded as the Western Hemisphere's primary financial and trading tax haven, Panama's status as a banking and free trade zone sanctuary was severely curtailed in the late 1980's because of the infamous Noriega affair but has since recaptured its prominent position as one of the most attractive and successful offshore jurisdictions. By the mid-1990s, Panama's economy had made an impressive recovery and virtually all of the refugee funds that left the country had returned while exchange reserves had been restored.
The business community is back to normalcy and new records are being set in several segments of the economy, including peak revenues from the enterprising Colon Free Zone and from Canal Zone shipping traffic. However, the United States Embassy in Panama and several major multinationals in the United States have criticized the Panamanian Government for its "monopolistic" markets and "unjust" treatment of United States investors doing business in Panama.
Gross national product has been averaging an annual increase of 6% in the past few years while the construction industry has been growing by 60% annually. By 2001, activity in the Colon Free Zone had grown to exceed US$19 billion and handover of the Panama Canal by the United States, Panama successfully faced the challenges of running Canal traffic efficiently, widening the 51-mile long waterway so as to permit large modern ships to sail through, and successfully developing 535 square miles of land on a commercial rather than the previous nonprofit basis.
After the successful invasion by the United States military forces to restore democracy to Panama and the return of the previously-elected government of President Guillermo Endara to control country, Panama embarked upon rehabilitation of its economy without the hindrance of General Noriega's presence. One of the first steps taken by the Government was passage of a law creating incentives for development of small and micro businesses, exempting them from income, property and other taxes. The Government has also approved a revised program to establish export processing zones in which a 20-year exemption from income tax and exemption from restrictive clauses of the Labour Code are some of the benefits being offered. The zones were designed to attract Asian capital. Foreign investment is flowing back, with China, Hong Kong and Taiwan investing heavily in the first stage of a major infrastructure and computer project now that the Asian currency crisis of 1997 has been tamed.
Since Noriega's unlamented departure, about 50,000 new companies have been formed. The resurgence of Panama's stature as a tax haven was helped by more than a billion dollars of aid and the repatriation of hundreds of millions of dollars of refugee funds, which had sought other sanctuaries. The standstill in offshore banking transactions and loss of business confidence in Panama's financial status primarily were responsible for the transfer of domiciles of hundreds of United States and European multinationals to more politically stable tax sanctuaries at that time where the redomiciliation laws welcomed the arrival of companies from other nations. However, the estimated US$30 billion in offshore funds that left Panama has now returned.
The traditionally strong shipping industry had suffered severely by the transfer of some maritime registries to such other flagship carriers as the Bahamas, Bermuda, the Cayman Islands, British Virgin Islands, Liberia, Singapore and Vanuatu but has steadily recovered. Lifting of the embargo by former President Bush, allowing Panamanian ships to call at United States ports, finally stopped a heavy outflow. Panama's New York City Office of Consular and Maritime Affairs, the only one outside the country empowered to handle safety inspections and issue licenses, is as busy as ever. Partly because of the political turmoil in Liberia, for the first time Panama has outranked Liberia not only in total number of registered vessels but also in total gross tonnage. The Panama registry has recorded more than 70 million gross tons compared with Liberia's one-time high of 51 million. Even before political strife descended upon the Republic, other shipping alternatives, including pipelines, airlifts and inter-modal sea-to-rail transport, and growing competition had caused deep concern in the Panamanian maritime industry.
Lifting of sanctions and unfreezing of US$400 million of blocked assets by the United States also eased the road to recovery. United States banks have reopened and issued new lines of credit for trade. Unemployment has dropped from 31% to 12%. The trade deficit of US$350 million is more than offset by some US$800 million of servicing income. Bank deposits have doubled since 1990.
"A Proposal for Economic Reconstruction" in the hands of the Government includes substantial amounts of United States financial aid. The United States Congress initially approved US$420 million of aid to Panama, but withheld US$80 million until Panama signed of mutual legal assistance treaty covering tax evasion in addition to money laundering. After negotiators reached a compromise, the treaty covering drug dealing and money laundering but not related to purely fiscal matters generally was disappointing in attaining the objective as the Government was not as cooperative as hoped in clamping down on money laundering and drug abuse. Although Panama was one of the first Caribbean nations to adopt a money laundering law in 1994, the Administration has been under constant pressure from the United States, OECD, FAFT, and other world organizations critical of the Caribbean Islands for being lax in tightening laws against crime, drug smuggling, and money laundering. In fact, Panama was declared a "harmful" tax haven in the OECD Report, placed on the "black list" of the Financial Action Task Force, and graded "uncooperative" by the Financial Stability Forum.
Finally, in 2000 Panama adopted four stringent decrees to further screen out perpetrators of those unsavory devices used by money launderers around the world. These measures were: (1) Legislative Assembly Law No. 41 of October 2, 2000, entitled "Capital Laundering" and amending the Penal Code by imposing harsh penalties of up to ten years imprisonment for publicly breaching the secrecy of information or carrying out unlawful transactions related to capital laundering; (2) Legislative Assembly Law No. 42 of October 2, 2000, setting down Measures for the Prevention of the Crime of Capital Laundering; (3) Ministry of the Presidency Decree No. 136 of October 3, 2000, creating the Financial Intelligence United for the Prevention of Capital Laundering; and (4) Executive Decree No. 213 of October 3, 2000, amending the 1984 Decree relating to the practice of trusts and making it compulsory for banks and certain financial institutions to render information on "suspicious transactions" (see section on Banking and Foreign Exchange for additional details).
Historically, one of the major factors responsible for the 35,000 holding company and tax sanctuary operations established in Panama by foreign business-men has been the relative tax freedom. Panama does not assess any income tax income produced from sources outside the country, including the proceeds of sales made outside of Panama. This territorial method of taxation was only one of the many advantages of incorporating in Panama. Income earned within Panama, including the proceeds of sales made within the country, is subject to Panamanian tax.
The normal corporate tax starts at 30% on income up to 100,000 balboas (US$100,000) and graduates to 42% on income over 500,000 balboas (US$500,000). Corporate dividends and earnings of branches of foreign corporations are subject to a 10% withholding tax. Interest paid or credited to the account of a foreign lender is subject to a 6% withholding tax. Interest on bonds, notes and other registered securities is taxed a flat 5% withholding tax unless traded on a registered exchange in Panama. Royalties paid to a foreign movie or television production company or distributor also are subject to a 6% withholding tax. Companies also must withhold a 10.75% social security tax on employees' salaries.
Tax rates begin at 3,000 balboas (US$3,000), and individual income is taxable at 52% between 3,000 balboas (US$3,000) and 3,250 balboas (US$3,250) or a tax of 130 balboas (US$130), then falls to 4% between 3,250 balboas and 4,000 balboas (US$4,000), rising to 33% between 50,000 balboas (US$50.000) and 200,000 balboas (US$200.000), and then dropping back to 30% over 200,000 balboas (US$200,000), at which the tax amount payable is 59,905 balboas (US$59,905). The first 3,000 balboas of income are not taxable. Employees also must pay a 7,25% social security tax on wages and salaries withheld by the employer.
Foreign companies, which do not buy or sell goods in Panama or the Colon Free Zone, are exempted from the 10% dividend withholding tax. Headquarters companies rendering services to companies and offices outside of Panama are exempt from income tax but pay the 1% business tax levied on declared capital, with the maximum 20,000 balboas (US$20,000). Income derived from transfer of shares in companies established under Panama law engaged exclusively in activities abroad is tax-free as it is considered to be foreign-source income.
Small Business Concessions
Under Law 31 of 1991, special rules were adopted for small enterprises or micro-businesses earning less than US$200,000 in gross income annually. The first US$100,000 of income is taxed at personal tax rates and the next US$100,000 of income earned by the micro-business is taxed at corporate tax rates. The micro-business is exempt from the retained earnings tax and withholding tax on dividend distributions.
In addition to the favorable tax situation, some of the other reasons for which Panama's corporate law is considered to be desirable are that there are no minimum capital requirements nor is there a time limit for issuing shares. Moreover, there is no requirement to file either tax returns or financial statements annually and it is not necessary to maintain a share register. Capital can be in United States dollars or any other currency and foreigners can serve as directors and/or shareholders.
Reduction on Exterior Operations
In order to qualify for tax reduction, the law states that the taxpayer must declare the income and pay the tax in a foreign country, which does not permit a credit of the total or part of the tax paid to Panama. However, companies operating the Colon Free Zone have an option to pay their taxes to Panama or to the country of the parent corporation of the Panama entity. Thus, the exterior operation profits earned on export shipments from the Colon Free Zone are not subject to tax. Reduced rates on income derived in the Colon Free Zone from manufacturing operations by taxpayers whose financial year began on or after May 1, 1975, are imposed at 2,5% up to 15,000 balboas (US$15,000), 4% between balboas (US$30,000) and 100,000 balboas (US$100,000), and 8,5% over 100,000 balboas (US$100,000). Colon Free Zone companies are exempt from withholding tax on distributions of export profits. Reinvested earnings may be taxed. Individuals are permitted to discount from their tax on income payable to exterior operations in the Colon Free Zone 0.5% of the net taxable income if there are from 30-100 national workers permanently employed, 1% of net taxable income if from 101 to 200 national workers are permanently employed, and 1.5% of the net taxable income if 200 or more national workers are permanently employed. Beginning as of January 1, 1976, individuals deriving 80% of their income from exterior operations during the first five years of operations may qualify for a 95% rebate on taxes payable provided that a minimum of 30 national workers are permanently employed.
The rebate is reduced by 5% during the three years following the 20% deduction permitted in the first four years. Wage payments may not exceed 15% of the salaries in collective contracts and the increase in number of workers employed may not produce an expansion of more than 10% in fixed assets.
