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Panama Overview
GENERALLY
Panama
is a Central American nation of 2.3 million inhabitants noted for its canal
which connects the Pacific to the Caribbean. The
official language is Spanish, but English is widely spoken. Panama's
time is five hours behind Greenwich Mean time (GMT), and is on Eastern
Standard time (EST), although it does not have daylight saving time.
Panama
has a constitutional republican form of government modeled heavily on that of
the United States.
The President is elected directly, as are the 72 members of the National
Assembly. The Supreme Court is the highest court. Each province has a
Governor and a provincial council.
The International
Airport, which is within 20 miles
of Panama City, provides service
to all major cities in the both North and South America,
and Europe. Panama’s
telecommunications system is excellent, and most courier services, such as
DHL, are available.
International
Memberships and Treaties
Panama
is member of the following international organizations: United Nations;
Organization of American States (OAS); Conference of Non-Aligned Nations;
International Maritime Organization; Interamerican
Development Bank; International Bank for Reconstruction and Development (Worldbank); International Monetary Fund; and the Latin
American Economic System (SELA).
Panama
subscribes to a Cooperation Agreement with the European Economic Community
(EEC), the General Treaty for the Economic Integration of Central America
(SEICA), and is negotiating to become a full member of the General Agreement
on Tariffs and Trade (GATT). Panama
also have preferential bilateral trade agreements
with most other Central American states and Mexico,
and also many of the former "Eastern Bloc" countries.
Currency
The Balboa ("PAB"), the unit of currency, is at
par with and equivalent to the U.S. dollar. The U.S. dollar is the
circulating medium since Panama
does not print any paper currency of its own. U.S.
currency and coins and Panamanian coins are circulated freely at face value.
There are no exchange controls, except that money-laundering laws control
transactions in excess of US$10,000.
Banking and Finance
Panama
issues three types of banking licenses: General Licenses for banks which
engage in business both in and out of Panama;
International Licenses for banks which engage in business exclusively outside
of Panama;
and Representation Licenses which are issued to foreign banks which establish
a branch office in Panama.
Banks operating under a General License are required to
keep paid-in capital of US$1 million and pay an annual tax of US$25,000, and
banks operating under an International License are required to maintain
assets of at least US$500,000 in Panama
and pay an annual tax of US$15,000.
All banking operations are regulated by the National
Banking Commission which has the power to investigate any bank to determine
its solvency. There are, however, very strict safeguards against the National
Banking Commission utilizing its powers to ascertain financial information about
any particular client of the bank, or of any client’s particular
transactions.
As a general rule, banks in Panama
practice secrecy and confidentiality, which is enforced by
the Panama Banking association. Panamanian banks can offer numbered
accounts.
Panama’s
unfortunate usage as a money haven for narcotics trafficking has given rise
to several laws meant to deter and punish money laundering. There is a
US$10,000 cash reporting requirement, and Panama
is party to a Mutual Assistance Treaty relating to money laundering from
drug-related transactions.
The Panama Stock Exchange (PSE) was created in 1988, and
is regulated by the National Securities Commission. To attract foreign
investment, shares traded on the PSE are exempt from income and capital gains
taxes.
Taxes
Income tax is levied on all revenues generated from Panama
sources. The following forms of income are not subject to income tax because
they are not considered to be produced in Panama.
- Billing
the sales of merchandise or goods from an office established in Panama
for an amount higher than they were billed to the office established in Panama,
provided the merchandise or goods move exclusively abroad.
- Transactions
conducted from an office in Panama,
but perfected, consummated, or having effect abroad.
- Distributing
dividends or partners' participations when they originate from income
not produced within Panama,
including income arising from the activities mentioned immediately
above.
Panama
is not a party to any Double-Tax Agreements (DTAs).
Foreign Trade
Panama
has been a transshipment point for world trade literally for centuries. And,
the Panama Canal established Panama
as the preeminent Central American trade port. Panama’s
laws reflect the importance of foreign trade to her economy.
The Colon Free Zone, located on the Caribbean
side of the nation, is the largest re-export center in the Western
Hemisphere, reaching US$9.6 billion in 1993. Firms located
within the Zone are exempt from import duties and other restrictions. There
are no taxes within the zone for the export of capital or the payment of
dividends, and there are reduced income tax rates
imposed on re-export sales.
Panama
has very few trade restrictions, except those which relate to retail trade
within the country. Foreign trade is so interwoven into the fabric of Panama’s
economy that there are very few differences in treatment between Panamanians
and foreigners.
Exports
Panama
offers three excellent tax incentives for exports:
- Total
exemption from import duties, taxes, levies, or any other charges on the
importation of machinery, equipment, and spare parts to be used in the
manufacturing process, as well as raw materials, semiprocessed
goods, containers, packaging materials, fuels, and lubricants to be used
in the manufacturing process.
