How to do Business in the Republic of Panama
The Republic of Panama is an independent country since 1903, joining Central America and South America, between Costa Rica and Colombia. It borders the Caribbean Sea and the Pacific Ocean. It is subdivided politically in nine provinces and five special indigenous regions. The Panama Canal crosses the Republic from North to South, at the Isthmus’ narrowest point.
Area: 77,082 square kilometers.
Population: 3,360,475 (July 2009 estimate).
Government type: Constitutional democracy, centralized Republic.
Capital: Panama City
Language: Spanish is the official language; English is widely spoken.
Time Zone: GMT-5
Currency: officially, known as the “balboa”; the US dollar is legal currency since 1904.
Weather: Tropical maritime; with a rainy season from May to January and a dry season from January to May.
Government: Constitutional democracy structured in three branches: Executive, Legislative and Judiciary.
Based on the civil law system; there is a judicial review of legislative acts in the Supreme Court of Justice and we accept compulsory International Court of Justice jurisdiction with reservations.
How to get here:
Our international airport is Tocumen International Airport, which is easily accessible from the United States and Europe. It is serviced by Copa Airlines, our national carrier, and many other international carriers.
The exercise of the economic activities depends mainly on the private sector. The most developing economic sector is services, with special emphasis on international commerce carried out within and from Panama. Outstanding in importance in the latter sector are the International Banking Center and the Colon Free Zone.
The official monetary unit is the Balboa, which is at par value with the United States dollar (US$), as the currency that circulates freely in the country. The constitutionally mandated absence of officially issued paper currency accords the circulation of the US dollar which holds immense importance for both local as well as international transactions.
Recent years have seen a boom in the construction and real estate industry related to foreigners choosing to relocate to Panama, as well as the ongoing project for a third set of locks in the Panama Canal with expected conclusion date by 2014.
Our Political System
Under our Constitution, the Republic of Panama is established as a sovereign and independent State with a unitary, representative, democratic, and republican government. The government is structured basically in three branches: the Legislative, the Executive, and the Judiciary.
The Legislative consists of a unicameral National Assembly, currently consisting of 72 legislators, elected to five year terms by direct, universal, and popular suffrage, and allowed re-election.
The President of the Republic and the Cabinet constitute the Executive branch. The President is elected for a period of five years by direct popular suffrage. One Vice President stands in for the President’s absences is elected concurrently for the same period.
The Judiciary branch consists of a Supreme Court of Justice, Superior Courts, and such tribunals as established by law. The nine Magistrates that comprise the Supreme Court are nominated for a period of ten years by the President of the Republic and his Ministers assembled in Cabinet, and their designation is then ratified by the National Assembly.
Most foreigners initially enter the Republic of Panama with a Tourist Visa or Tourist Cards valid for 30 days, and are renewable for an additional 90 days. Tourist Cards are available from airlines travelling to Panama and Tourist Visas from Panamanian Consuls abroad.
Foreigners remaining in Panama for more than 30 days must register with the National Immigration Service (“Servicio Nacional de Migración”) of the Ministry of Government and Justice and must apply for prior leave to exit the country.
There are different types of visas available within Panama to attain legal residency, and a case by case review must be done in order to verify the applicable visa status.
Foreigners investing in Panama:
The creation of legal vehicles and the enactment of business regulation within the country have been consistent with the strategy of promoting services as offered by the Panamanian economy. There are few existing limitations for foreign investments. Foreign and local investors are accorded equal status under the Law, which also holds among foreign investors themselves. With the exception of retail trade, which is limited to local nationals and purchasing real estate within 10 kilometers of the Costa Rican and Colombian borders, Panama has no general prohibitions for foreigners to hold equity in local businesses and/or in joint ventures. Foreign investments in public services are allowed generally, except that law expressly prohibits direct or indirect investment by foreign governments.
Under an open economic policy and with the explicit purpose of attracting foreign investments, the Government has set up various legal procedures and institutions. The Ministries of Economy and Finance and the Ministry of Commerce and Industries are the main official institutions engaged in giving direction, regulating and monitoring commercial activities within the country.
Choosing Your Corporate Structure:
The main corporate structures covered under Panama law are:
a) Corporations (“sociedades anónimas”)
b) Limited Liability Companies (“sociedades de responsabilidad limitada”)
c) Limited Partnerships (simple or by shares) (“sociedades en comandita”)
d) Branch of a foreign corporation
e) Multinational Companies Headquarters (“sede de empresa multinacional”).
For estate planning purposes, other structures such as private interest foundations (“fundación de interés privado”) and trusts (“fideicomisos”), are also available.
Corporations Regulated by Law 32 of 1927, as amended, Panamanian Corporate Law is inspired in Delaware’s Corporate Law.
• Expedite incorporation procedures;
• Limited Liability of shareholders, directors and officers;
• Favorable tax treatment of foreign earned income.
1. A corporation can be constituted by two or more persons or corporate entities, even if they are not domiciled in Panama;
2. It begins its existence after its articles of incorporation are registered in the Public Registry;
3. The article of incorporation must include:
a. Name and domicile of the parties who execute the articles;
b. Name of the corporation with an indication that it is a corporation;
c. The purposes and objectives of the corporation;
d. The capital stock and the number and classes of shares into which it is divided, which as of May 2009 can be:
i. Bearer and/or registered,
ii. Of various classes with designations, rights, privileges, and limitations,
iii. With or without a stated par value.
e. The number of shares underwritten by each party to the articles of incorporation;
f. The corporate domicile and the name and address of its resident agent in Panama, which must be a law firm or lawyer;
g. The corporation’s duration, which may be perpetual;
h. The initial Board of Directors, which should have at least three members and may be natural persons or legal entities;
i. Other legal clauses agreed upon.
4. Directors may be represented and cast their votes in the meetings of the Board of Directors by proxies.
5. Any corporation, regardless of where it undertakes its business, must keep a record book for Minutes and another for Shares.
6. Accounting and other records may be kept using ledgers, electronic media, and other means as approved by law.
Management of the Corporation:
There are two main corporate bodies in charge of the management of the corporation:
• The Board of Directors:
The Board is responsible for the management or supervision of the corporation. The Board has absolute control and full supervisory powers, and may exercise all powers granted to the corporation, save for limitations in the Law, the Articles of Incorporation, and the By-laws, or those set aside for the shareholders. The Board of Directors appoints Corporate Officers.
• The General Shareholders Meeting:
The shareholders hold paramount power in the corporation. Their engagement is unavoidable when amending the Articles of Incorporation, appointing Directors, enacting, amending or repealing by-laws, and when the articles of incorporation so require, to transfer into trust or to encumber property with liens or mortgages to secure the corporation’s debts with third parties, and any agreement to merge or dissolve the corporation.
In addition to the aforementioned, corporations may also have any agents and representatives which the Board of Directors, the By-laws, or the Articles of Incorporation may establish and designate.
A Panamanian corporation not undertaking business within the Republic is not under any obligation to submit tax declarations or its financial statements to any local authority and accounting ledgers, as well as any other information about its business, may be kept and stored in any part of the world.
On the other hand, corporations with business taxable within Panama are under the obligation to file an income tax declaration, as well as discharge any other lawful requirement related to the type of business they undertake.