Agricultural and Other Exemptions
In the agricultural sector, farmers with gross income under US$100,000 are exempt from all income and real estate taxes. Investments in agri business qualify for a 30% tax deduction but the funds must remain invested for at least three years. Companies in the tourist industry that sign an agreement with the Government receive a full exemption from income taxes for a period of 13 years. In addition, income from investments in tourism or related activities and on the importation of materials, implements, furniture, vehicles, boats and equipment required for tourism is granted an exemption of 20 years. So-called "small enterprises" or "micro-businesses" (companies whose gross earnings are less than US$200,000) are exempt from the retained earnings tax and are taxed as a natural person on the first US$100,000 and a corporate body between US$100,000 and US$200,000. Headquarters companies rendering service to companies and offices outside of Panama are exempt from income tax but pay the 1% business tax levied on declared capital, with the maximum 20,000 balboas (US$20,000). Air transport companies may opt to be taxed at 3% of gross receipts of Panamanian source income or normal taxes.
All sales of urban real estate with the exception of newly-constructed buildings are subject to the 2% tax on real estate transfers, including capital gains from real estate sales. Royalties, rents and annuities paid to non-resident individuals or legal entities are subject to withholding taxes at the normal individual or company rates. Capital gains from securities transactions are exempt from tax if registered with the National Securities Commission and a minimum of 25% of the assets of the stock of the selling company is located in Panama.
Panama does not impose any tax on income accumulations. Inheritance and gift taxes, which are applied only on property located in Panama, range from 4% to 33.75%, with a 20% discount upon payment. These taxes are not levied on securities of a Panamanian company having the bulk of its assets outside Panama. There is not estate tax in Panama but all real estate transfers are subject to a 2% tax. Bearer shares are subject to a 20% withholding rate. Royalties paid to non-residents by companies operating in the Colon Free Zone are not subject to withholding tax. All imports outside the Colon Free Zone are subject to a 7% surtax of their Freight On Board value in addition to the normal import duties. In addition to the value-added tax of 10% on alcoholic drinks, 6% for syrups, mixtures and extract compounds, and up to 0.05 bolivar per liter for alcoholic drinks.
Retired Individuals Program
The "Retire to Panama – and Live" program inaugurated in 1970 with the issuance of Cabinet Decree No. 260 and Executive Decree No. 146, allows indefinite residence in Panamanian territory to retired and pensioned individuals who are at least 45 years old or cannot work because of a physical disability. Applicants for a tourist-pensionee-visa must prove to the Panama Government Tourist Institution (PAT) that they have a permanent income of 400 balboas (US$400) monthly plus 75 balboas (US$75) for each dependent family member. They must certify annually to PAT that their income has remained the same or increased; in case of a decrease, the visa may be cancelled. Another requirement is a medical certificate from a local doctor stating that the applicant is not suffering from mental or contagious diseases. Visas are issued without payment of deposits, levies or migration fees. Individuals who obtain visas are entitled to the following benefits: (1) duty-free importation of household and personal goods up to a value of US$5,000; (2) duty-free importation once a year of a motor vehicle, including a mobile house or trailer; and (3) exemption from inheritance and donation taxes. Executives of multinational companies receiving a minimum of US$1,000 monthly are eligible for a US$3,000 import duty exemption on household goods and for visa procurement fees. Visa holders are ineligible for employment unless they work for the Government or obtain authorization to enter private enterprise from the Ministry of Labor and Social Welfare. Investment in Panama is permitted. Whereas in Costa Rica pensionades are exempt from income taxes, in Panama they are liable to taxes amounting to 7,5% on the minimum required income of 4,8000 balboas (US$4,888) and rising to 56% over 200,000 balboas (US$200,000).
Reinsurance business had been attracted to Panama by the Reinsurance (Companies) Law No. 72 of 1976. Between 1976 and 1981 the total amount of business underwritten grew five-fold from US$20 million to US$100 million. Prior to the 1988 unrest, 36 companies were registered in Panama handling offshore insurance and another 26 were issuing reinsurance through the Latin American Reinsurance Syndicate. The National Reinsurance Committee grants reinsurance and brokerage licenses to companies with a minimum capital of 250,000 balboas (US$250,000) that satisfy certain solvency requirements. Following adoption of the unitary tax law by the States of Florida in which multinational corporations are taxed on a proportion of their worldwide operations, a number of companies previously had transferred their Latin American headquarters to Panama.
However, it was not until 1996 that the National Assembly passed a law permitting formation of Panamanian captive insurance companies that are exempt from tax on their premiums and profits. They are forbidden to handle domestic risks. Captives are required to maintain a headquarters office in Panama, appoint a local representative, obtain a license from the Panama Superintendency of Insurance, and register with the Superintendency. Licenses are issued for two types of risks:
- Long-term, including life insurance, pensions, annuities, and hospitalization; companies need to have US$250,000 minimum capital and a 6% solvency margin; and
- General, all types of insurance not covered in long-term; companies need to have US$150,000 minimum capital and a ratio no higher than five to one between net retained premiums and net assets at the close of the fiscal year.
An unusual provision calls for licensees to make a compulsory investment in Panama of 35% of the reserves of their branches and subsidiaries. In addition, companies pay an annual Government fee similar to the levies plus an annual US$2,000 fee to the Superintendency for certification, program reviews, and financial analysis services. Audited financial statements and an annual report on insured and reinsured risks must be filed with the Superintendency four months after the end of the fiscal year. Under the 1996 Captive Insurance Company legislation, a payment of 1,000,000 balboas (US$1,000,000) must accompany an application to establish an insurance or reinsurance branch or company. The minimum reserve of 35% may be in State or National bonds, certain income-producing real estate, guaranteed loans by the State or time deposits and savings accounts. A bond in favor of the National Treasury must also be established in the amount of 100,000 balboas (US$100,000) for negligence and fraudulent acts.
Panama also is becoming a center for counter trade or barter transactions as a result of its approved concept of practicing the so-called "triangular hedge." This is the acceptance of a local currency commodity-dollar as a payment for exchange of goods in international commerce. Under the "triangular hedge" mechanism long-term commodity contracts are negotiated on futures exchanges so that prices may be locked in for long periods. It is particularly beneficial to foreign traders dealing in such staple commodities as copper, petroleum and sugar as well as certain metals and agricultural products.
Panama also had been used by foreign investors for captive leasing companies, to own and license patents, trademarks and copyrights, and to promote and handle sales in third countries of goods produced by the parent company or its subsidiaries (which are owned by an offshore holding company).
INVESTMENT AND CAPITAL INCENTIVES
To lure United States operations into the Republic, Panama also offers extensive tax and other investment incentives. Under the Investment Incentives Act of 1970, industries located in Panama that produce manufactured goods for the domestic market may be granted income tax exemption on the excess of 20% of profits reinvested in fixed assets for expansion of plant capacity or production of new products. These above qualifying companies also may take 12.5% of annual depreciation of the value of equipment minus residual values, or at a fixed percentage of the declining balance. A company qualifying as above also may deduct from income tax an amount equal to 10% of salaries of non-administrative personnel and 50% of the cost of utilities for industries located in eight designated areas of the interior of Panama.
A revised Incentives Act passed in 1986 also grants industries located in Panama and producing manufactured goods for the domestic market a five-year 100% exemption from import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process. Partial exemption also may be granted on import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process. Partial exemption also may be granted on import duties and fees on raw materials and semi-processed products including containers and packages, as well as lubricants and fuels not available locally in sufficient quality or quantity or at competitive prices. Under Law No. 3 of 1986, enterprises located in any of the 12 designated districts in the interior of the country and which produce goods for domestic consumption are exempt from income tax for the first five years and pay 50% of the tax for the next three years on income from local sales. The exemption is 100% on income from buildings and land owned.
Manufacturing companies in Panama's Colon Free Zone that produce for export may be granted 100% tax exemption from income, export, sales and capital taxes for five years and are subject to the reduced rates of 2.5% to 8.5% on export income earned in the Zone after the tax holiday expires. An enterprise that exports a portion of its production receives the same benefits as a firm exporting its total production on a pro rata basis. A foreign company operating in Panama that is liable to taxes on its Panamanian income in the country of its parent corporation may opt to pay the income tax liability to Panama and qualify for a preferential loan equal to the amount repayable in five years at half the going rate of interest.
Moreover, manufacturing companies that produce for export may be granted for the duration of the contract 100% exemption from import duties and similar charges on imports of machinery, equipment and parts, raw materials, semi-processed products, and other materials including containers and packages, fuels and lubricants. All of the above exemptions are for periods of up to 15 years, with the exception of those in eight priority development areas, which are granted 20 years exemption. Under Decree No. 5 of January 19, 1979, companies engaged in assembly operations are exempted from income tax if a specific amount of Panamanian labor is employed. Companies established under Decree No. 5 of January 19, 1979 to engage in assembly operations are liable to 3% of the exempt taxes on imported machinery and equipment. During the term of the contract the company is entitled to a 10% exemption of import duties on the import of machinery, equipment, spare parts, raw material, oil and lubricants used in the assembly operations.
Under the legislation passed in 1986, it is no longer necessary for investors to sign a "Contract with the Nation" approved by the Ministry of Commerce and Industry. Instead, investors register in the National Industry Official Registry maintained by the Ministry paying a 10 balboa (US$10) registration fee, valid for ten to fifteen years depending upon the district in which ventures are planned and an annual 50 balboa (US$50) fee. In addition, an industrial company that receives a five-year income tax holiday is entitled to the exemption from the profits tax on exports, customs duties exemptions on machinery, equipment and spare parts, and special reduced depreciation rates.
In addition to substantial investment of Panamanian private capital, Hong Kong, Taiwanese, South Korean, and Japanese businesses are exploring Panama as a location for the development of light industries, tourism, and marine activity.