- Total
exemption from income tax on profits arising from exports, with the
exception of the extractive industries.
- Total
exemption from taxes on exports as well as from taxes on sales or on the
capital or assets of the company, with the exception of license fees and
property taxes.
PANAMA FOUNDATIONS
The Panamanian entity which is of most interest is the
Private Interest Foundation, which is very similar to the Liechtenstein Anstalt ("Establishment"), but which can be
formed for substantially less cost. Panama
created this entity in 1995, and it presents a serious alternative to
standard offshore trusts and corporations. Indeed, it is possible that the
Panamanian Private Interest Foundation may soon surpass the Anstalt as the entity-of-choice for sophisticated
offshore practitioners.
Formation
A Panamanian Private Interest Foundation is
"constituted" by the adoption, by the founders, of a
"Constitution". The founders may be individual persons, trusts, corporations,
nominees, agents, etc. A single founder is permissible.
An initial "endowment" of capital is required,
to be exclusively destined to the purposes expressly provided in the founding
instrument. Subsequent increases to capital may be made either by the
founders, or any other persons.
To obtain a Constitution, the founders must subscribe to
the forming instrument which must contain the following information:
- The
name of the foundation, which must include the word
"Foundation"
- Foundation
capital of not less than US$10,000
- The
names and address of the initial Foundation board members
- The
domicile of the Foundation
- The
name and domicile of the Foundation’s resident agent, which is usually
an attorney, who must "authorize" the foundation instrument
before it is registered with the Public Registry Office
- The
purposes of the Foundation
- The
procedure to appoint the beneficiaries of the Foundation (the founders
may be beneficiaries)
- A
reservation of the right to modify the foundation instrument
- A
statement of the duration of the Foundation
- The
"destiny" (intended usage) of the Foundation’s assets, and the
liquidation procedure upon dissolution
The foundation instrument can contain any other lawful
clause which the founders deem convenient.
The Foundation is deemed to be formed once it is filed
with the Public Registry Office.
Purpose
Private Interest Foundations must seek non-profit
purposes. However, they may carry out commercial activities which further the
Foundation’s purposes.
Taxes
Private Interest Foundations are taxed essentially the
same as a Panamanian corporation. The Foundation’s activities are exempt from
any kind of taxes, duties, charges or fees so long are they relate to
activities and assets outside of Panama,
and do not result in any income from Panamanian sources.
Capital
Once the Foundation has been registered, the founders must
formalize the transfer of capital to the Foundation. Importantly, once
capital has been contributed to the Foundation, the founders retain no interest
(unlike shareholders). Transfers of capital to the Foundation are
irrevocable. Foundation capital may not be attached or garnished, except as a
result of the acts of the Foundation itself in pursuit of Foundation
purposes. This creates an absolute barrier between the creditors of a founder
and the capital which is contributed to the Foundation.
Management
One the Foundation is constituted,
it is managed by a board. The board must have at least three (3) members, whose
duties are to further the Foundation’s purposes. The Foundation instrument
may also provide for various supervisory groups (custodians, auditors, etc.)
who are appointed by a majority vote of the founders.
Change of Domicile
Panamanian Foundations, and their assets, may be moved to
another jurisdiction. Similarly, Foundations created outside of Panama
may change their domicile to Panama
and thereafter be treated as a Panamanian Foundation.
Anonymity
Every Panamanian Foundation must have a Panamanian attorney
acting as its resident agent, and that attorney is required to keep certain
information relating to the founders so as to defeat money laundering.
Secrecy and
Confidentiality
All members of the Foundation’s board, as well as all
auxiliary groups, must keep the activities of the Foundation secret and
confidential, except as otherwise provided by law. This duty extends to all
persons who are involved with the Foundation, such as notaries and bankers.
Violation of this duty subjects the violator to civil and criminal penalties.
PANAMANIAN
CORPORATIONS
Types of
Business Entities
Panama’s
legal system is based on civil law, as opposed to common law. Nonetheless,
because of its traditional close U.S.
business ties, Panama
in 1927 adopted a Corporation Statute which is similar to the old Delaware
corporation statute.
In addition to the corporation (sociedad
anónima), Panama
has several types of modern business entities: the limited liability company
or "LLC" (sociedad de responsabilidad limitada);
the limited partnership (sociedad limitada); and the limited partnership (sociedad limitada por acciones).
Incorporation
Requirements
The following information must be contained in the
Articles of Incorporation:
- The
name of the corporation, which must end in "Corporation",
"Corp.", "Incorporated", "Inc." or,
commonly, "S.A." It cannot end in "insurance",
"re-insurance", "trust", "mutual fund" or
"bank".