Limited Liability Companies:
Law 4 of the 9th of January of 2009 regulates limited liability companies and provides a new vehicle through which foreigners and nationals can structure their investments and make use of tax advantages that laws of their country of origin provide for limited liability companies.
• More flexibility and privacy in the creation and use of the LLC structure, although an LLC requires more disclosure for its constitution than a Panamanian corporation (“sociedad anonima”).
• Possibility to convert into any other type of legal entity.
• Possible tax advantages of its taxation: income tax of an LLC falls on the partners in accordance to their share of participation in the LLC
1. An LLC can be formed by at least of two or more partners, which may be individuals or legal entities, whose names and domiciles are noted in the publicly available articles of organization;
2. There is currently no legal limit on the number of partners than an LLC may have;
3. The articles of organization must be entered to the Public Registry and may be documented either by an officially recorded private document or by a public deed and must include the following information:
a. The identity of the granters, the partners and an indication of their domicile;
b. The LLC’s domicile;
c. The duration of the LLC, which may be perpetual or for a definite period of time;
d. An indication of the corporate purpose, which may be broad or limited;
e. The amount of authorized corporate capital, which may be in any currency, the shares or interests in which it is divided and the value of each one;
f. The designation of one or several individuals who will be in charge of the administration and representation of the LLC and who may or may not be partners;
g. The designation of one or more officers or general power of attorney holders, special power of attorney holders, and the powers granted to them;
h. The designation of a resident agent, which must be a lawyer or a law firm; and
i. Any other legal agreements that the granters wish to include.
4. The LLC can exist for a term, which can be renewed, or it can exist in perpetuity;
5. Capital may be completely or partially paid at the time of incorporation, and only the contributions in kind must be completely made at the time of incorporation;
6. Modifications to the corporate capital can be made by amending the articles of organization, however, a reduction of the corporate capital is not allowed if such a decrease could cause the company’s assets to be less than its liabilities;
7. Transfers of corporate quotas that change the identity of the partners and the dissolution of the LLC must be registered to be valid.
8. Transfers may now be made through a private document and must be entered to the Public Registry, but to become a partner, the transferee must be approved by the other partners;
9. Panamanian LLCs to transform into any type of company or merge with any other type of company, if such a conversion or merger is approved and any other type of company can transform into an LLC.
Management of the LLC
Panamanian LLCs are governed by two corporate bodies.
• A General Assembly of Partners
The General Assembly of Partners is the meeting of all the partners of an LLC. This Assembly can be notified through electronic means and written agreements between partners are valid, without the need for a meeting, and whether the partners are present or absent.
Administrators are individuals designated to carry out the LLC’s operations. If there were several administrators, agreements are to be made by a majority of votes, unless the articles of organization state otherwise.
Panamanian LLCs not undertaking business within the Republic of Panama are not under any obligation to submit annual tax declarations or its financial statements to any local authority. Its accounting ledgers, as well as any other information about its business may be kept in any part of the world.
On the other hand, Panamanian LLCs with taxable income in Panama are under the obligation to file an annual income tax declaration, as well as discharge any other lawful requirement related to the type of business they undertake.
Registration as a Branch of a Foreign Corporation
Corporate structures organized in other countries or jurisdictions may register as a branch of a foreign corporation in the Republic of Panama.
• Expedite incorporation procedures.
1. The registration of the foreign corporation to do business in Panama encompasses its registration:
a. Before the Public Registry Office (our corporate registry),
b. The Ministry of Commerce and Industry’s Panama Emprende system which will issue a Notice of Operation, and
c. Registration before the Ministry of Finance and Treasury as a taxpayer;
2. To register the foreign entity before the Public Registry Office we need to file the following documents, to wit:
a. A certified copy of the company’s articles of incorporation and amendments to date, duly authenticated;
b. A copy of the company’s Balance Sheet;
c. A declaration of the amount of its capital engaged or to be engaged in business in Panama;
d. A Certificate of Good Standing issued by the registrar of the State of incorporation.
3. The Branch must appoint one or more natural persons that will act as legal representatives of the corporation in the Republic of Panama, with power to act in the name and on behalf of the company in all its local activities;
4. Usually, a general power of attorney is registered on behalf of the firm handling the Branch’s matters.
The branch will be required to file taxes on the taxable income it generates within Panama. It will be under the obligation to file an income tax declaration, as well as discharge any other lawful requirement related to the type of business they undertake.
Multinational Headquarters Regime
Law 41 of the 24th of August of 2007 creates a special regime for the establishment and operation of Multinational Companies Headquarters and creates the Licenses Commission of Multinational Companies Headquarters.
• Favorable tax treatment for the company;
• Special migratory visas for its workforce;
• Flexible labor regulations for their employment contracts.
1. In order to qualify for the benefits of Law 41, the company or its business group has to fit specific criteria:
a. It has to have headquarters in a foreign country,
b. Carry out activities in several countries or different regions of the same country, and
c. Its assets should be of at least US$200 million;
2. A Multinational Company Headquarter is intended to be a part of the multinational company which provides services to the company’s headquarters, subsidiaries, affiliated companies or associated companies outside of Panama;
3. A Multinational Company Headquarter can carry out the following type of services for the multinational company or companies that are part of the same business group:
a. Management and /or administration of operations of any of the companies of an economic or corporate group in a specific geographic area or globally, including strategic planning, business development, managing and/or training personnel, operation control and/or logistics;
b. Logistics and/or warehousing of components or parts required for the manufacturing or assembling of any product manufactured by the company;
c. Technical assistance to companies of an economic or corporate group or to customers having acquired products or services from any such companies, for which the latter shall be under the obligation to provide support services;
d. The financial management, including treasury services, of an economic or corporate group;
e. The accounting of an economic or corporate group;
f. Preparation of plans being part of the designs and/or constructions, or any thereof, in the normal course of business of the headquarter or any subsidiaries thereof;
g. Consulting, coordination and monitoring of marketing and advertising strategy for goods or services produced by any economic or corporate group;
h. The electronic processing of any activity including the consolidation of operations of an economic or corporate group, which may include network operations;
i. Support of operations and research and development of products and services of an economic or corporate group;
j. Any other analogous service previously approved by the Cabinet Council;
4. In order to obtain a license, a written request must be submitted to the Technical Secretariat of the Commission by way of the application form, along with a series of documents.
A Multinational Company Headquarter can operate as a foreign company registered in Panama or as Panamanian corporation that is owned by the multinational company, its subsidiaries or affiliates. While the company may also engage in local activities, they must do so through a separate legal entity. The separate entity must keep their personnel separate from the Multinational Company Headquarter’s personnel and will not partake in the benefits Law 41 grants to the Multinational Company Headquarter.
After obtaining a license, Multinational Companies Headquarters are under the obligation to present an annual report to the Technical Secretariat regarding their activities in the isthmus and will have a duty to report any changes in the status of their operations in the country and its personnel.
Law 41 establishes tax benefits for the Multinational Companies Headquarters and for its management personnel. The hallmark of the tax system of Panama is linked to strict adherence to the principle of territoriality. Only taxable income generated from any source within the Republic of Panama, regardless of where it is paid from or received, is subject to tax liability. Because Multinational Companies Headquarters essentially generate their income from providing services abroad, there is little if no taxable income.