Relief for Shipping Operations
Since the end of World War II, Panama had become a haven for American ship owners seeking relief from the high taxes and wage rates which prevail in the United States and other countries of the world. Panama has one of the largest number of vessels registered of any country in the world and has progressed from second on the list to first in total tonnage. Shipping activities account for 20% of Panama's gross national product. Inasmuch as shipper's earnings are derived in great measure from outside of Panama, they are not subject to Panamanian taxes. In addition, since Panama grants the equivalent exemption to United States flagships, earnings derived from the operations of foreign corporations' ships registered in Panama are exempt from United States tax. New registrations under Panama's ship registry have been helped by the substantial improvement in the safety record of the fleet. Virtually all categories of casualties show improvement including incidence of collisions, fires explosions and those caused by mechanical problems. More than one-third of Panamanian ships are now inspected annually. In 1994 Panama introduced the certification procedures used by Lloyd's Register and by 1998 all tankers, bulk ships, passenger liners, 500 gross ton cargo ships and gas carriers will have to rate approval under the scheme. Other cargo ships and drilling units over 500 gross tons have until 2002 to meet the new standards. To be certified, shipping firms will have to create and continuously implement plans that safeguard the environment, ensure general safety and develop safe shipping training programs for ship workers and onshore employees.
In a many-faceted endeavor to build a better reputation for its registry, the Government has raised the number of ports where inspection is available from 270 to 350, and is checking registration applications more carefully while conceding that it may remain difficult to trace "ghost" owners. Fraud and bribery are being eliminated in the issuance of officers' certificates and new examinations are being devised for officers who are allowed to sail without a certificate on some ships of less than 200 gross tons. Some ship owners had been attracted by Panama's willingness to allow ship owners to use the Panamanian registry but fly the flags of other nations for a period of up to two years. By chartering a vessel to a company maintaining an office in a different country, the ship owner can take advantage of the latter country's import maintaining an office in a different country, the ship owner can take advantage of the latter country's import and export incentive programs when they are available only to national-flag shipping. The Panamanian registry lists over 12,000 ships with a combined tonnage of 70 million gross tons, which places Panama first and second worldwide, respectively, in these categories. Total tonnage of merchant ships of more than 1,000 tons exceeds 30 million tons. The registry has more than 3,000 Japanese ships. However, a few of them have shifted to the Marshall Islands registry which in 1990 started offering freedom from income, asset and withholding taxes to foreign maritime entities. The Pacific archipelago with many Japanese-speaking residents is being marketed as a ship registration site for Pacific Rim ship owners, particularly Japanese, who heretofore have favored the Panamanian registry. Panamanian vessels carry 16% of world trade.
Ship Registration Fees
Registration of vessels, which may be done by Panamanian attorneys or management servicing companies, is subject to a tax computed on the basis of US$1 per net ton up to a tonnage of 100,000 tons with a minimum of US$250. For tonnage exceeding 100,000, the charge is US$0.50 per net ton while the rate is US$0.20 per net ton for tonnage exceeding 500,000 tons. If several vessels belonging to the same owners or the same group of companies are registered at the same time, the tonnage of the various vessels may be added together and the sliding scale of rates applied. The annual tax is US$0.10 per net ton and other fixed charges are approximately US$700. The fee for the registration of the bill of sale, computed on the basis of US$0.20 per net ton, plus a 20% surcharge, is based on the above rates. There also is an annual service charge, in lieu of consular service charges, payable by all vessels, ranging from US$750 to US$2,300, and an inspection fee costing from US$300 to US$800, plus small certificate fees of from US$5 to US$80. Consular services are available in most major ports around the world. Offices are able to temporarily register ship ownership under the Panamanian Ship Registry within 24 hours, giving owners six months to present all the documents in Panama. Under this system, mortgage holders may also establish their claims on ships through worldwide Panamanian consul offices. Shipping income derived by Panamanian flagships are subject to a 6% withholding tax while representative offices must withhold 5% of expenses of public companies.
Discounts and Incentives
In an effort to lure ship owners to the Panama registry, especially from Liberia, the Panamanian Government has adopted a set of incentives of reduced fees and discounts. All ships registering in Panama may prorate the tonnage tax rather than pay the full 12-month fee at the outset. Discounts are available to ship owners registering more than one ship a special incentive are being offered on a case-by-case basis to owners of large fleets. Provisional registration is permitted for vessels of foreign registry or under construction. A two-year bareboat charter registration also is available for foreign vessels if a Consent Certificate is obtained under a reciprocity agreement now in effect with Mexico, the Philippines, Nigeria, Turkey, Kuwait, Brazil, Peru and several European countries.
In view of the Colon Free Zone's tradition as a great shipping center, the importance of another exclusion to current United States taxation under the foreign based company income rules cannot be underestimated as a boost to Panamanian shipping at one time. Under the Revenue Act of 1962, foreign based company income did not include income derived from, or in connection with, the use, hiring, or leasing for use of any vessel (or aircraft) in foreign commerce, or the performance of services directly related to the use of any such vessel or aircraft. However, this was revised under the Tax Reform Act of 1986, which eliminated the inclusion of reinvested shipping income as qualifying for exemption under Subpart F income. Previously, other shipping income had been disqualified from the exclusion.
In September 1992 the Government created a National Council for the Development of the Maritime Sector whose function is to facilitate the advancement of the industry in Panama.
Panama continues to be an important site for trust operations. Revised trust regulations amending the outmoded rules of 1941 were approved by Executive Decree No. 16 of October 3, 1984. The legislation amends the tax treatment of trusts so that income on property and on transfer of assets is exempt from taxation where a resident trust has foreign source income and/or foreign situs assets.
A trust deed must specify that the trust is Panamanian and when and where it was created. Documents should also designate: the settlor, who does not have to be a Panama resident and who can be a beneficiary; the beneficiary or the class of entities that may be beneficiary; and a trustee as well as that person's authorities and duties and any limits to abilities. If a trust has two trustees, they must manage jointly, whereas if more than that number, the trustees will manage by majority vote. Documents should appoint a Panamanian attorney or law firm to be the trust's registered agent. Trust deeds should define property, land and valuables included in the trust, as well as how assets will earn income and how the income will be distributed, although there is no limit to the ability of a Panama trust to accumulate income. Trustees must register any real estate in their name and as the trustee in the Public Registry. Income and assets assigned to a minor's trust that is managed by the national savings bank (Caja de Ahorros) may not be legally attached by the settlor's creditors, unless those assets are specified in a final court judgment. Although the country does not have either a forced-heirship law or an asset protection law per se, there are laws that protect the assets of a trust from attachment by either a settlor's or trustee's creditors unless fraud can be proven by the creditor on asset transfers. There is no time limit for creditors to bring such suits. Confidentiality rules in Panama are very strict. Anyone involved in the trust, including trustees, the people who work for them and official organizations, who divulges information unlawfully is subject to a 50,000 balboa (US$50,000) fine and time in prison for up to six months. No time limit is placed on the life of a Panamanian trust or its right to acquire income.
Since trust property is distinct from assets belonging to the settlor and trustee, it is therefore protected from legal actions unless the property was placed in the trust under fraud. Trustees may move a trust and all its property to another country just on the basis of a declaration and as long as all laws are complied with, a trust may stipulate in its documents that it is liable to the laws of a different country as well as to Panama's laws. It may be revocable or irrevocable and substitute beneficiaries may be named by the grantor, who also may change the beneficiaries at any time. Establishing a trust in Panama requires a document that clarifies the following:
- The trust is created in Panama, as well as the date and place of establishment of the trust;
- Designation of settlor, trustee and beneficiary or the class of entities that may be a beneficiary, delineation of the trustee's authority and duties and any limits to the trustee's abilities;
- Definition of property, land and valuables included in the trust, as well as how income from the assets will be earned and distributed;
- Name of a Panamanian attorney or law firm to be the trust's registered agent; and
- If a private deed is the manner in which the trust is established, then the document must be witnessed by a Panamanian notary public.
Beneficiaries must receive an accounting from the fiduciary not less than once a year, unless the time frame is stipulated differently in the documents. A trust may be governed by either Panamanian law or the law of another country, as declared in the trust deed. In addition, a Panamanian trust may be transferred to another country or a foreign trust may be transferred to Panama. Any changing of governing law for a trust requires a legally notarized document. In addition, cases where a private deed establishes the trust the document must be witnessed by a Panamanian notary public or a notary public from any country as permitted under Decree Law No. 5 of July 2, 1997. This amendment supplanted the previous requirement confining the witness to a Panamanian.
All juridical and natural persons involved in trust operations are subject to the Panamanian National Banking Commission, which means that banks are able to manage trust without posting extra guarantees or acquiring additional licenses. On the other hand, all other trustees must have a lawyer represent them in the licensing procedure and pay a 1,000 balboa (US$1,000) fee, although Panamanian nationals must pay US$2,000 to obtain a trust license.
Under the 1984 law paid-in capital had to be at least US$1 million because the Trust Law fell under the jurisdiction of the National Banking Commission, which requires a minimum capital of 1 million balboas (US$1 million). This relatively high sum caused considerable criticism among various trade and professional associations and the business community banded together to have the capital requirement reduced. Its contention was that the amount of trust business in Panama did not warrant such a large outlay, which should come under the "bracket of banking business." The Panamanian Government considered the possibility of lowing the paid-up capital requirement in order that a larger share of the trust business be administered by separate trust organizations rather than almost exclusively by the banking industry. As a result, the 1984 Executive Decree was amended by Executive Decree No. 53 of December 30, 1985, modifying the US$1 million capital requirement called for by banks under the banking regulations by inserting Article 14 in Chapter II on Guaranties. This states that every trust enterprise engaged in the trust business, which specifically includes trustees other than banks, in or from Panama must maintain at all times in the Republic of Panama at the disposal of the National Banking Commission a guaranty of 250,000 balboas (US$250,000) for the due performance of its obligations. Not less than 10% of the guaranty must consist of deposits in the Banco Nacional de Panama or the Caja de Aborros. In addition to cash deposits, the guaranty may include Government bonds, bank guaranties or checks issued or certified by local banks. Panama's Law 31 of December 30, 1991 declared no fee for creating a trust, a thus repealed the previous 100 balboa (US$100) charge due at the time of trust creation and once a year thereafter, as well as the 20 balboa (US$20) penalty for not paying the tax on time. However, all trusts are subject to an annual tax of 100 balboas (US$100) paid within three months of the anniversary date. Arrears in payment are subject to a 20 balboa (US$20) surcharge.
