Panama: Growth and stability

Author: | Published: 1 Oct 2011
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The Republic of Panama occupies a strategic geographical location and configuration which are often considered to be its principal natural resources. Its economy has historically been oriented toward domestic and foreign trade services; however, in the past years, due in large part to the real estate boom, it has attracted the most direct foreign investment of all Central American countries.

The International Monetary Fund projected that the Panamanian economy would grow at a rate of 6.2% in 2010, identifying as key factors the soundness of the public finances and banking system. For the year 2010, the government estimates that the country’s GDP grew between 6.5% and 7%, by which Panama resisted the recent global financial crisis in much better form than many other economies in the region.

The country is presently experiencing a special impulse due to the investments being made in a project involving the expansion of the Panama Canal, estimated at $5.2 billion, plus an additional $5 billion, at least, in infrastructure projects by the government. Another key factor that has favoured the Panamanian economy has been the increase of direct foreign investment coming primarily from the United States, Spain, Colombia, Venezuela and the United Kingdom, and which is concentrated in the hotel, real estate, electrical and commercial sectors. To further fuel the cause, Panama has recently executed treaties to avoid double taxation with 12 countries, removing it from the OECD’s grey list and providing another lure for international investors.

By adopting aggressive fiscal policies, Panama has gained Investment Grade for the first time, granted by the most recognised rating agencies: Fitch Ratings (BBB- Positive), Standard & Poor’s (BBB- Stable) and Moody’s Investors Service (Baa3 Stable). Consequently, Panama has joined a select group of countries with Investment Grade, becoming only the fifth Latin American nation with this rating (along with Brazil, Chile, Mexico and Peru).

In recent years, both the Panamanian government and the private sector have invested significant funds with the purpose of promoting tourism in the country. In 2008, Deloitte Touche Tohmatsu released a report ranking the highest occupancy rates in the world, outside the United States. Panama City came in second with an 84.7% occupancy rate, close behind Perth, Australia and followed in third place by Dubai. According to statistics provided last year by the World Tourism Organization the region rose by 9% in 2010 from 2009. STR Global confirmed that the Central/South America hotel development pipeline comprises 133 hotels totalling 21,384 rooms, and that Panama tops the list with 3,113 rooms under construction.

Buying or selling property in Panama

Before learning how to purchase or sell a property in Panama, there are some ground rules to become familiar with.

Foreigners and Panamanian companies owned by foreigners cannot purchase real estate within 10 kilometres of the borders with Costa Rica or Colombia.

Foreigners can own islands and beach-front property, but there are, in certain instances, cumbersome formalities that must be followed before obtaining title.

In addition, the purchase of real estate can be accomplished mainly by the purchase of titled property or by purchasing the shares of a Panamanian corporation that owns the real estate.

The standard process when purchasing real estate in Panama is as follows:

(i) Due diligence of the property including a title search in the Public Registry, tax status at the Ministry of Economy and Finance and a physical inspection of the real estate;

(ii) The execution of a preliminary agreement also known as a promise to purchase contract, which stipulates the common clauses required in said type of agreements and important information (purchase price, method of payment and closing date);

(iii) Payment of a transfer tax equivalent to 2% based on either the sale price or on the assessed property value, whichever is higher;

(iv) Payment of a capital gains tax equivalent to 3% on either the sale price or on the assessed property value, whichever is higher in cases where there is no gain, or payment of a capital gains tax equivalent to 10% of the profit made by the seller in the purchase/sale operation in cases where there is a gain; and

(v) Execution of the definite purchase contract embodied in a public deed, which must be filed and recorded in the Public Registry of Panama.

The Public Registry of Panama was created to serve as the means of constitution and transmission of the ownership of real estate and their collaterals. Unlike other countries, for example the United States, title insurance is not required due to the fact that the Public Registry provides publicity and protection to and from third parties.

Once the definite purchase deed has been recorded at the Public Registry, the title is transferred and the purchase/sale process is complete.

Property taxes must be paid on real estate in Panama. Owners pay tax according to a progressive scale that ranges from 1.75% on the excess over US$30,000 to 2.1% on the excess over US$75,000.

As part of the effort being carried out by the government of Panama in maintaining the surge in the construction sector together with the growth in the real estate market and the national economy, the Legislative Assembly approved Law No 21 of 2008, which amends Law No 6 of 2005 on fiscal equity.

Law No 21 establishes a 20-year tax exemption on real estate tax improvements on new constructions which have construction permits issued before July 1 2009, as long as the registration of the improvements are recorded in the Public Registry before December 31 2011.

Investment framework and policy

The development of institutions and instruments to regulate business activities in Panama has been consistent with its trade and services-oriented economy, which is closely connected to the international market and geared to using Panama’s geographic position. As a result, the aim of the legal and institutional framework is to offer many facilities and incentives for the development of international commercial and service activities in Panama, with very few requirements regarding the nationality of investors and with no restrictions on converting currencies or transferring funds.