Law 41 establishes the following tax benefits for the corporation:
1. They are exempt from payment of income taxes on the services it provides to entities abroad.
2. They are exempt from paying the tax on the transfer of goods and services to export services provided to people residing abroad, with the following limitations:
a. Multinational Companies Headquarters with local operations in Panama must provide those services through a separate legal entity and will be liable for the tax on the transfer of goods and services;
b. Multinational Companies Headquarters must pay this tax for goods and services purchased within the country and for their imported products.
3. Multinational Companies Headquarters are permitted to reach tax related agreements with the Ministry of Economy and Finances in order to consolidate their earnings and the payment of taxes for income obtained in several countries.
The foreign management personnel of Multinational Companies Headquarters are granted the following tax benefits:
1. They are exempt from payment of income tax, social security and education contributions so long as their salaries are paid from abroad;
2. They are allowed to import household items without the payment of custom duties on their first arrival to the country.
There is a special and efficient procedure for obtaining visas for the personnel of a Multinational Companies Headquarters. Law 41 instructs the Ministry of Commerce and Industry to procure the paperwork for the foreign personnel and their dependants, which they do through a Single Window Service.
The Visa for Permanent Personnel of Multinational Companies Headquarters is issued for a non renewable period of five years, during which they have the benefit of multiple entries and exits. Holders of this type of visa do not require a work permit. For temporary personnel, there is a Special Visa for Temporary Personnel of Multinational Companies Headquarters, which can be obtained by personnel from countries that require a visa to enter Panama. This visa has a maximum duration of three months and the holder does not require a work permit. Special visas are also available for special events, obtainable by personnel of countries who require a visa to enter the country and will only enter for a specific event.
It must be noted that the ordinary visa application requirements and costs still apply and their personnel need to be covered by private medical insurance plan.
Labor Law Benefits:
Among the benefits conferred upon personnel by Law 41 are the following:
1. Their personnel do not require work permits;
2. Labor Code mandated quotas do not apply to the management personnel of Multinational Companies Headquarters.
The Panama Pacific Special Economic Area
The Special Panama-Pacific Economic Area Agency is a Government entity created by Law No. 41 of 2004 (amended by Law 31 of 2009 and Law 8 of 2010), same which is in charge of managing, directing, operating, and developing the Panama-Pacific Area.
This is an area made up of 2,005 hectares (approximately 4,952.35 acres) of land located on the west bank of the Panama Canal, near the Pacific Ocean, where the U.S. Howard Air Force Base operated. This Base was under the command of the United States of America, until it was reverted back to Panama in 1999, by virtue of the Panama Canal Treaties. The Panama-Pacific Agency also makes it easier for the paperwork procedures which the companies operating therein need to carry out, as well as to assist them in any need they may have.
The Panama-Pacific Agency operates as a system known as the Integrated Processing System (in Spanish, SIT). It makes it easier for all companies which operate therein, to carry out all the processing of their paperwork procedures which must be processed before Government entities, thus avoiding the need to go to different places or locations for services to be rendered. Therefore, the institutions stationed at SIT take care of and resolve at the site, all processing of paperwork procedures required for by the companies operating within the Panama-Pacific Area, pursuant the new and swift, accelerated procedures. At present, Government entities which have established an office at SIT are as follows: The National Immigration Service (in Spanish, SNM), Ministry of Labour and Labour Development (in Spanish, Mitradel), the National Environmental Authority (in Spanish, ANAM), Municipal Government, Social Security Office (in Spanish, CSS), National Customs Authority (in Spanish, ANA), just to name a few.
Individuals and corporation established in the Panama-Pacific Area may engage in all kinds and types of activities not expressly prohibited the laws and rules and regulations currently in force in the Republic of Panama, on health, security, and public order issues. Regarding activities which in the opinion of the Agency may affect equilibrium of contract agreements entered into with the State, individuals and corporations who engage in said activities can register at the Registry of the Panama-Pacific Area, but shall not benefit from the tax and labour incentives provided by the law currently in force.
There shall be no showrooms within the Panama-Pacific Area, of products which are internationally marketed in other free zones or which receive special tax treatment.
The Panama-Pacific Area is an area or zone free from all taxes for the Companies of the Panama-Pacific Area, except for the provisions of article 60, 72 and 77 of Law 41 of 2004. Therefore, all activities, businesses, services, operations or transactions within the Panama-Pacific Area shall be 100% free from direct and indirect taxes, levies, rates, duties and national encumbrances, including but not limited to the following exonerations:
1. Exemption from any tax, levy, rate, encumbrance or import duty on any kind or class of merchandise, products, equipment, services and other goods in general that are entered
into to the Panama-Pacific Area, including but not limited to machinery, material, containers, construction, pre-fabricated material or merchandise, raw material, fuel and lubricants, production input material, final products, cranes, vehicles, automobiles, artifacts, supplies and spares entered into the Panama-Pacific Area.
2. Exemption from the Tax on the Transfer of Movable Property and the Rendering of Services (a kind of sales tax) on all kinds or types of merchandise, products, equipment, goods, services and other goods in general entered into the Panama- Pacific Area, as well as any tax, rate or duty on the rendering of services. This exemption includes the financial lease of any equipment or other movable good, as well as equipment, raw material and production input material.
3. Exemption from any tax, duty, rate, levy or fee with regard to the movement or storage of fuel or other hydrocarbons and their derivative.
4. Exemption on the payment of any fee for the notice of operation.
5. Exemption from Stamp Tax.
6. Exemption, on commercial and industrial improvements, from real estate taxes on land and improvements as well as from the Tax on the Transfer of Immovable Goods. For the purposes of the Tax on the Transfer of Immovable Goods, it must be evidenced in the respective public deed only that the immovable good that is being transferred is located within the Panama-Pacific Area, and it shall not be necessary to have the exemption from the payment of tax and the data of the respective affidavit evidenced, the notaries public being able to bear witness of the respective agreement.
7. Exemption from any tax on the export or re-exports of any type or class on merchandise, products, equipment, goods or services.
8. Exemption from any tax, rate, duty, encumbrance, withholding or other fees of 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 of the Panama-Pacific Area, to the Operator and to the Developer as referred to in this Law, and for the financial lease of the equipment required for the development of the activities, business or operations carried out within the Panama-Pacific Area.
9. Exemption from the payment of the tax levied on international telephone calls.
The Developer, the Operator or the Companies of the Panama-Pacific Area shall submit the following statements, documents and reports to the Ministry of Economy and Finance, through the intermediary of the Agency:
a) Affidavit in respect of Income Tax.
b) Statement regarding the Tax on the Transfer of Movable Property and the
c) Rendering of Services.
d) Return on the Tax on the Transfer of Immovable Property.
e) Any other returns, reports or documents provided for in the Law and/or its regulations.
The workers of the Developer, the Operator or of the Companies of the Panama-Pacific Area, the residents and the visitors of the Panama-Pacific Area shall not enjoy the tax benefits.
All of the following activities that are listed in article 60 of Law No. 41 of 2004 are exempt from paying the following taxes:
1. Income tax for net taxable income received from the activities, business, and operations carried out within the APP.
2. Taxes on Dividends retained from profits or dividends paid to its shareholders or partners, and the Complementary Tax.
3. Taxes on Monies Transfers sent Overseas, retained as payments for commissions, bonuses, and payments for technical assistance services or for any other item.