The December 30, 1985 amendment added a number of restrictions on the settlor's activities. Trust enterprises are prohibited from investing the trust's assets in the shares of the trust enterprise or in other property owned by it and in shares of stock or properties of an enterprise in which directors, officers, partners, consultants or administrative managers, with some exceptions, participate. The trust may not make loans from trust funds to officers, stockholders, employees, subsidiaries or other affiliates. Neither may it acquire for itself or through an intermediary the properties in trust.
In an effort to further expand Panama's offshore services, the Government adopted Law No. 25 of 1995 allowing the establishment of Private Foundations. Regulated by Executive Decree No. 417, the Panamanian foundation resembles a corporate body and operates similarly to a trust but offers numerous other advantages besides normal trust services. It is patterned after similar entities available in Liechtenstein, Aruba and the Netherlands Antilles.
Private foundations, which pay a US$150 annual registration fee, are exempt from all taxes, liens and imposts on their assets, including assets located abroad; money deposited by natural or juridical persons whose income does not arise in Panama or is not taxable in Panama; and all securities including shares issued by companies whose income does not arise in Panama or is not taxable in Panama; and all securities including shares issued by companies whose income does not arise in Panama or is not taxable in Panama even though securities are deposited in Panama. Tax exemption extends to transfer of immovable property and of cash, certificates and securities assigned to the founder's spouse or close relatives. To prevent abuse of private foundations, they are subject to all Panama anti-money laundering legislation.
The most important feature of the foundation is the creation of an asset protection vehicle that provides strong safeguards against overly ambitious creditors. It is easy to form, with minimum organization requirements, and it builds blocks against foreign successor laws. Confidentiality is broadly protected as well as providing 100% income tax exemption for transactions outside of Panama. Like corporations, foundations may carry out business activity on an overall basis in order to obtain profitable advantages to beneficiaries, who may be clients, spouses, children, companies and charitable organizations.
Panamanian private foundations resemble trusts, except that they own outright assets placed in them, they are separate from the donor's estate and may not be attached, seized, levied on, or otherwise invaded to satisfy the founder's or beneficiaries' debts. Creditors may challenge a donation to a foundation on grounds of intent to defraud them but only within three years of the date the assets were transferred. Beneficiaries of private foundations will be approved by Panama's courts even if their nomination is contrary to laws of heirship in beneficiaries' or the donor's country of origin.
A foundation may not engage in commerce as its main activity but may carry out business transactions as needed to protect its property and may exercise rights conferred by shares of business corporations it owns. The initial donation to a private foundation must be 10,000 balboas (US$10,000) or more expressed in any currency.
Creating a Foundation
Founders of Panamanian private foundations may be companies or individuals. Foundations are governed by a Council consisting of at least three members (who may include the founder) unless the founder is a juridical person, in which case the founding entity may act as Council. The foundation must have a resident agent in Panama, either a Panamanian attorney or law firm. Creation of the foundation is accomplished by filing its charter, countersigned by the resident agent, in the Public Registry. The charter may be written in any language using the Latin alphabet as long as it is registered with a Spanish translation. This document must contain:
- The foundation's name, including the world Foundation;
- The amount of the original donation, which can consist of money or any kind of property;
- Names and addresses of Foundation Council members;
- The foundation's address, along with the name and address of its resident agent;
- The foundation's purposes;
- Manner of designation of beneficiaries, who may include the founder;
- Reservation of the right to modify the charter;
- The foundation's duration; and
- Uses to which assets will be put and the manner of liquidating them upon dissolution.
A charter may include other provisions deemed necessary by the founder as long as they are not contrary to Panamanian law. The resident agent countersigns the foundation charter before it is registered in the Public Registry.
The administration of a foundation may be governed by Foundation Regulations. A protector may be appointed to review distributions or Council activities. The founder may designate auditors to verify accounting practices. Under strict rules of confidentiality, Foundation Council members or public officials or private persons who breach secrecy can be fined 50,000 balboas (US$50,000) and imprisoned for six months. The Foundation Council must render accounts to beneficiaries annually or at other intervals specified in the charter. If no objections are raised to the accounts, they are automatically approved 90 days from the date of receipt. Foundation members then become exempt from liability for their administration, unless they have neglected to act like a diligent pater familias or are charged with damage claims for fraud or gross negligence.
The foundation Charter describes how beneficiaries (who may include the founder) are to be chosen. Later it is up to the Foundation Council to distribute the assets and resources being settled in favor of beneficiaries. A supervisory body, either a protector or auditor, has the right to exclude beneficiaries and to add others. A dissatisfied beneficiary can bring a complaint charging violation of rights to the attention of the protector or other supervisory body. In the absence of a supervisory body, the beneficiary can appeal to a court in the foundation's domicile.
Removing Foundation Members
Removal of foundation members can be performed by the founder or, if charter and regulations do not cover removal procedures, by the court. Grounds for judicial dismissal include failure to exercise due diligence, incompatibility of interests with the beneficiaries or founder, and a criminal conviction. The court may act upon a request from the founder and beneficiaries.
The founder has the right to revoke the foundation. The foundation is dissolved on the date specified in the charter, or when its goals are met, or in case of insolvency, bankruptcy, or total loss of assets. A foundation established abroad may be redomiciled to Panama with complete continuity of all legal rights and duties created by it. This is accomplished by filing a Certificate of Continuation accompanied by a copy of the original charter of the foundation and a power of attorney enabling a Panamanian lawyer to register the foundation in the Public Registry. A Panamanian private foundation's charter or regulations may provide for transfer of the foundation and its assets to another jurisdiction.
Under the Temporary Incentives Tax Law 109 of December 30, 1974, industrial, service, agricultural and livestock companies may receive accelerated depreciation of fixed assets, dividend tax exemption if accumulated profits from previous years are reinvested, and a 25% deduction for reinvestments in assets used in producing income up to 30% of total tax payable.
Operating losses may be carried forward for three years in certain cases through manufacturing contracts under the Investment Incentives Acts (Cabinet Decrees No. 413 of December, 1979 and No. 172 of August, 1971) when companies are producing entirely for local consumption.
Capital gains on existing properties of owners are exempted from tax if a new investment amounts to four times the amount of capital gains. When less than four times, there is a 20% deduction of the difference between the gain and investment.
Interest paid on loans used to purchase dwellings is exempt from taxation up to 14,000 balboas (US$14,000). Profits reinvested in real estate are exempt from income tax. Individuals who purchase dwellings for themselves may be exempt from the real estate tax for 15 to 20 years from the date that construction began. The exemption period is from ten to 25 years depending upon the rentals for individuals and companies constructing dwellings for leasing. Interest paid by individuals on mortgage loans granted for construction, improvement or acquisition of dwellings occupied by the taxpayer is exempt from tax up to 15,000 balboas (US$15,000).
Also exempt from income tax are interest and commission fees earned by banks and financial institutions on loans and financing for the agriculture, stock raising and agro-business sectors.
Individual retirees may qualify for import duty exemptions on US$5,000 worth of household goods, tariff exemptions on imported motor vehicles, exemption from inheritance and donation taxes and visa procurement fees. Executives of multination corporations receiving a minimum of US$1,000 monthly are eligible for a US$3,000 import duty exemption on household goods and for visa procurement fees.
Panama's long-awaited privatization law, signed by former President Endara on July 14, 1992, requires that at least 45% of shares of State firms be sold on the securities markets. A coordinating unit for the privatization process has been established by the Ministry of Finance. The 1991 Bilateral Investment Treaty with the United States offers additional protection and an alternative for foreign investors. Moreover, the country is in the process of joining the General Agreements on Tariffs and Trade.
POLITICAL AND ECONOMIC STABILITY
With the Noriega problem solved, the Government of Panama once again welcomes foreign investment and holding companies. In the past, it has gone out of its way to assist overseas investors. Foreign businessmen receive the same treatment as Panamanians. A series of major Constitutional reforms became effective in August 1992, designed to strengthen the democratic process. These included abolition of the Armed Forces, one of the most significant changes in Panama's political history.
First Woman President
In 1999 voters broke precedent and elected a woman President, Mireya Moscoso, widow of a well-known political figure, Arnaulto Arias, who had also been elected President but was deposed by the military before he could take the oath of office. President Moscoso's term in office expires in 2004, and after that she cannot succeed herself according to current Panamanian law. One international problem to be faced is a series of border attacks by Colombian guerillas, who heretofore have been curbed by the United States Army. Troubles have already started as Colombian citizens, frightened by warfare between guerrillas and paramilitary forces, have fled out of their country into the Panamanian province of Darién. The border has been described by a Darién bishop as "the most dangerous, conflicted and vulnerable" in Latin America. Fearful of reviving Noriega days, the present Government does not want to reintroduce an Army and is not eager for help from foreign forces. After withdrawal of the Army when the Canal handover occurred on December 31, 1999, Panama is basically protected only by a police force, having disbanded its army. However, if necessary, Washington reserves the right to return to Panama to protect the Canal. Domestic tranquility is threatened by triads, criminal gangs said to be active in drug and weapons smuggling in conjunction with the Russian Mafia and Cuban intelligence.
