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Panama: Free trade zones

James Sattin

While this summer's grand inauguration of the expanded Panama Canal has rightfully taken centre stage in the conversation on Panama's role in facilitating international trade, other more subtle efforts by the government are also beginning to produce noteworthy results. In particular, in April Panama's legislature passed Law 8 of 2016, which, among other things, restructured the Colon Free Zone. This is a long-standing international free trade zone located in the city of Colon on the Atlantic side of the Panama Canal. Law 8 replaced the 68 year-old Law 18 of 1948, which was understandably in need of modernisation.

Law 8 provides comprehensive legislation on a variety of free zone-related issues. Its key features include:

  • allowing certain new types of regulated activities within the Colon Free Zone, such as businesses relating to aviation and airports;
  • encouraging foreign businesses to set up operations and headquarters in the Colon Free Zone. It does so by offering numerous tax benefits and exemptions, as well as creating a new, one-stop window for the much quicker and more efficient processing of immigration and work visas for foreign employees;
  • increased efforts and procedures to prevent money laundering, corruption, and the funding of illicit activities; and
  • the incorporation of certain provisions and ideas from Panama's public procurement law into the administration of the free zone.

Among the benefits offered to businesses that operate in the Colon Free Zone are exemptions from national and local taxes in relation to the entry and storage of goods and certain other securities. There is also a 50% reduction in the annual operations tax rate applied to companies, from approximately one percent down to 0.5% of capital.

Similarly, there are exemptions from value added taxes (VAT) for the master developers and promoters of projects in the free zone as well as in the Panama Pacific Special Economic Area, which is located on Panama's pacific coast. Also, companies that have obtained a multinational company licence for the Colon Free Zone may now operate call centres there, provided they consolidate their operations.

Although Law 8 is young and its effects are only just beginning to take hold, it has already led to new businesses setting up operations in the free zone. Many businesses that are already in the free zone are also reorganising to take advantage of the law's benefits. The free zone is also set to reap the benefits of the revitalisation of the city of Colon itself, which is currently undergoing massive government and private investment-funded reconstruction. This includes the building and restoration of residential and commercial complexes, government buildings, new and refurbished streets and sewage systems, among countless commercial ventures.

The expanded Panama Canal may be the most visible sign of Panama's role as an integral cog in the machine of international trade, but beneath the surface, Panama's government is engaged in extensive efforts to make the country's economy more accessible and attractive to all of the world's markets.

James Sattin

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