4. Import taxes and Personal Property Sales and Rendering of Services Tax, specifically for companies which render professional services regulated under special current legislation and rules and regulations.
Activities listed in article 60 which are tax-exempt
, are the following:
a. The rendering of services to natural or corporate persons located outside the territory of the Republic of Panama.
b. The disposition or transfer of shares of Companies of the Panama-Pacific Area, of the Operator or of the Developer, whether such transfer is evidenced in a direct or indirect manner, through the sale of shares of companies that are in turn the owners of the shares of Companies of the Panama-Pacific Area, of the Operator or the Developer.
c. The disposition or transfer of all kinds or classes of merchandise, products, equipment and goods, as well as the rendering of services, between Companies of the Panama-Pacific Area, the Operator and the Developer, or to companies established in other petroleum free zones or port premises of the Republic of Panama; the latter being subject to the provisions of articles 50 and 51.
d. The activities carried out by the Developer pursuant to the Developer Agreement of the Panama-Pacific Area and to sub-section 5 of article 42 of Law 41.
e. The sale of any kind or class of merchandise, products, equipment and goods, as well as the rendering of services, to visitors, passengers or crew members in transit or whose destination is foreign countries, except in cases where the sale is made by the own manufacturer of the merchandise, products, equipment or goods, or by a Company of the Panama-Pacific Area that belongs to the same economic group as the manufacturer.
f. The sale of any kind or class of merchandise, products, equipment and goods, as well as the rendering of services, to vessels that cross the Panama Canal bound for foreign ports or that navigate between any operational port of the Republic and foreign ports, except in cases where the sale is made by the own manufacturer of the merchandise, products, equipment and goods, or by a Company of the Panama-Pacific Area that belongs to the same economic group as the manufacturer.
g. The sale of any kind or class of merchandise, products, equipment and goods, as well as the rendering of services, to aircraft that use the operational airports of the Republic, bound for foreign airports, except in cases where the sale is made by the own manufacturer of the merchandise, products, equipment and goods, or by a Company of the Panama-Pacific Area that belongs to the same economic group as the manufacturer.
h. The rendering of services relating to aviation and airports, including the transportation, handling and warehousing of cargo in general; the repair, maintenance, conversion and reconversion of aircraft; the distribution, maintenance, conversion, reconversion and manufacture of parts and/or spares for aircraft, whether for their import into the Fiscal Territory, their export or disposition or transfer between the Companies of the Panama-Pacific Area, the Operator and the Developer, or to companies established in other free zones of the Republic of Panama, whether of petroleum or which have a special tax treatment.
i. The manufacture of high technology products, components and parts, whether for their import into the National Fiscal Territory, their export or disposition or transfer between companies of the Panama-Pacific Area, the Operator and the Developer, or to companies established in other free zones of the Republic of Panama, whether of petroleum or that have a special tax treatment.
j. Multimodal and logistic services, as well as transactions of sale of merchandise not manufactured in the Area, destined abroad, provided such sale is made by a multinational company or any of its branches, affiliates, subsidiaries or companies of the same economic group.
k. The rendering of services from call centers for commercial use; the gathering, processing, storage, commutation, transmission and re-transmission of data and digital information; the connection of radio, television, audio, video and/or data signals; the administration of offices for users within the Panama-Pacific Area, the Developer or the Operator, or that are established outside the territory of the Republic of Panama; the investigation and the development of resources and the digital applications for use in Intranet and Internet networks.
Law 41 of 2004 contains special labor provisions for the Special Panama Pacific Economic Area, nevertheless, matters not regulated by said Law shall be regulated by the Labor Code in a supplementary manner; that is, it applies to those issues not regulated by Law 41 of 2004. We can mention among the Labor regulations, the following:
· 25% fixed overtime pay for overtime hours.
· Mixed and night work shifts, paid per tour actually worked.
· Possibility to agree on rotating shifts.
· Possibility to agree on weekly day off different than Sunday.
· Fixed overtime pay of 50% for working on a weekly day off.
· Possibility to negotiate the manner of making use of vacation time.
· The following are considered to be grounds for dismissal: reduction in sales, and/or request of services because of market fluctuations.
In the event of economic grounds for dismissal, Labor authorities shall have 15 days to render a decision thereupon. In the event that no decision has been made, the dismissal shall be considered to be justified.
• Day, night, and mixed shifts shall be paid on an hourly basis having been worked.
• Maximum duration, without exceeding that established by Law.
• Right to compulsory day off, is governed by the Labor Code.
• Overtime hours can be agreed upon, with the limitations set forth under the Labor Code, with an only overtime pay of 25%.
• Unless otherwise agreed upon, overtime work shall be compulsory if relief has not arrived.
• Freedom to negotiate the compulsory weekly day off, same which can be any day of the week.
• This includes all companies located within the Special Economic Area, which are part of the list of companies which pursuant the Labor Code, can open on Sundays and on national or mourning holidays.
• By way of negotiation of a Collective Work Agreement, on vacation issues.
• The Labor Code applies temporarily, until a Collective Work Agreement is approved.
Justified grounds for dismissal are listed in the Labor Code of the Republic of Panama, as well as economic grounds or reasons for dismissal as regulated under Law 41 of 2004.
Market fluctuations which cause the loss or considerable reduction on the demand for services or sales are grounds for dismissal or layoff.
Ministry of Labor must render a decision for request for dismissal or layoff within a period of 15 days; otherwise the company will understand that it is authorized to proceed with a reduction of personnel.
In lieu of Labor Conciliation Boards, the Office of Conciliation has been created at the Agency, which shall handle all out of court, unofficial Labor claims.
• There is an obligation to enter into Labor contract agreements in writing, subject to the formalities and provisions as set forth in the Labor Code.
• Special Visas for Area employees and investors who invest no less than B/. 250,000.00 in risk capital companies.
• Visas for technical employees and investors: provide the right to import items for personal, domestic use and consumption, in an amount of not greater than B/.100.000.00.
Promotion and Industry Development
With Law 76 of 2009, the Certificate for Industrial Promotion (CERFIN) is created, with the aim of encouraging the development of industry, based on the effective integration of technology with high added value. This benefit is applicable to industrial manufacturing companies, agro-processing and marine resources companies, as well as to all the integrated operations of industrial firms engaged in the acquisition and processing of agricultural and forestry raw materials, including micro, small, medium and other companies established or being established in the Republic of Panama.
The Certificate for Industrial Promotion is a non transferable nominative document approved by the authorities, which is exempt from any kind of tax, does not cause any interests, and is valid for eight (8) years from its issuance. The same may be used by the beneficiary for the payment of all taxes and national contributions. The certificate may not be used for payment of taxes, fees or contributions of the company that were generated in fiscal years prior to its issuance, to cover the minimum payment of dividends or complementary taxes, for payment of excise tax on fuel or oil products, or for payment of taxes subject to withholding.
The CERFIN will be granted to agri-industrial businesses that invest in privileged activities, which may receive the benefit of 35% reimbursement of disbursements incurred in such activities and 25% for other industrial activities they perform. The activities encouraged by the law are:
1. Research and development;
2. Management and quality assurance and environmental management;
3. Investment or reinvestment of profits in the establishment or expansion of productive facilities or the capacity to produce;
4. Preparation and training of human resources;
5. Increase in employment associated with production.
Companies that for whatever reason are enjoying any other benefit or tax incentives, construction companies, communication or power generation, transmission and distribution of electricity, or companies engaged in the packaging and distribution of products without the intervention of industrial processing, are not allowed to request a CERFIN. On the other hand, companies that are established after the entry into force of Law 76 may apply for the CERFIN two years after starting its operations.