Despite the previous turbulent conditions, the economy in this country of 2,400,000 persons has remained far stronger than most observers had predicted. Tourism continues to recover, with more than 400,000 visitors in annually generating US$3,000 million of income. Inflation is only 2%, the lowest in all of Latin America.
Hoping to attract foreign investment, the Government is putting customs duty cuts into effect on a group of more than 100 products required by the bread baking and construction industries. Complaints from domestic cement manufacturers are being met with the reminder that the tariff cuts were part of a well-publicized growth plan. Official sources say that the reductions exceed the levels for lowered duties Panama negotiated with the World Trade Organization.
Other Panamanian measures envision expanded trade in the Canal's new era. In its continuing campaign to enter commercial alliances with the rest of the Western Hemisphere, Chile has negotiated a free-trade pact with Panama while Panama and Mexico have issued a joint statement promising a free trade accord between them shortly. An agreement with Taiwan also is aimed at promoting trade. Under its terms, Panamanian companies will receive management consulting services from Taiwan. A leading Taiwanese steamship company is constructing a US$200 million port terminal in Panama.
In spite of the once strained political climate, an average of 114 new companies have been registering daily in Panama. Gross national product is growing by 3% annually while new employment remains at 5%. The unemployment rate has dropped from 31% to 14% and per capita income at US$2,075 is still one of the highest in Latin America. Tourism earnings now surpass banking profits, rising to US$550 million. In an effort to attract foreign investors in tourism, the Government has outlined a US$700 million development plan for investment over the next five years to improve resort facilities on the Atlantic and Pacific coasts. Total trade passing through the Colon Free Zone now exceeds that reached during the Noriega regime; traffic has recovered and now exceeds US$17 billion. The Colon Free Zone, which accounts for 5% of gross domestic product, enjoys steady growth while Panama Canal traffic, representing 10% of GDP, is climbing at 2%. To make up for the reduced expansion in Canal traffic, tolls have been increased by 9%. The agricultural, fishing, and livestock sectors are experiencing problems, including banana quotas by the European Community, a weakening of coffee prices, a cut in the United States sugar quota, and ecological problems in the shrimp industry.
Exports have risen steadily since 1988, reaching 700 million balboas (US$700 million) while imports have skyrocketed to 2.7 billion balboas (US$2 billion), registering a trade deficit of approximately 2 billion balboas (US$2 billion) annually. Imports arrive chiefly from the United States, Japan and Taiwan, while two-thirds of re-exports go to the Caribbean and Latin America, especially the Netherlands Antilles, Colombia, Ecuador and Venezuela. Transit through the Panama Canal has declined by 14% since completion of an oil pipeline connecting Puerto Armuelles on the Pacific Coast near the Costa Rican border with Chiriqui Grande on the Atlantic Side.
GEOGRAPHY, COMMUNICATIONS AND TRANSPORTATION FACILITIES
Situated on the isthmus between North and South America, the Republic of Panama covers 29,700 square miles, including the Colon Free Zone at the Atlantic entrance to the Panama Canal. Transportation facilities are excellent, with sea, air and land routes easily available. Panama City and Colon Free Zone are connected by the Trans-Isthmian Highway. The Inter-American Highway bisects Panama while busy Tocumen International Airport 15 miles from the capital, Panama City, is linked with nearly two dozen airlines. Modern port facilities are available throughout the country, with Cristobal and Balboa, at opposite ends of the 51-mile Panama Canal, long-established as shipping centers. Drydock facilities in Panama are regarded as one of the best in Latin America.
Panama Canal Handover
When the United States surrendered joint ownership of the Panama Canal on the last day of the 20th century, control of the strategic waterway shifted to the independent 11-member Panama Canal Authority. Whereas previously the Canal operated on a non-profit basis, the Authority hopes to attract more foreign investors to 525 square miles of land adjacent to the Canal, valued at US$4 billion, by privatizing and offering 20-year concessions extendable to 40 years. Spanish and Hong Kong investors are already active in the area. Container port projects at Balboa and Cristobal awarded to Hutchison Port Holdings of Hong Kong led United States opponents of the handover to warn that Chinese activity in Panama would endanger the United States; however, the prevailing opinion is that fears are unwarranted, especially since the container terminals have nothing to do with Canal operations. Responding to skeptics who have questioned whether the Canal will be efficiently run and not overwhelmed by politics, Fernando Manfredo, who negotiated the 1977 treaty ceding the Canal to Panama, has stated: "The Canal is and will continue to be the main link of Latin America to the rest of the world and the world's premier shipping lane."
The future of the Canal had become a volatile issue in Panama, with political opponents of former President Ernesto Pérez Balladeres charging that he packed the Canal Authority with relations, business associates, and members of his Democratic Revolutionary Party. Outrage over Belladares' actions caused voters to reject a Constitutional amendment allowing him to succeed himself.
The Canal Authority faces the daunting job of replacing jobs and income earned from the American bases and transforming former United States facilities in the ex-American Canal Zone into industrial parks, housing, a university, hotels, sports facilities, casinos, and shopping centers. At the Canal's mid-point, a former military radar tower has been converted into a unique hotel topped by a dome containing an eco-lodge, while nearby a US$25 million rainforest resort is being developed. A 50-mile water passageway, the canal has been earning US$545 million a year in tolls.
Improving the Canal
Although 92% of world shipping can still fit into the canal, about 18% of ships under construction are too large to maneuver through because they exceed 105 feet in width or have a draft of greater than 39.5 feet. The Government therefore is sponsoring a US$1 billion program to broaden and otherwise improve the Canal in the hope of increasing traffic by 20%. Projects include: widening of the Gaillard cut (to be completed in 2002); introducing new locomotives; replacing ancient electric motors with hydraulic systems to open the gates; and enlarging the water supply five-fold by creating three new reservoirs to the west of the Canal. The latter improvement could lead the way to a third and wider lane of locks in the Miraflores area. The Government has already turned Albrook Field into a civil aviation airport and will develop Howard Air Force Base into either a regional transportation hub or an aircraft maintenance center. A research center, the City of Knowledge, is planned for Fort Clayton.
To avoid corruption, patronage, and diversion of Canal revenues to cover Government spending, the Panama Canal Authority is independently administered, with its own labor laws, procurement procedures and fiscal controls. An advisory board formed to safeguard the Canal's future includes several shipping line presidents, as well as representative of the Port of New York and New Jersey, International Maritime Organization, Industrial Labor Organization and United States-Panama Business Council.
Because of their strategic location as a gateway to the Atlantic and Pacific Oceans, Panama and its Colon Free Zone have become a unique center of combined sea-air transportation. Lower transportation costs frequently are available by combining air shipment of individual orders direct from warehouse shelves after normal ocean delivery. For example, air shipment is feasible in a matter of hours since the airport at Tocumen is highly accessible. An improved road system covering more than 5,000 miles facilitates shipments across the isthmus.
Low-cost air freight services recently have become a major advantage for companies using the zone as a sales trading base. For example, foreign firms operating in the zone ship a larger volume of goods by air than by sea. As a result of the increasing volume of cargo originating in the zone, the outgoing carriers have reduced tariffs through application of standard commodity classifications and rates. Combined with economical importation by steamer, the delivery cost at final destination makes the sea-air combination an attractive method of serving customers throughout Latin America, in Africa and in the Far East.
Panama is linked with Latin America and the rest of the world by one of the best telephone and telegraph systems in the Western Hemisphere and is hooked into the satellite system. Postal services are excellent.
BANKING AND FOREIGN EXCHANGE
Long recognized as a commercial beehive of Central America since it was a converging point of world steam-ship lanes, Panama had similarly developed into a banking and foreign exchange center. The National Banking Commission and the Government's wholly owned commercial bank, Banco Nacional de Panama (BNP), manage and supervise Panama's central banking functions. With the closing down of most banks during the 1988 political strife resulting from the Noriega upheaval, a number of major foreign banking offices and branches left the country, but virtually all have returned. Before this political and economic turmoil took hold of the Republic, Panama's banking system, patterned after the United States banking system, had increased to more than 120 commercial banks. Under Panama's revised banking legislation, any transaction exceeding US$10.000 must be scrutinized by the bank involved to make certain it has not evolved from money laundering operations. The United States and Panama also signed a Mutual Legal Assistance Treaty covering money laundering. The United States failed to persuade Panamanians to include tax evasion in the treaty because they fear it would prove disastrous to the offshore banking business. Signing the agreement has made Panama eligible for US$80 million in United States aid which otherwise would have been subtracted from the total grant of US$420 million.
Inspired by the 1970 banking law, which guarantees free movement of funds and lower taxes, more than 30 foreign countries have been represented with commercial banks in Panama. Despite the run on banks during the height of the Noriega crisis, only three banks closed and the banking industry survived without "suffering permanent damage." Total number of companies registered has soared to more than 285.000.
Since the end of the Noriega regime deposits have recovered to some US$30 billion and total loans and advances are up 50% to US$15 billion. However, domestic credits still are down because of the lagging economy. More than 6,000 Panamanians are employed by the banks, with 85 foreign banks operating in Panama. Net assets of foreign banks grew by US$8 billion in the last five years and their level of liquidity is high. Of the 120 banks officially registered, more than 70 provide full domestic and foreign services, 29 are licensed strictly to conduct international operations and the remainder are representative offices. A number of major American banks have opened branches in Panama in order to provide their customers with financing outside of the United States and to facilitate the use of Eurodollar borrowings. Many banks use their Panamanian branches to channel Eurodollars into Central and South American markets, while some of the banks are also active in financing trading. Numbered accounts are available at local banks. Offshore loans and most agricultural credits are exempt from Panamanian income tax.