- The
main objects of the corporation. This can either be very general (e.g.,
"international business purposes") or very specific (e.g.,
"exporting of widgets to Cuba
by way of Jamaica").
- The
amount or authorized capital, indicating the amount of shares into which
such capital is to be divided. It is not necessary to state the amount
of capital if the shares are of no par value, but the number of shares
to be issued must be disclosed.
- Whether
or not the shares are to be bearer shares.
- The
names and addresses of at least three (3) directors, which may be
nominees. There is no requirement that the beneficial owners of the
corporation be revealed.
- The
names and addresses of the initial officers of the corporation, which
must be at least a President, a Secretary and a Treasurer. The directors
can also be officers, and the same person can hold more than one office
(although this is not recommended).
Capital and Shares
There is no mandatory minimum capital, nor is there a time
limit when authorized capital has to be paid in. Shares can be issued with or
without par value. Multiple and preferred share classes are permitted, and
shares may optionally be issued as Bearer or Nominative shares. A
registration tax of US$60 is payable if the authorized share capital does not
exceed US$10,000. It is common practice to specify authorized capital of
US$10,000 in 100 common, voting shares having a par value of US$100 each.
Each corporation must maintain a stock register indicating
at least the number of shares and the date of issuance.
Management
The corporation is formed by at least one organizer and at
least one subscriber, usually nominees, who appear before a Notary Public to
incorporate the company, and who thereafter elect the first Board of
Directors.
The Board of Directors must have at least three directors.
The directors can be of any nationality and are not required to reside in Panama.
Meetings of the Board can be held anywhere in the world if allowed by the
bylaws.
The Board must elect at least the following officers: a
President, a Secretary, and a Treasurer. The officers can also be of any
nationality, and need not reside in Panama.
A director may also be an officer, and one person may hold multiple offices, i.e.,
a single person could be President, Secretary and Treasurer. There may, of
course, be additional officers authorized by the corporation.
The corporation is required to maintain a registered agent
in Panama,
which person must be an attorney or a law firm.
Taxation
Registration
There is an annual registration tax of US$150.
Corporate Income
The general rule is that Panamanian companies are not
taxed on income derived from sources outside of Panama;
in other words, they are only taxed on business activities within Panama,
if any. This is true even if the Panamanian corporation maintains its offices
and employees within Panama.
Dividends
There is no tax on corporate dividends so long as the
corporation’s income was derived from sources outside of Panama.
If the income was derived from sources within Panama,
there is a 10% tax on dividends from registered shares and a 20% tax on
bearer shares.
Capital Gains Tax
There is no capital gains tax so long as the corporation’s
income was derived from sources outside of Panama.
If the income was derived from Panamanian sources, then the capital gains are
treated, essentially, as dividend income and subject to tax on that basis.
Reporting
A Panamanian company must report all income from
Panamanian sources, but it is not required to file a return if all sources of
income were from outside of Panama.
PANAMA TRUSTS
Panama’s
trust law is based on the common law trust, the trust statute being last
amended in 1984. Panama’s
trust laws are poor by offshore standards, primarily because the Rule Against
Perpetuities is still enforced, and there is no such thing under Panamanian
law as a discretionary trust. Panamanian trust laws fall far short of the
standard set by the Cook Islands and Nevis.
Purpose
The trust may be created for any purpose not contrary to
law or public policy.
Formation
The trust is created by a private trust document, bearing
the signatures of the settlor and the trustees.
These signatures must be notarized, however, filing or registration of the
trust document is not required unless it relates to Panamanian real estate.
The settlor, trustee, or beneficiary may be a
corporation.
Duration
The trust must be limited to a fixed duration, unless
otherwise stated in the trust document. Further, the trust document will
control whether the trust is revocable or terminable by the settlor prior to expiration.
Confidentiality
The trustee and his agents must keep the trust strictly
confidential and secret, or else fines of up to US$50,000 and imprisonment
not to exceed 6 months.
Taxes
Panamanian trusts are exempt from all taxes, encumbrances,
etc., so long as the trust only administers property outside of Panama,
and income which is not from a Panamanian source, except that Panamanian
deposit accounts may be administered tax-free. There are also some exceptions
from taxes from Panamanian source income, such as when the income is derived
from a tax-free zone or from certain public projects.
Foreign
Law/Flight Clauses
The settlor and trustee may
agree that foreign law will apply. In lieu of such agreement, Panamanian law
will apply. The trust and all trust assets may be transferred to another
jurisdiction (i.e., "Cuba
clauses" or "flight clauses" are recognized).
Foreign Trusts
Foreign trusts may be brought into Panama
and governed by Panamanian law so long as they comply with Panamanian
formalities.
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