Companies which adopt the provisions of Act 76 of 2009 may import raw materials, semi-finished or intermediate products, machinery, equipment, packaging, and other inputs used in the composition or the process of developing their products, paying in addition to the VAT, only the import tax equivalent to 3% of CIF value of foreign inputs.
All companies benefiting from the incentives provided under Law 76 must inform the Ministry of Trade and Industry through a sworn affidavit, the name of beneficiaries who have directly or indirectly more than 5% of the shares of that company.
This act shall take effect on 23 January 2010 and is valid for 20 years.
The Panamanian port sector was managed by the Government of Panama (then under the National Ports Authority) until the early nineties, when the Government of Panama approved the first of the Contract-Laws that established the legal framework for private sector investment in ports. In this manner, Manzanillo Port on the Atlantic coast, the first privately administered port and currently one of the most efficient ports in Latin America was developed. Later on, in 1996, another Contract-Law provided for the establishment of the Colon Container Terminal port, managed by Evergreen and also in the Atlantic coast. One year later, after an international public bidding process, the Government of Panama privatized the operating ports of Balboa and Cristobal, which are transferred to Panama Ports Company, a company under the Asian operating and managing Hutchinson Whampoa group.
The restructuring of the National Ports Authority into the Panamanian Maritime Authority, starting in 1998, affirms the Government’s interest in promoting technical and efficient port and maritime regulation which allows for the reassertion of Panama as an international maritime center which takes advantage of the Panama Canal and the diverse geographic and logistical natural conditions that make Panama unique in the world.
Recently, Law 56 of August 06, 2008 established for the first time the judicial framework of the ports sector. Said law, in addition to three other laws applicable to maritime commerce, the merchant marine navy and maritime procedure, constitutes an important effort to modernize and update the maritime sector and provide it with competitiveness in comparison to other maritime centers and, therefore, make it more attractive for commercial entities of any kind.
Finally, with the construction of a new port in the area of Rodman in the Pacific coast, to be operated by a very successful Singaporean company, the supply of port services in Panama is expanded, guaranteeing greater competition for shipping companies and users in general.
To the extent that Panamanian authorities in charge of the maritime and ports sector, the private sector concessionaires of ports and other related entities keep constant coordination efforts to find solutions, obtain feedback and capitalize on opportunities that may surface in the future to launch Panama as a true maritime powerhouse, we will benefit more than significantly in generating wealth and improving the employment and living standards of many Panamanians within a sector that is, without a doubt, an example of taking advantage responsibly and with a long term view of the resources with which Nature has blessed us.
Your Notice of Operation:
Once the branch or company is registered at the Public Registry, the next step is to obtain the Notice of Operation, which is the equivalent of a business license.
Law 5 of January 11, 2007, by which the opening process of enterprises is speed up and other norms are established, provides the legal groundwork for the Notice of Operation, which has replaced the commercial licenses that were once issued by the Ministry of Commerce and Industry. It is the only process required to start a new activity in Panama and includes the Taxpayer’s Unique Registration Number, known as the RUC, “Registro Único de Contribuyentes”.
1. The Notice of Operation is obtained online through a website called Panama Emprende (www.panamaemprende.gob.pa) through which information on the corporation, its directors, employees, activities, operation, starting date of business and a sworn statement is introduced;
2. The number issued by the Panama Emprende System is the only number that will identify a taxpayer at all levels of government, including the Ministry of Economy and Finance, the Ministry of Commerce, the Social Security System and municipalities.
Regulated Activities and Exempt Activities
Certain regulated activities need to comply with previous requirements before starting the operation notice process.
Registering with the Authorities:
Ministry of Economy and Finance:
Registration as a taxpayer before the Ministry of Economy and Finance assigns the company a taxpayer number known as “Registro Unico de Contribuyente” or RUC and is generally completed with the obtainment of the notice of operation. It is prudent, however, to verify registration is in effect directly at the Ministry of Economy and Finance.
Registration as a taxpayer before the Municipalities in which it operates assigns the company a taxpayer number in the Municipalities. While this is generally also completed with the obtainment of the notice of operation, it is prudent to verify registration is in effect directly as the Municipalities.
Companies engaged in any of the following regulated industries may require registration at any of the following entities:
1. Banks and financial institutions at the Superintendency of Banks of Panama (“Superintendencia de Bancos de Panamá”),
2. Insurance and reinsurance companies at the Superintendency of Insurance of Panama, (“Superintendencia de Seguros de Panamá”),
3. Securities activities at the National Securities Commission, (“Comision Nacional de Valores”),
4. Companies engaged in activities involving public services such as water, energy, electricity and telecommunications at the National Authority of Public Service (“Autoridad Nacional de los Servicios Públicos”),
5. Companies engaged in private or commercial air travel at the Civil Aeronautic Authority (“Autoridad de Aeronáutica Civil”),
6. Companies engaged in the tourism industry at the Tourism Authority of Panama (“Autoridad de Turismo de Panamá”).
Panamanian labor conditions are governed by the Labor Code (Cabinet Decree No. 252 of December 30th, 1971 as modified). Legal subservience and economic dependence hallmark the existence of a job relationship under the Code. The existence of said relationship gives rise to the obligation for payment of wages.
Workers’ rights are considered a minimum and cannot be relinquished nor diminished. Any act, contract or statement suggesting waiver or impairment of worker’s rights is held to be null and void. Furthermore, employer or business’ division into different legal entities does not impinge on workers’ rights.
The two entities you will engage with on the matter of your employees are:
1. The Ministry of Labor and Labor Development;
2. The Caja de Seguro Social (Social Security).
Employment contracts must be executed in writing in 3 copies (one each for the worker, employer and Ministry of Labor and Labor Development). In absence of such contract, worker allegations of facts and circumstances, which should have been contained thereon, shall be deemed proven, barring contrary proof from the employer.
Contracts can be entered into for specific or indefinite periods and for specific works. The maximum term for a specific contract is one year. It will nonetheless be held as effectively covering an indefinite period should the employee:
1. Continue working beyond the contract’s expiration,
2. Continue working beyond conclusion of works agreed,
3. When successive contracts are entered into for definite terms or for specific works.
Contracting under probation period of up to three months is viable, provided the service sought requires certain ability or dexterity and is explicitly spelled out in the contract.
Termination of Employees:
Under Panamanian law an employer cannot terminate without cause a permanent job relationship, barring justification provided by law and under legal formalities. Exceptions to this general rule include:
1. Workers with service of less than two continuous years,
2. Household staff,
3. Ratings on vessels trading internationally,
4. Apprentices, and others.
The Law prescribes a specific set of causes justifying dismissals, categorizing them as disciplinary, not attributable, and economic.