Under the 1970 reform regulations, which weeded out offshore "pirate" banks, the Banking Commission (Comision Bancaria Nacional) issues bank licenses; sets reserve requirements and supervise the banking system in other ways. Every foreign licensed bank must keep a minimum of 500,000 balboas (US$500,000) on deposit at all times to guarantee it can cover its obligations. This consists of deposits at the Banco Nacional de Panama, government banking bonds, or assets free of encumbrances and those designated by the National Banking Commission. The 500,000 balboas (US$500,000) are considered as part of the 1 million balboas (US$1,000,000) capital. Bank licenses are issued in three categories: License 1, for full-service banks that serve both residents and non-residents of Panama, which must have the minimum paid-in capital of 1 million balboas (US$1,000,000) and contingent lines of credit equal to 10% of their assets in Panama; license 2, for offshore banks, which require minimum capital of 250,000 balboas (US$250,000); and License 3, for foreign banks having only representative offices in Panama.
Panama Banking Law (Decree Law No. 9) 1998
Panama's revised banking law came into force in June 1998 with the stated intent of strengthening and modernizing bank regulation up to Basle Committee standards while maintaining an autonomous regulatory environment. Panama's banking industry hopes that the position taken by the Superintendent of Banks created in the Law will be made with complete impartiality in view of the fact the appointment is made by the President's office without the right of the Assembly to advise and consent, making such a power potentially easy to abuse. The Banking Superintendency replaces the old Panamanian Banking Commission and is granted not only greater supervisory powers but also the ability to authorize the transfer of shares in a bank when such a transfer affects the control of it. A Superintendant also possesses the capacity to authorize mergers or consolidations of banks and the inspection of the economic groups of which the bank is part.
A restriction is imposed by the Law on the granting of credit facilities to one natural of juridical person where such facilities or warrants exceed 25% of the bank's capital regardless of whether the loan is totally guaranteed with money deposited in the bank. These sweeping changes were designed to improve confidence in the banking system and to encourage deposits from foreigners. Allowances will also be made for foreign regulatory authorities to file requests for information and make inspection visits to the offices of foreign banks located in Panama for the purposes of regulation and supervision. Agreements are to be facilitated between foreign regulatory authorities and the Banking Superintendency as well.
Other provisions include the following that are designed to improve depositor, investor and consumer protection:
- The effective interest rate of all loans must be specified;
- Abusive clauses in banking agreements will be addressed;
- Banks are required to file additional audited statements; and
- The bank liquidation process will be simplified.
Banking confidentiality is also guaranteed by the new Law.
Fees for banks located in Panama and those that have representative offices will be paid on the following basis:
- General licenses – 30,000 balboas (US$30,000) plus a sum of 35 balboas (US$35) for each million on total assets up to a maximum of 100,000 balboas (US$100,000) - (25,000 balboas (US$25,000) under previous laws).
- International licenses – 15,000 balboas (US$15,000)(same as under previous law).
- Representative licenses – 5,000 balboas (US$5,000).
There are also conditions for minimum capital requirements to carry out the banking activities based on Basle standards, minimum assets to be maintained in Panama, description of activities incompatible with those of banking and a number of other requirements enacted.
The bank act permits numbered bank accounts and sets severe penalties of a fine of up to 10,000 balboas (US$10,000) and a jail sentence of up to six months for anyone who discloses information except to the Court in a criminal proceeding. Judges and magistrates must keep the facts confidential while a case is under investigation and may decide never to release the facts. However, in 1987 the National Assembly passed a bill requiring banks to furnish information on financial transactions of suspected drug dealers and allowing their numbered bank accounts to be frozen. Disclosure is required for cash transactions exceeding 10,000 balboas (US$10,000) under anti-money-laundering measures enacted in 1990. The Banco Nacional, the Panamanian counterpart of a central bank, is the depository of government funds and manages Panama's international reserves. It also operates as a commercial bank and handles the clearing operations for the banking system.
The US$100 annual fee levied on corporations also is applied to branches of foreign banks. In addition, there is a banking tax of US$300, monthly for each banking office located in Panama City and a municipal charge of approximately US$30 annually. The clearing house fee is US$350 per month for each member. The annual tax on a License 1 bank is US$25,000 balboas (US$25,000), and 15,000 balboas (US$15,000) for a License 2 bank. An annual license tax equal to 1% of paid-in capital is also imposed up to a maximum of 20,000 balboas (US$20,000).
Anti-Money Laundering Laws Strengthened
Although Panama was one of the first Caribbean countries to adopt strict anti-money laundering measures, its provisions did not satisfy the three international groups that in 1999 issued "report cards" on offshore jurisdictions' performance. Not only was Panama described as "harmful" by the Organization for Economic Development and Cooperation (OECD), but it also landed on the "black list" issued by the Financial Action task Force, and was graded "uncooperative" and not up to international standards by the Financial Stability Forum.
To prevent a disastrous withdrawal of foreign investment, Parliament engaged in damage control by passing two important laws in October, 2000: Law No. 41, entitled "Capital Laundering," amends the Penal Code to expand the scope of anti-money laundering measures to capital laundering," which includes all serious crime ranging from drug trafficking to white slavery and extortion. Cabinet Decree No. 10 of March 9, 1994 made it mandatory for persons entering Panama to declare to Customs the amount of cash or negotiable instruments carried into the country. Since then, bank transactions exceeding U.S. US$10,000 in cash or similar exchange have hade to be registered and declared. Law No. 41 of 2000 extended these requirements to include all transactions of more than US$10,000 by the stock exchange, casinos, insurers, real estate agents, and the national lottery. Data is now submitted to the newly-created Financial Intelligence Unit for the Prevention of Crime and Capital Laundering (FIU). Law No. 42, also of October 2, 2000, set down the bill for Prevention of the Crime of Capital Laundering. Under Legislative Decree No. 42, natural persons and corporate bodies must declare to the Financial Intelligence Unit (1) cash deposits exceeding 10,000 balboas (US$10,000), (2) cashing or exchanging lower denominations of currency for higher denominations, or vice versa; and (3) cashing checks and payment orders issued to bearers with blank endorsements and issued on or close to the same date. Presidential Decree No. 163 of October 2, 2000 amended Decree No. 136 of June 9, 1995, extending the operational capacity of the Financial Intelligence Unit by listing in detail the Unit's functions for: (1) covering collection of information from public institutions and private entities; (2) identifying suspicious or unusual transactions by studying information; (3) exchange of information with similar enterprises in other countries; and (4) providing assistance when required to the Office of the Attorney General and Banking Superintendency.
Confidentiality Still Protected
Executive Decree No. 213 of October 2, 2000, which established the Financial Intelligence Unit for the Prevention of Capital Laundering, covers disclosure of information concerning trusts obtained by the Banking Superintendency or any other Government inspectors and introduces penalties for breaches of confidentiality in all financial matters. A public official violating this provision may have to pay a fine up to US$1,000,000.
Under a Panamanian law passed in 1994 with the help of the Panamanian Bar association, money laundering is penalized with prison sentences recently raised to a maximum of 12 years, no bail for defendants, and confiscation of assets. Bank employees are subject to criminal responsibility if found guilty of allowing any money laundering or bending the rules for extradition of offenders in drug-related cases.
Banks and other financial institutions must practice proper due diligence under Panamanian law. They are required to know their clients, monitor and report suspicious transactions of which they are aware, establish internal procedures and controls to prevent money laundering operations, train personnel properly to deter tainted transactions, and keep records of all documents and transactions for a period of five years.
The July 27, 1994 Law was further strengthened by Executive Decree No. 468 of September 19 of that year, and the Code of Conduct approved by the International Lawyers Association, which makes it mandatory for all attorneys to know their clients and to obtain sufficient information and references from clients before rendering any services. A high-level Presidential Commission operates with authority to use all means to prevent money laundering and a so-called "Drug czar" coordinates its efforts with other activities to promote anti-money laundering.
A "Financial Analysis Unit (FAU) for the Prevention of Money Laundering Obtained from Drug Trafficking" operating under Executive Decree No. 136 of June 9,1991 has been successful in compiling information from banks and other private and Government entities and individuals to inhibit activities linked to money laundering. In 2000, the FAU received increased authority to analyze all information compiled to detect suspicious or unusual transactions and movements of cash in the country from drug trafficking. Confidentiality of all financial and banking transactions is honored in order to protect the respectable status of the FAU.
Panamanian authorities have also taken drastic action to help prevent illicit money laundering operations and crime in the Colon Free Zone. In 1996, the Government issued a decree requiring all transactions in the Zone exceeding US$10,000 to be declared and it also halted receipt of such traditional payments as money orders, traveler's drafts and third party transfers.
Captive Finance Companies
Under the Panamanian banking legislation, so-called "captive finance companies" are encouraged to provide available funds and support cash flow requirements by offering a useful tool to finance semi-durable and durable products and stockpiling of goods through fully-recourse paper and collateral loans. In its efforts to become a still more important financial center in the Western Hemisphere, Panama created a rediscount counter for export credits. Initial capital was subscribed to by various Latin America Central banks whose Finance Ministers are supporting the Panamanian plan. There are no exchange is the United States dollar, which is freely interchangeable with the Panamanian monetary unit, the balboa. The balboa is at par with the United States dollar.
Documents are now being processed normally for most letters of credit and collections drawn on Panamanian buyers, with delays on receiving funds longer than 60 days. Meanwhile, the United States Treasury has eliminated regulations that made it nearly impossible for United States companies to survive in Panama. A ruling published in the Federal Register permits "administrative fees and taxes paid in connection with basic business activity" to be processed. The action by the Treasury is said to have come as result of pressure and complaints from the American Chamber of Commerce in Panama.
TRANSFER OF FUNDS AND GUARANTEES
There are no levies or controls on transfer of funds. Investment guarantees on nationalization or expropriation and against inconvertibility of currency are available through the Overseas Private Investment Corporation in the United States.