Historically, the policies of the Panamanian government toward foreign investment have been so open that there has never been any need for a formal statement of policy on this subject, and legislation hardly establishes any differences in treatment between nationals and foreigners. Similarly, all foreign investors, regardless of their country of origin, are treated equally and there are no general restrictions of foreign ownership on foreign enterprises and joint-ventures.

The country’s foreign investment policy may be summarised as follows.

  • There is no explicit formal policy about equity participation of foreigners in investment ventures in Panama. Pragmatism dictates that, for larger projects, the size of the Panamanian capital market precludes any significant participation of national investors. Usually, for the larger ventures involving the exploitation of natural resources the Panamanian government prefers to have a majority participation in the equity.
  • The government encourages maximum employment of local nationals. Foreign companies are allowed to bring in needed foreign personnel to train Panamanians; however, the law sets maximum percentages of foreign employees allowed to be on the payroll of a given employer. Foreign companies are also allowed to fill certain key or top management posts, including those positions involving sensitive information, with their own personnel.
  • There are no regulations or limitations on converting and transferring funds to and from Panama.
  • The Panamanian government does not limit, in any form, overseas borrowing and the remittance of dividends and royalties abroad by foreign or national investors.

Direct investment

The main method of investing in Panama is the creation of a subsidiary. This has been the standard vehicle for many overseas companies to establish their interest in Latin America. On the other hand, the registration of a branch is used as an investment method only in specific cases when certain tax advantages or other benefits are granted to the parent company in the country of origin.

The ease and flexibility of Panama corporate law, coupled with a dollar economy and Panama’s strategic geographical position makes it the ideal place for setting up headquarters to serve the Latin American and Caribbean markets.

Some relevant aspects that attract foreign investments are:

  • Panama’s legislation does not consider as taxable income revenues originating from transactions that take place outside the Panamanian territory (offshore) even when they are managed within Panama;
  • Panama’s Corporation Law is very flexible about the purpose of a corporation, the amount of capital, the nationality of shareholders, the existence of bearer shares, and the geographic scope of operations;
  • There is no control over free transfer to and from the country of capital, dividends, or payments for any other purpose; the fact that there is no national paper currency acts as a built-in guarantee against the establishment of foreign exchange regulations;
  • An international banking centre which operates freely in all currencies and creates a financial climate that encourages the free movement of funds; and
  • In Panama, investments in the domestic industry are more frequently done through purchases of stock or assets of an existing company and also as part of the privatisation programme sponsored by the government. In addition, a fair amount of domestic investment is also done by entering into joint-venture agreements.

Panama Corporate and Commercial law recognises various types of legal entities, to wit: the corporation (Sociedad Anónima); limited liability company (Sociedad de Responsabilidad Limitada); general partnership, with a clause of limited liability (Sociedad Colectiva Limitada); and partnership limited by shares (Sociedad en Comandita por Acciones).

The most common form of business entity adopted by Panamanians and foreign investors in Panama is the corporation because of its ease of incorporation and the flexibility that it grants businesspeople and investors

Special incentives for reforestation

Pursuant to Law No 6 of 2005, special incentives were established concerning the activity of reforestation. The purpose of the Law is to increase reforestation in Panama and to regulate this activity through the National Environmental Authority (Autoridad Nacional del Ambiente, or ANAM) and the Ministry of Economy and Finance.

The main tax incentives under the Law are:

  • total exemption from the payment of income tax on earnings derived from the commercialisation of products extracted from forest plantations up to their final cut, which are established within a period of 13 years starting on the day Law No 6 was enacted, as long as the owners of these plantations are recorded at the Forestry Registry of ANAM;
  • total exemption from import duties, taxes, levies, or any other charges on the importation of machinery and agricultural equipments, spare parts, tools, agrochemicals, seeds, and any other element necessary for the exclusive use of the reforestation activity; and
  • total exemption from the payment of property tax and property transfer tax, as long as the real estates under reforestation use more than 75% of the land for this purpose or have a minimum of 200 hectares under reforestation.

Special economic area

Law No 41 of 2004 created the Panama Pacifico Special Economic Area, comprising 2,005 hectares of the former Howard American military base. The main objective of the Law is to promote specific business activities, including back office operations, call centres, high-tech product and process manufacturing, offshore services, stock transfer between on-site companies, corporate headquarters (governed by MCH Law 41 of 2007), and distribution centres of multinational companies (Law 8 of 2010), among many others.

London & Regional Panama, the master developer of the Special Economic Area, plans to develop 1 million square meters of commercial space and 20,000 new residential units. In addition, Panama Pacifico includes the former Howard airport with a 2,591-metre airstrip which will allow international private flights, among other uses.

Panama Pacifico is only 15-minutes by scenic road from downtown Panama City. It is near the Panama Canal, Balboa container port and the Port of Rodman. It is also near the coast where Kobbe Hills, a Greg Norman Signature championship golf course and residential community, will be developed.