Major grounds for dismissals include:
1. Incurring in acts of violence or threats against an employer or his relatives, senior staff or co-workers;
2. Incur into grievous lack of probity or integrity or in the commission of property crimes to the detriment of the employer;
3. Sabotage of job-related machines, tools, and product, buildings and appurtenances;
4. Negligently imperil security of the workplace and of persons present there;
5. Willfully and repeatedly refuse measures preventing occupational hazards;
6. Unjustifiable disobedience of management-related orders to the employer’s detriment;
7. Repeated lack of attendance without employer authorization;
8. Sexual harassment, lewd or criminal conduct by worker during working hours;
9. Repeated and unauthorized consumption of alcohol or drugs;
10. Evident deficiency in productivity against specific standards measured under technical and evaluation systems previously approved by the Ministry of Labor and Labor Development or agreed to in collective bargaining;
11. Self-evident lack of talent or inefficiency by the worker or his loss of legal qualifications for his specialty which preclude discharge of contractual obligations;
12. Force major or happenstance implying unavoidable, direct, definitive cessation of the employer’s activities;
13. Employer’s bankruptcy proceedings;
14. Contractually-defined job interruptions or decrease in employer activity, due to serious market downturns, partial profitability due to production losses or through innovations in production procedures and equipment or analogous causes, all subject to corroboration.
To legalize dismissal an employer must deliver a letter formally notifying the worker of the decision as well as a date and specific cause for termination of the job relationship.
As a general rule Panamanian law allows contracting foreign workers in a proportion of not more than 10% of the workforce, except for foreign technicians, whose percentage may increase up to 15%.
Foreigners require a Work Permit issued by the Ministry of Labor and Labor Development. A Work Permit is valid for one year, renewable for similar periods up to a maximum of 5 years.
Exempted from said percentages are foreign staff members of businesses established solely to supervise from Panama transactions executed, carried out, and consummated abroad, prior official approval.
Employers with Ministry of Labor and Labor Development authorization to recruit foreign technicians are under the obligation to substitute them by Panamanians after five years.
Salaries may be set by unit of time (month, fortnight, week, day or hour) and by piecework. It encompasses, in addition to money or payment in kind, gratuities, receipts, bonuses, performance premiums, commissions, profit sharing, and any income or benefit accruing to the worker by virtue of his job or as consequence thereof. In any event it may not be less than the legal minimum (decreed by Government according to service and geographical location) or by agreement.
Thirteenth Month Bonus (Décimo Tercer Mes)
Under Panamanian law employers must pay workers a special bonus styled “Thirteenth Month” consisting of a day’s salary for each eleven days’ work, to be disbursed in three equal installments on April 15th, August 15th and December 15th of each year.
This worker bonus is not attachable, but is subject to income tax and Social Security assessment. It is tax deductible for the employer as an expense in the production of his income.
Work Shifts and Overtime:
Three work shifts exist under the Labor Code, to wit:
1. Day shift (from 6:00 a.m. to 6:00 p.m.);
2. Night shift (from 6:00 p.m. to 6:00 a.m.);
3. Swing shift (encompassing periods other than the above, but limited to three hours within the night shift).
Day shift involves a maximum 8 hours, and its workweek is defined as up to 48 hours.
Maximum night shift is 7 hours and its work- week covers up to 42 hours.
The swing shift is allowed a maximum 7.5 hours work and its week is up to 45 hours.
The same wages accruing to a full Day shift of 8 hours are to be paid for each 7- hour Night shift and 7.5-hour Swing shift.
Overtime entitles surcharges on regular wages as follows:
1. 25% during the Day shift;
2. 50% during the Night shift or as an extension of a Swing shift begun during a Day shift;
3. 75% for extensions of a Night shift or of a Swing shift begun during a Night shift.
No more than three hours overtime per day or nine hours per week are lawful. Should overtime materialize in excess of said limits, the surplus itself shall bear a surcharge of an additional 75%.
Shifts during National holidays or days of mourning carry a surcharge of 150% (which includes payment for the day’s rest), without prejudicing the worker’s right to another weekday’s rest as compensation
Shifts on a Sunday or other mandatory day of rest entitles the worker to a 50% surcharge, without prejudice to his right to enjoy another day’s rest.
In calculating these surcharges, the surcharge for work on a Sunday, holiday or National day of mourning is initially applied to regular wages, and this amount subsequently serves as the basis for determination of any overtime owed.
National Holidays and Days of Mourning
The following are mandatory rest days in Panama:
• January 1st and 9th;
• Carnival Tuesday;
• Good Friday;
• May 1st;
• November 3rd;
• November 10th and 28th;
• December 8th and 25th;
• Inaugural Day for a new President of the Republic.
Workers are entitled to annual paid vacations determined at the rate of 30 days for every 11 months of continuous work (or one day for every eleven days of service). Payment will involve one month’s salary when the latter had been agreed on a monthly basis and 4 1/3 weeks when weekly wages had been agreed.
Vacation time may not be waived nor exchanged for neither money nor any other compensation. Time off for vacation can be divided only in two equal portions. Up to two vacations terms may be accumulated, in which event the worker must take at least fifteen days’ rest from the first term and the balance should accumulate for the subsequent term.
Seniority Payments and Discharge Provision Fund:
Upon termination of any job contract for an indefinite period, for whatever reason, every worker is entitled to receive from his employer a “Seniority Payment” to be fixed at the rate of one week’s wages per each year’s service from the commencement date of the work relationship. In the event of an incomplete year of service, the worker is entitled to proportionate payment.
For Seniority Payments calculations, the average amount of any and all compensation received by a worker during the final five years of employment is deemed to constitute his salary for every year throughout his working relationship. The official Social Security Administration as well banks, life-insurance companies, and savings and loans associations are authorized to manage Seniority Payment sinking fund contributions.
Since 1995, employers are under the obligation to set up a Discharge Provision Fund to cover Seniority Payments and indemnity for unjustified dismissals or warranted resignations.
Every three months an employer must contribute into this Fund a quota for the worker’s Seniority Payment, plus 5% of the monthly amount towards an indemnity to which the worker might be entitled should their relationship end in unjustified dismissal or warranted resignation. These quarterly contributions will be held in trust by banks (with General License), insurance companies (with license to operate in Panama), businesses holding fiduciary licenses, co-operatives and companies managing investment funds or mutual funds. Such contributions are deductible expenses to the employer’s income tax calculations.
Indemnity for Unjustifiable Dismissal:
The Labor Code provides for an indemnity to be disbursed solely in cash in event of termination of an indefinite job contract without a justifiable cause, as per a schedule established in the Code. For job relationships initiated following August 12th, 1995, indemnity is 3.4 weeks for every year served during the first ten years, while every subsequent year thereafter carries one week’s salary each. This indemnity cannot be combined with the other scales. An appropriate proportional amount is payable, should a full year not be completed.
Collective Job Relationships:
Formation of unions by company or by industrial is viable under Panamanian law. Workers’ right to strike in order to protect their rights and working conditions is also recognized. Similarly, collective bargaining between employers and unions is also lawful. Collective job conflicts are submitted to arbitration. Employer strikes (“lockouts”) do not exist in Panama.
Both employers as well as workers or employees must pay mandatory contributions into the Social Security Administration (Caja del Seguro Social, or C.S.S.), in order to cover benefits for disability (temporary or permanent), death, old age, maternity leaves, dental and medical services, pensions and retirements.
As a general rule, under Panama law every employee (including foreigners) employed by a natural or juridical person operating within Panama must be insured against occupational hazards with the Social Security Administration (C.S.S.). Premiums for this coverage are set by the aforementioned entity via a schedule covering types and degrees, and payments are from employers’ sole account.