English is widely used throughout Panama, although the official language is Spanish. Bilingual secretaries are readily available. English-language newspapers are published. Ninety-two percent of the population is literate.
Most widely used Panamanian business entity and the one best suited to foreign investor's needs is the public company (Sociedad Anonima or S.A.), governed by the General Corporation Law of 1927, which is patterned after Delaware's corporation law. The S.A. can be used for either offshore exempt purposes or as a local company that is active in Panama's free trade zones. It may also operate in Panama's financial, tourist or heavy industries, though the company must arrange for the requisite license and will pay tax on income arising from such domestic concerns. Some articles of the Commercial Code deal with stockholders' powers, while laws enacted in 1956 and 1962 and amended in 1997 control capitalization.
Code of Commerce
Decree Law No. 5 of July 2, 1997 broadly amended the Code of Commerce by revising, deleting or adding a number of pertinent articles covering evidence of organization, competent authority, exchange of information, continuity, transfer of registration, franchises, accounting procedures and records, fungible securities, stockbrokers' meetings, directors' resolutions and many more adjustments to the Code. Among the most significant changes is the permission granted corporate shareholders and directors, as well as individuals or corporations. Special general powers of attorney must be granted by public deed or by private documents authenticated by a Notary of Public. These documents do not have to be recorded in the Public Registry Office, a decision that may be made at the option of interested persons.
Except for a bank or insurance company, there is no minimum capital requirement and both cash and in-kind contributions are permitted. Non-cash contributions are assessed by the Board of Directors and listed in the incorporation documents as shares with no nominal value. Capital, which can be designated in any currency need not be fully subscribed to or paid within a certain time. Registered shares do not have to be paid in; bearer shares must be fully paid in unless special instructions are issued. Two adults are required to organize a corporation and each customarily subscribes to a least one share. After incorporation, the number of shareholders can be reduced to one. Shareholders elect a Board of Directors of three to 11 members who need to own shares in the company. There are no requirements as to Panamanian citizenship or residence for corporate ownership and directors but there must be a statutory resident agent, who usually is the incorporating attorney. Directors or officers of a Panamanian corporation may be of any nationality and country of residence and can be nominees. Stockholders' and directors' meetings, management of the company, maintenance of its accounts and storage of the share register can be anywhere in the world. Proxy voting is allowed. Incorporating costs, including legal and accounting fees, range from US$500 to US$1,002.
An initial act of the International Lawyers Association, created in 1994 by the 17 most internally active law firms in Panama, was to support Executive Decree No. 468. Uncovering illegal financial activities is the main goal of this decree, which requires registered agents of exempt firms to know the full nature of their clients and maintain in their files the kind of data that law authorities need in order to identify and apprehend drug dealers or other money launderers.
Panamanian attorneys draw up a public deed and then usually complete the incorporation process, after which they assign their rights to their clients. Getting official approval can sometimes be accomplished in as short a span as three working days but the usual period is from ten days to two weeks. Articles of Incorporation (pacto social) submitted to the Mercantile Division of the Public Registry should include: the name and addresses of the corporation, its resident agent 8either a Panamanian lawyer or law firm), officers and at least three directors with their signature powers; the corporation's main objectives or a statement that it may pursue any legal activities; amount of capital and types of shares; and lifespan of the corporation, which can be limited but is usually stated as perpetual. By-laws can either be inserted in the Articles or registered separately.
The name of the corporation, which may be expressed in any language, must include a word or abbreviation such as "Sociedad Anonima," "S.A.," "Corporation," "Corp.," "Incorporated," or "Inc." to denote clearly that it is in fact a corporation. Because the name must be cleared with the Public Registry, to avoid conflict with existing companies it is advisable to submit one or two alternate names along with the preferred name. A name can be reserved for 30 days with the Public Registry. Instead of waiting to clear the name and comply with other incorporation formalities, investors can also acquire a shelf company at a somewhat higher cost.
An S.A.'s Capital
The application for incorporation must include the number of shares into which the capital is to be divided. If the capital is represented by a stated number of no-par value shares, the Mercantile Registry will assign a fixed value of US$20 each for registration tax assessment purposes but no specific amount of capital need be stated. The shares may be nominative or bearer. Panamanian law permits Preferred; Class "A," Class "B," voting, nonvoting and other capital share arrangements. A popular procedure is to issue 500 no-par shares totaling US$10,000 capital since this entails a minimum registration fee of US$24. Articles of Incorporation normally provide for US$10,000 of authorized capital consisting of 100 par value shares of US$100 each. One bearer share is entitled to one vote if the certificate is exhibited at the shareholders' meeting or other evidence of ownership is provided.
A President, a Secretary and a Treasurer are required. Although an individual may hold more than one office, the President is not allowed to serve as the Secretary of the same corporation. Names and addresses of officers and directors must be supplied, but shareholders can remain anonymous.
Dividends are paid to shareholders out of net profits or from the excess of assets minus liabilities. Corporations may declare and pay dividends upon the basis of the amounts actually paid for shares that have been partially or fully paid. Dividends also may be paid in shares of the corporation is the shares are issued for this reason and, if the shares previously have not been issued, the amount must at least equal the value of the shares issued and is transferred from the surplus account to the capital account.
The Board of Directors must consist of at least three directors, who may be of any nationality or domicile. If the Articles of Incorporation or the bylaws do not otherwise provide, the Board may approve two or more members to constitute a committee having all the powers to administer or manage the business of the corporation. The Board of Directors may authorize the sale, lease or exchange of all or part of the assets provided it is authorized to do so by resolution of the majority of shareholders.
A company can use any currency to record its transactions in the obligatory balance sheet and inventory book. An audit of annual financial statements must be performed by independent Panamanian certified public accountants for: (1) companies listed with the National Securities Commission, insurance and reinsurance companies, banks and savings institutions; and (2) any company with capital or annual sales volume or gross income exceeding 100,000 balboas (US$100,000). Companies that invite the public to buy securities must submit audited financial statements to all registered shareholders and to the National Securities Commission. There are no statutory audit requirements other than for the companies mentioned above and in general no need to file financial returns. Books of account must be stored in Panama if they record transactions conducted within the country.
Amendments to Panama's General Exposition Law of July 1997 permit redomiciliation of Panamanian companies to other foreign jurisdictions and of foreign companies into Panama. Corporate directors are allowed for the first time. Other changes in the law include: (1) elimination of the requirement for share registers and for minute books to be legally stamped and bound; (2) granting permission for meetings of shareholders, directors and liquidators to be held by telephone, fax, E-mail or other electronic media; (3) removal of the need for powers of attorney to be publicly registered but permitting specific powers of attorney to be registered if desired; and (4) assets located outside Panama can be pledged to creditors by an offshore corporation through a public deed or a notarized private document without undergoing formalities of execution and registration in Panama.
If the Articles of Incorporation provide, two or more corporations may merge into a single corporation but the merger agreement must be approved by the shareholders of each one of the merging corporations at separate meetings especially convened for this purpose. Although distributions may be in cash, promissory notes or bonds, the amount of capital issued by the new corporation may not exceed its assets after the distribution. The merger agreement must be filed at the Mercantile Registry. After the merger agreement has been executed and filed, the debts of the terminating corporation must correspond to the newly-consolidated corporation and compliance and payment thereof may be required as if it had been previously contracted.
There is a 1% company license fee charged annually based on the invested capital, with a maximum of 20,000 balboas (US$20,000). It is in the form of an annual business operating license. The minimum tax on registered capital is paid only at the outset of incorporation with the schedule of rates 50 balboas (US$50) on the first 10,000 balboas, 0.075% between 10,000 balboas and 100,000 balboas, 0.05% between 100,000 balboas and 1,000,000 balboas, and 0.01% over 1,000,000 balboas of capital, or 537.50 balboas, graduating to 1,537.50 balboas on 10,000,000 balboas. 20% surtax is applied on these rates. Companies with no-par value share pay the minimum capital registration tax of 20 balboas plus a 20% surtax or a total of 24 balboas on the first 10,000 balboas. No-par shares are subject to a maximum fee of US$1,000. There is a registration duty of 537.50 balboas on the company's capital in order to file the deed plus 0.0001% when capital is over 1,000,000 balboas plus 0.0001% on the excess. The annual franchise tax for the Public Registry is 150 balboas. Non-Government owned insurance companies pay a franchise tax of 10,000 balboas on assets up to 5,000,000 balboas, 20,000 balboas between 5,000,000 balboas and 10,000,000 balboas and 25,000 balboas over 10,000,000 balboas. New insurance premiums are subject to a 2% tax plus a 5% surcharge (7% for fire risk). There also is a 1% license or patent tax on net worth of firms. An annual registration fee for corporations of US$150 is payable. A US$150 fee is charged for the registered agent.
Other Business Entities
In addition to the corporation, which is the most common form of business entity employed by foreign investors, the commercial code recognizes: (1) the general partnership (sociedad colectiva), (2) the simple limited partnership (sociedad en commandita simple), (3) the stock-issuing partnership (sociedad cooperativa). It is also possible to form a limited liability company (governed by Law 24 of 1966), joint venture, capitalization company, sole proprietorship and branch. More documents must be registered for a branch than for a corporation so that forming a branch may be more costly and time-consuming. All documents must be stamped by a notary public and authenticated by a Panamanian Consul in the country of origin. The parent company must obtain a commercial or industrial license and must appoint a resident agent, who is authorized to act in all legal matters and appoints a manager having adequate power of attorney to carry on business and make decisions, which are not always in line with the parent company's whishes or intentions. The agent may be a company employee or director but any legal representative is acceptable. Specialists in company, bank and trust organizations will act as agents.
A Spanish colony until 1821, when it broke away from Spain and forged a political alliance with neighboring Colombia, in 1903 Panama ended its ties with Colombia and emerged as an independent republic.