All companies registered in the area will be exempt from indirect taxes, such as:

  • any tax, levy, rate, encumbrance or import duties on any merchandise, products, equipment, services and other goods in general that are entered into Panama Pacifico;
  • sales taxes.
  • any tax, duty, rate, levy or fee with regard to the movement or storage of fuel or other hydrocarbons and their derivatives;
  • any commercial or industrial licences or registration tax;
  • real estate taxes on land and commercial/industrial improvements as well as from the Tax on the Transfer of Immovable Goods;
  • export/re-export tax of any type of merchandise, products, equipment, goods or services; and
  • any tax, rate, duty, encumbrance, withholding or other fees of a similar nature applied to payments to foreign creditors, for the interest, commissions, royalties and other financial fees generated by the financing or refinancing granted to the companies in Panama Pacifico and for the financial lease of equipment required for the development of the activities, business or operations carried out within Panama Pacifico.

Direct taxes are paid by all companies except those established by Law 41 of 2004 as business activities specified under article 60 which will be completely exempted of all taxes. Payment of direct taxes refers to Income Tax, Dividend/Complimentary Tax, and Transfer/Withholding Tax.

The labour rules within the area are similar to Panama’s general labour rules, with a few variations. The labour regime is designed to allow 24-hour operation, at a competitive scheme.

Multinational companies

Created by Law 41 of 2007 (not to be confused with Law 41 of 2004), the Multinational Company Headquarters law seeks to create the conditions that will enable Panama to become the site of regional headquarters for multinational companies, which will undoubtedly benefit the economy by attracting foreign capital investment, use of local goods and services, creation of jobs and the transfer of technology. An MCH Licence will be granted to companies for an indefinite period of time and will be accompanied by a registry number that must be used in all administrative processes in Panama.

The headquarters of multinational companies that are presently operating in Panama and provide services to companies related to the multinational company outside of Panama can take advantage of the benefits afforded by this Law.

The main tax incentives are, firstly, a total exemption from income tax payments in regard to the net or gross income generated in Panama for services rendered to persons (individuals or legal entities) domiciled abroad, that do not generate taxable income in Panama.

Secondly, because the Law deals with the exportation of services, the services rendered by a company will not be subject to the payment of service tax, as long as the services are rendered to persons domiciled abroad that do not generate taxable income in Panama.

Other rights for investors

Panama grants permanent residence permits to foreigners who invest in the development of the country. These permits can be extended to their relatives as long they prove an additional investment or economic solvency of $2,000 for each dependent.

A foreign investor with his own capital can invest either in his own name or through a legal entity in any commercial or industrial activity that is not restricted to Panamanians. In general, the investment grants a Provisional Permit of Residence valid for two years. Once the two years have expired, Permanent Residence may be requested.

Law 54 of 1998, better known as the Juridical Stability Investment Law, was enacted with the intention of guaranteeing all foreign and national investors equality in terms of rights and obligations of investments made in Panama.

Among the investment activities for which the law provides legal stability are: tourism activities, industrial, agricultural, forestry, mining, petroleum, telecommunications, construction, and port developments, among others. A qualifying enterprise must have a minimum investment of $2 million, and the projects must be finalised within a maximum period of two years; the government may grant an extension, however.

The most important guarantee that the law provides is 10-year stability as of the time of registration of the investments. This guarantees that all legal, tax, customs, municipal and labour rules will remain identical to those in force at the time the investment was registered.

Any controversies that may arise between the state and the investor by reason of the application, execution or interpretation of the law must be settled by conciliation in accordance with the Regulations of Conciliation of the Center of Conciliation and Arbitration in Panama.

The Law provides the investor a compensation mechanism for those cases in which the state, for reasons of public utility or social interests, expropriates an investment protected by this Law.

About the author

Gilberto Arosemena Callan joined Arosemena Noriega & Contreras in July 2007. He has participated in a range of international transactions including real estate acquisitions, securities matters, negotiations and drafting of commercial contracts, corporate and estate structuring, trusts, and identification of investments in various fields. He is involved in arbitration both as a lawyer and as an arbitrator.

Arosemena received his law degree from the Universidad Santa Maria La Antigua in Panama. He also holds a Master’s of Laws from Northwestern University School of Law in Chicago, a specialisation in Business Administration from Instituto de Empresa in Madrid, a Master’s in Arbitration, and a postgraduate degree in International Trade from Universidad Latinoamericana de Comercio Exterior. He has authored many articles and newsletters, including the chapter on Panamanian arbitration law in the book Commercial Arbitration in Latin America. Arosemena is an active member of the American Chamber of Commerce in Panama and Panama Bar Association, among others.

 

Contact information

Gilberto Arosemena Callan
Arosemena Noriega & Contreras

Elvira Mendez Street Nº 10
Interseco Building, 2nd Floor
P.O. Box 0816-01560
Panama, Republic of Panama

t: +507 366 8400
f: +507 264 4569
e: garosemena@anorco.com.pa  
w: www.anorco.com