Classifications and ratings of firms or employers are set by Social Security Administration. Premiums are quantified by multiplying total salary amounts by the degree of risk associated with the business and by a constant factor of seven Balboas cents (US$0.07).
This contribution styled as “Educational Insurance” is a mandatory subsidy for educational activities within the country. It is made up by contributions from workers (salaried or self-employed) and from employers. Contributions into the Educational Insurance Fund are deductible from the taxpayer’s income tax calculations.
Managing your Business
Contracting with Third Parties:
Contracts without special legislation are generally covered under the general rules for contracts. The general rule of contracts encompasses the notion of contractual freedom, in which parties may accord into any clauses, pacts, terms and conditions deemed convenient as long as they do not contradict the law, public morals and public policy.
A note must be made on adhesion contracts. Contracts between providers of goods and services and consumers are also regulated by Law No. 45 of October 31, 2007, which dictates norms on consumer protection and defense of competition. This law creates the Consumer Protection and Competition Defense Authority (“Autoridad de Protección al Consumidor y Defensa de la Competencia”). In adhesion contracts, the Law deems such clauses as might imply a waiver of consumer rights recognized in Law to be null and void.
Contracting with the Government
Law No. 22 of June 27, 2006 regulates public contracting, or contracting with the government, as modified by Law No. 41 of July 10, 2008.
Contracts with the government are now managed through an online portal system called “PanamaCompra”, which details the products and services required by the public sector. All government entities are required to publish all the information pertaining minor contracting, contractor selection proceedings, direct contracting and the contractual stages.
PanamaCompra is managed by the General Directorate of Public Contracting (“Dirección General de Contrataciones Pública”), an autonomous entity with legal personality which regulates, interprets, controls and advises state and public entities on contractor selection proceedings. The Directorate is subject to the control exercised by the General Comptroller of the Republic (“Contraloría General de la República) and the Executive’s policies as outlined by the Ministry of Economy and Finance.
Tax legality is among the fundamental rights enshrined in the Political Constitution of the Republic of Panama, which is to say all tax and revenue schemes must be enacted into Law. The Fiscal Code (Law No. 8 of 1956 plus its successive reforms) is the principal body of law governing the country’s taxation system.
The Republic of Panama has negotiated double-taxation treaties only with the following countries: Mexico, Italy, Belgium, the Netherlands, Barbados and Spain. These agreements are pending to be enacted as laws by the National Assembly to be enforceable.
Among the major national tributes levied under the Panamanian tax system are taxes on:
4. Real estate;
6. Document stamps;
7. Commercial and industrial licenses;
8. Banks, finance companies and exchange houses,
9. Fuel and Petroleum by-products
10. Transfer on Chattel and Services (ITBMS)
11. Selective Consumption (ISC)
12. Real Estate Transfer and,
The hallmark of Panamanian taxation is strict adherence to the principle of tax territoriality. Thus Article 694 of the Fiscal Code specifies that only “taxable income generated from any source within the territory of the Republic of Panama regardless of where it is received” is subject to income tax.
Said Article clearly envisions certain activities as not taxable within Panamanian territory by not considering them to be income:
a. Invoicing from a business within Panama for the sale of merchandise or products for an amount greater than that for which such items had been invoiced to say business within Panama, whenever said merchandise or products do not physically enter Panama.
b. Supervise from an office within Panama business transactions performed, completed, or having effect abroad (offshore operations); and,
c. Distribute dividends on shares or participations or quotas of juridical persons that do not require Notice of Operation or do not generate taxable income in Panama, when such dividends on shares or quotas derive from income not generated within the territory of the Republic of Panama, including the income generated by the activities listed under a) and b) above.
If a natural or juridical person perceives income from both Panamanian and non-Panamanian sources, tax is liable only against that portion obtained from a Panamanian source.
Legal entities with taxable annual income over $1,500,000.00, have to calculate their income tax under an alternative formula, that is, 1) a rate of 27.5% (25% from the year 2011) of their net income; or 2) 4.67% of their gross taxable income; have to use the formula which gives the highest amount. Legal entities with taxable annual income under $1,500,000.00 may only apply the first alternative.
Income tax in Panama is levied only upon Net Income derived from operations within the territory of the Republic of Panama. Income obtained from corporations consummated abroad is not income obtained from sources within Panama and, therefore, is not taxable under our laws.
Even if a Panamanian corporation has an office in Panama, employees in Panama and a license to engage in business in Panama, it still does not pay Panama income tax, if the transactions out of which the income arose were consummated outside of the Republic of Panama . No tax liabilities arise even though payment of the merchandise is made from the Republic of Panama, or payment therefore is received in the Republic of Panama or if the sale or purchase corporations are directed from an office situated in the Republic of Panama.
Corporations that generate taxable income have the obligation to pay a monthly advance on income tax equivalent to 1% of total taxable income of each month from 1st January 2011.
Annual Franchise Tax:
Panamanian corporations pay an annual franchise tax of US$300.00.
As of 2003, said tax is payable in the following manner:
• No later than June 30 of each year: those corporations which have been incorporated during the months of January to June inclusive;
• No later than December 31 of each year: those corporations which have been incorporated during the months of July to December inclusive.
Failure to pay the aforementioned tax will result in a penalty of US$50.00 for each year, or fraction thereof, for which payment is overdue and the non registration of documents or issuance of certification by the Public Registry other than those ordered by authorities or requested by third parties seeking protection of their rights. Failure to pay franchise tax for more than three consecutive periods will cause an additional penalty of US$300.00
Dividends and Complimentary Tax:
Under the general tax provisions of the Tax Code, a corporation that distributes dividends or profits to their shareholders must withhold 10% of said amount if the income was generated in Panama and 5% if the income arose from sources outside of Panama, for nominative shares (or 20% for bearer shares), as dividends tax. If dividends are not distributed, or if the total dividends distributed are less than 40% of the net income, dividend taxes must be withheld over 40% of the net income after taxes, or in other words, at a 4% rate of the total net income after taxes. This 4% rate is the Complimentary Dividend Tax. The other 6% will be paid when the dividends are actually paid or distributed.
Panama law further provides that a Panama corporation which has, as its only income, dividends or participations from other corporations, Panamanian or foreign, is not subject to Panama income or dividend tax.
There is the obligation to pay a 10% dividend tax on any loan or credit that a company grants to its shareholders, including cases where the dividend payable tax is 5%. As of 1st January 2012, all dividends paid or credited on cumulative preferred shares issued by corporations will not cause this tax, provided that certain conditions set forth in the law are met.
Real Estate Taxes:
All land located within Panamanian territory as well as improvements to them are subject to this tax, save the following realty intended for:
a. The State, municipalities or association of municipalities;
b. Autonomous or semi-autonomous entities, subject to its own regulations;
c. State-sanctioned worship or churches;
d. Public or social welfare programs;
e. Family Homesteads;
f. Treaty exemptions or State contracts;
g. Labor unions, provided the real estate is not used for profitable activities;
h. Those with taxable base (including improvements) not exceeding US$30,000.00.
i. Agriculture or cattle farming, if the registered value (valor catastral) does not exceed US$150,000.00.