Public authority is vested in the legislative, executive and judicial bodies. The legislature is a unicameral National Assembly consisting of 67 Assemblymen elected by direct popular vote for a period of four years. The executive branch is headed by the President of the Republic, elected by direct popular vote for a period of five years, together with two Vice-Presidents. The Cabinet is appointed by the President. The 1983 amendment to the 1972 Constitution prohibits the President from succeeding himself but he may be reelected after his successor has left office. Legislative power is in the hands of the legislative assembly. The Supreme Court, the court of last appeal, is composed of Justices who are appointed by the Executive branch and must be approved by the Legislative Assembly. Cases are also tried in Superior District Courts and lower courts. For political purposes, Panama is broken down into nine provinces and the territory of San Blas. Each province is led by a governor and is divided into municipalities, each with a mayor as its chief executive.
At least 90% of the workers in every commercial or industrial enterprise must be Panamanians (or certain specified foreigners such as those married to Panamanians or residents of Panama for 20 years or more), and these persons must receive 90% of the wages and salaries. However, there are a number of exemptions and the laws are not rigid with regard to bringing in administrators, experts and technicians as required. The principal labor legislation is the Labor Code, which establishes a maximum of eight hours a day and a 48-hour work week for day work.
Collective bargaining is not mandatory and is not widely practiced. Organized labor represents considerably less than 10% of the labor force. There are no strong national union movements. Unemployment has dropped to 14%. The minimum wage in Panama City and Colon is less than US$1.00 an hour, with a lower rate in other areas.
Employers are required to withhold from employees the social security quota of 7.5% on salaries, wages and other compensation plus 1.25% education tax, with no limit on the taxable amount, and to contribute an additional 10.75% plus a 1.25% education tax. Employers also may be charged from 0.56% to 5.6% of their total wages and salaries for cost of compensation to cover occupational accidents. Dismissed pay ranges from one week's salary to three weeks' salary when length of the employees' service is from one to two years. Severance payments graduate from one week's to seven months' salary when the employee's length of service exceeds 20 years. The Social Security Law sets forth the areas and categories of employment for which social security coverage is mandatory. Foreigners may engage in a business with the exception of the retail trade and certain professions and trades. Under the 1975 Tax Credit Certificate legislation to encourage nontraditional exports, 20% of the amount of local value added to exports may be used to offset all direct or indirect taxes. Companies in urban areas must add a minimum local content of 20% and a minimum local value of 20%. For rural areas, the limit is reduced to 10%.
FREE TRADE ZONE
One of the most efficient and sophisticated trade zones in the world, the Colon Free Zone is located on the Caribbean side of the isthmus adjacent to the Panama Canal. The Colon Free Zone has operated under special legislation as an autonomous institution since 1948. It provides facilities in the heart of Latin America where firms can warehouse, process, manufacture, repackage, display and ship their merchandise or products. They pay duty on imports only when items are shipped into the customs territory of the Republic. There are no taxes on production machinery or materials, no sales tax or tax on investments or on dividends, and there is no capital gains tax if the company keeps the asset for at least two years. Income that arises from sales to other countries gets the benefit of a reduced tax: on profits up to US$15,000 the tax is 2.5%; US$15,000 to US$30,000 profit pays a tax of US$375 and 4% on the amount above US$15,000; US$30,000 to US$100,000 profit pay US$975 and 6% on the amount above US$30,000; over US$100,000 profit pays a tax of US$5,175 and 8.5% on the amounts above US$100,000 only when items are shipped into the customs territory of the Republic. This enables them to serve the market of Panama, the Panama Canal Zone and the entire Latin American market effectively from one location.
Under Law 28 of October 22, 1995, tax credits available to exporters in the Colon Free Zone are progressively reduced until they are completely abolished by December 31, 2002. Benefits to taxpayers subject to the Industrial Promotion Law and operating under the Law may operate under the Tax Incentives Act but are subject to general income tax rules.
Imports arrive chiefly from the United States, Japan and Taiwan, while two-thirds of re-exports go to the Caribbean and Latin America, especially the Netherlands Antilles, Colombia, Ecuador and Venezuela. Relatively few of the more than 1,800 firms doing business in the free zone build their own facilities. They find it more practical to lease a building or space, or even to operate through independent public warehouses, management service firms, and other specialized organizations within the zone. Annual turnover in the free zone is currently at the rate of US$17 billion and employment exceeds 8,000 workers.
As a result of the Colon Free Zone's continually expanding warehouse facilities for its tenants, foreign companies are able to reduce excessive inventory building for foreign markets, a costly burden in their overall profitability. For instance, by maintaining flexibility of stocks, goods may be avoided while, simultaneously, shortage of the same stock may be created due to unexpected demand by other markets. For companies, which are not in a position to build their own warehouses, the Colon Free Zone will arrange contracts of reasonable duration and at low rentals to construct these facilities to specifications of the lessee at reasonable fees. The present 178 acres of the zone, including 94 acres in Colon City and 84 acres on France Field, contain some public warehousing space but are occupied principally by buildings leased to companies or land on which firms have constructed their own buildings. Building plans must be approved by the free zone technical department. In view of the rapid expansion in turnover in the zone in recent years, the total area has been extended to 268 acres.
Development of France Airfield
With passage of the Canal Treaty and the return to Panama of the France Air Field, the Government acquired 148 additional acres. It has constructed a bridge that eases truck access into France Field. Leases usually are for 20 years with option for renewal. Free zone warehousing includes such services as receiving and checking merchandise, repacking, reshipping, documentation, freight forwarding and the maintenance of inventory and accounting records. A number of reputable management servicing companies, such as the Panama International Trust Corporation (PANTRUSCO), provide these facilities for foreigners who cannot or prefer not to provide their own staffs. Several banks now operate in the France Field as well as the original area. Captive finance companies may be used for short-term financing of distributor and agent sales as well as storage of goods in the zone.
Export Processing Zones
The success of the Colon Free Zone during the past four decades inspired Panama to pass a law authorizing the establishment of multi-sector export processing zones (EPZ's). Under Law No. 16, passed in November 1990, these zones are restricted to production or assembly of goods and services for export along with necessary support activities. The National Assembly has created a supervisory body, the National Commission of Export Processing Zones, under the Commerce Ministry, to handle the establishment of the zones and to regulate their activity. Under Law No. 25 of November 30, 1992 companies and individuals investing or operating in an EPZ are entitled to an exemption from income tax and import duties and sales taxes on imported machinery. Developers and promoters also are exempt from real estate taxes on the sale of land in an EPZ. In addition, interest and dividends from securities issued by promoters in local or international capital markets are exempt from tax in Panama. Investors may be foreign or Panamanian companies and must obtain a license from the National Commission of Export Processing Zones for the development of a specific zone. Companies established in an EPZ are expected to export 100% of their production. Special immigration and labor permits are available for investors and employees in approved EPZs. Companies that become zone tenants are exempt from some of the burdensome clauses of the Labor Code and from import taxes on equipment, building ownership taxes, and income tax for up to a 20-year period. Another benefit is loss carry forward provisions for up to three years. Profits exceeding 20% of the taxable income reinvested in the expansion and development of the export processing zones may continue to be exempt from income tax after termination of the original ten-year tax holiday. Private enterprises establishing industries in designated zone areas are also granted exemption from real estate taxes on transfer of land and sales taxes. When all production is re-exported, there is a 100% indefinite exemption and a 20-year holiday from real estate taxes if the zones are located outside the Provinces of Panama and Colon.
Petroleum Free Zones
Under Decree No. 29 of July 14, 1992 Petroleum Free Zones were created for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a maximum of US$250,000. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for US$1,000,000. Local products must be used if available at competitive prices.
Qualified investors can engage in the following activities:
- Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments;
- Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and
- Import, store or handle petroleum for export or marketing and distribution within Panama.
Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.
DOCUMENTATION FOR TRADING
Panama permits the invoicing of foreign trade documents in any currency, including that of the importing and exporting country. Importers are not required to make prior deposits in local banks whose export proceeds do not have to be surrendered to authorized banks or to the Central Bank. An importer must provide a commercial invoice and a consular invoice issued in the country of origin indicating the unit price, total FOB value and any freight and insurance charges. An entrance form signed by the Commercial Movement Department of the Free Zone must accompany the invoice and bill of lading. In addition, an internal movement form is needed when goods are transferred to another firm in the Zone and there is an outgoing form for exports. Imports generally are not subject to quota restrictions. A 7% surtax and a 5% VAT may be imposed.
Panama has a tax treaty with the United States avoiding double taxation only on shipping income. And in April, 1991, Panama signed an agreement for a "Treaty for the Mutual Assistance on Criminal Matters" with the United States in order to provide for more effective coordination between the two countries in dealing with investigating, prosecuting, and suppressing serious crimes, and with continuing effort to increase this effectiveness. Despite powerful opposition from Panamanian bankers, who were concerned the treaty would violate their secrecy status code, the National Legislative Assembly of the Republic of Panama approved the execution of the treaty in July 1991. This Mutual Assistance Treaty, similar to those approved with other Caribbean Basin Initiative countries, including Bahamas, British Virgin Islands and Cayman Islands, relates to drug abuse, crime and fraud, or specifically such criminal activities as illegal narcotics, theft, crime of violence, fraud, or use of fraud, or violation of a law of one of the Contracting States relating to currency or other financial transactions contributing to the crime. The provisions in the treaty do not allow for any exchange of information in matters relating to taxation.
In an effort to cooperate in the arrest of money launderers, the Government also signed a Mutual Legal Assistance Agreement with the United Kingdom and adopted a law tightening requirements for companies' registered agents concerning gathering information and their client references.
(Courtesy of Matthew Bender: 'Tax Havens of the World' by Walter H. & D.B. Diamond).
To learn about Panama's secrecy laws: click here!
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