Horizontal Property Annual Tax
The progressive tax rate and base for calculation over the construction is the following: (Regular Rate)
• From US$0.00 to US$30,000.00 0%
• From US$30,000.00 to US$50,000.00 1.75%
• From US$50,000.00 to US$75,000.00 1.95%
• Over US$75,000.00 2.10%
The tax rate and base for calculation over the land, during the period of exemption from the construction, is the following:
• From US$0.00 and more 1%
(Once exemption from the construction ends, the Regular Rate applies).
Non-Horizontal Property Annual Tax
The progressive tax rate and base for calculation over the land and construction is the following: (Regular Rate)
• From US$0.00 to US$30,000.00 0%
• From US$30,000.00 to US$50,000.00 1.75%
• From US$50,000.00 to US$75,000.00 1.95%
• Over US$75,000.00 2.10%
Alternative Tax rate for both Horizontal and Non-Horizontal Properties
The alternative tax rate and base for calculation of this tax is the following:
• From US$0.00 to US$30,000.00 0.00%
• From US$30,001.00 to US$100,000.00 0.75%
• Over US$ 100,000.00 1.0%
The Real Estate tax must be paid according to the official assessment value, which is usually the declared value on the sale document. The maximum annual percentage of assessment is 2.10%, which is based on the value of the land and plus the declared value of the improvements built on it.
The taxable base will depend upon the total value of the land plus all improvements. Real estate transactions at prices of more than the appraisal value will automatically increase the value of said properties for tax purposes. Certain properties and improvements thereon are exempt or can obtain exemptions from real estate taxes according to special incentive tax laws.
Those properties with assessed registered values of less than US$30,000.00 are exempt from payment of real estate taxes, as well as those new properties that have an exemption which extension depends on the value of the property.
Real Estate Transfer Tax:
Transfer tax must be paid by the seller at the moment of transfer of the property.
This tax is approximately 2% of either the sale price stated in the Purchase and Sale Contract or the registered property value, whichever is higher.
New residential properties bought for the purpose of using them as a personal residence are exempt from the payment of the Real Estate Transfer Tax.
In regards to Income Tax on capital gains for the transfer of a property, renewal of the immediate benefit, applicable to all taxpayers who decide voluntarily and not later than 31 December 2011, to submit to the Ministry of Economy and Finance (MEF) an affidavit of the estimated value of its property, along with an appraisal performed by a real estate appraisal company, so that, once MEF approves this value, it is taken as the basic cost of the property, applicable to the capital gains tax at the time of its transfer. Also, the benefit of applying the flat fee of 1% to estimate the property tax remains, instead of the progressive rate reaching up to 2.10% on the ratable value of the property.
Notice of Operations Tax:
It is US$60,000 the maximum annual amount of tax payable in respect of tax on Notice of Operations, at a 2% tax rate on the company’s capital. In the case of companies established in free zones, the tax basis will be 1% with a maximum of US$50,000 annually.
Only those companies licensed as Regional Offices of Multinational Corporations and companies that are operating under special regimes, applicable to areas developed through the award of international processes for the selection of contractors are exempt from the requirement to obtain a Notice of Operation.
Financial institutions regulated by Law 42, 2001 shall pay a 2.5% annual tax on their paid capital as of December 31st each year, which will not exceed in any case B/.50,000.00.
Capital Gains Tax:
By means of Law No.18 of June 19, 2006, certain provisions of the Tax Code were amended, including article 701, which establishes new rules for the application of capital gains tax derived from the sale of bonds, shares, participation quotas and other securities issued by legal persons, as well as capital gains arising from the transfer of other movable properties.
Except for shares registered with the National Securities Commission and if transfer (i) is made through a stock exchange or other organized market, or (ii) results from a merger or corporate reorganization or consolidation and shareholder only receives other shares in surviving entity or its affiliate, which are exempt from capital gains tax, the following events are now subject to income tax, at a fixed rate of 10%:
• Capital gains resulting from the transfer of bonds, shares, participation quotas and other securities issued by Panamanian companies.
• Capital gains derived from the transfer or sale of other movable assets.
• Capital gains derived from the transfer of securities resulting from the acceptance of a public offer for the purchase of shares, pursuant to the Securities Law.
Income produced by capitals or securities that are economically invested in the territory of Panama, regardless if the sale is executed in or outside of Panama is considered Panamanian-source income and thus, taxable.
The buyer of the shares has the obligation to withhold from payment to seller, 5% of the total amount of the transfer, on account of income tax payable on seller’s capital gains. Buyer has the obligation to send payment to the Tax Authorities the sum withheld within 10 days following the date the obligation to pay arose. If there breach of this obligation, the issuer company is jointly liable for the payment of the unpaid tax.
Seller has the option to consider the sum withheld by buyer (5%) as the definitive income tax to pay for the capital gains. If the sum withheld exceeds the amount resulting from the application of the 10% rate to the gain obtained from the sale, seller may file a special tax return to credit the sum retained and claim the excess resulting as a credit in his favor applicable to the income tax levied in the same fiscal period in which the transaction was completed. The sums obtained from the transfer are not cumulated to the taxpayer’s taxable income.
The Tax Authorities are currently preparing the regulations of Law No.18 of 2006, but these have not been adopted yet.
Movable Assets and Services Transfer Tax (ITBMS)
A 7% value added tax is levied on the transfer of movable assets in the Republic of Panama and the rendering of services by merchants, manufacturers, professionals, lessor and other service providers.
New exemptions to this tax are established, as follows:
• Concrete, additives and its derivatives made by subcontractors to contractors of the Panama Canal Authority for the execution of the design and construction project of the third set of locks in the Panama Canal and vehicular crossing on the Atlantic side of the Panama Canal, pursuant to in Law 28 of 2006, as well as the incorporation of raw materials to produce concrete, by subcontractors of contractors of the Panama Canal Authority for those projects.
Services related to the preparation and delivery of concrete at the jobsite, additives and its derivatives made by subcontractors to contractors of the Panama Canal Authority for the execution of the design and construction project of the third set of locks in the Panama Canal and vehicular crossing on the Atlantic side of Panama Canal, pursuant to Law 28 of 2006.
The Municipalities of the Republic of Panama are legally empowered for the collection of taxes and rates set at the District level. Pursuant to Law No. 106 of 1973, an extensive range of profitable activities are taxable by Municipalities, including: wholesale and retail commerce, banking, insurance, finance companies, mutual funds marketers, hotels, inns, motels, taverns, wine merchants, motor vehicle tags, lucrative public entertainment, legal gambling, etc. Monthly rates vary from US$20.00 to US$500.00 according to the activity involved as well as the turnover of the relevant commercial or industrial establishment.
Accounting and Auditing Standards:
Panama has adopted as accounting standards the International Financial Information Standards (NIIFs in Spanish) issued by the International Accounting Standards Board (IASB). The International Auditing Norms and Guidelines issued by the International Federation of Auditors are also adopted as applicable norms in Panama.
Intellectual Property Rights:
Law No. 35 of May 10, 1996 regulates industrial property. This statute intends to protect inventions, utility patents, models and industrial drawings, industrial and commercial secrets, trade and service marks, collective marks, warranty marks, declarations of origin, source denominations, commercial names and advertising slogans and signs.
Protection is applied for at the General Directorate of Industrial Property Registration (D.I.G.E.R.P.I.) of the Ministry of Commerce and Industries.
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