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PANAMA AS AN INTERNATIONAL BANKING CENTER The Panamanian banking center, originally created in 1970, has recovered its place among prime offshore banking centers in the Americas. Between 1990 and 1994, assets and deposits roughly doubled, reaching US$31.7 billion and US$25.9 billion, respectively. The privileged location and business climate of the country, as well as the competitive services provided by its 110 banks, continues favoring investors of all countries. Cabinet Decree No.238 of 1970 regulates the banking system and created the National Banking Commission as a regulatory agency of the banking business, allows the possibility of establishing a branch bank organized under the corporation laws of Panama. Such corporation receives the same treatment by the corporation laws, except that it must contain in its name the word "BANK", or any of its derivatives, either on Spanish or English. TAX BENEFITS FOR THE BANKING INDUSTRY The income tax system of the Republic of Panama is basically territorial, in other words, only that income which is earned from operations made within the territory of Panama, (so called local-source Income) is subject to income tax in Panama, while all those operations made outside of Panama or made from Panama to produce its effects outside of the country (Foreign Source income) are not subject to Panamanian income tax. On the other side, there are several profitable exemptions that present attractive possibilities for the banking industry operating in or from Panama. Such benefits include exemptions of corporate income tax on interest earned on the following transactions: 1.- When the borrower is, either a natural o legal persons, with residence or offices outside of Panama and the use of the borrowed funds is made outside of Panama, although the reimbursement of capital and interests occurred within Panama. The exemption referred to above also covers the finance fees charged by the respective Bank over the interest rate agreed. 2.- Interests on all securities issued by the government. 3.- Interests recognized or paid on savings or time deposit accounts that are maintained on Banking Institutions established in Panama. The National Banking Commission has determined that time deposit can be established only in amounts over US$40,000.00 without any restriction as to the interest rate that could-be imposed. Saving deposits are defined as all those deposits under US$14,000.00 and the maximum interest rate that can be paid is Five and a Half percent. (5 1/2%). 4.- Interest paid to official or semi-official entities of international organizations or foreign governments. 5.- Interest paid to foreign investors for loans whose principal is directed, exclusively, to housing projects for low-- income families as determined by the Ministry of Housing. 6.- Interest paid on investments made in hotels and motels. Furthermore, some other benefits derived from the attractive "local-source" tax structure of Panama, which considers as not taxable, when earned within the territory of Panama, income from invoicing of merchandise abroad and distribution of dividends from foreign earnings. In Panama, there are no exchange restrictions, allowing a free exchange market with the possibility of unlimited transfers of capital and multi-currency operations. The medium of exchange is the US Dollar which is equal and freely interchangeable with the Panamanian Balboa. TEMPORARY PERMIT In order to achieve a proper incorporation and registration in the "Public Registry Office" of the proposed corporation, it is absolutely necessary to obtain a temporary permit from the National Banking Commission so that the Articles of Incorporation containing the word "BANK" or any of its derivatives may be recorded. BANK CHARTERS IN PANAMA Normally, the usual form to incorporate or organize a corporation under the laws of Panama does not present any problems. It is only required that the promoters present the Articles of Incorporation before a Notary in order to be protocolized and after that the charter must recorded with the Public Registry Office. . BANKING LICENSE: Once the Panamanian corporation has been set up or, in case of branch of a foreign bank, it has been registered and once the temporary permit had been obtained from the National Banking Commission and the deed has been recorded in the Public Registry Office, the interested parties through its Legal Representative, must apply for the License to engage in banking business, in any of the three (3) types of licenses contemplated by Cabinet Decree No.238 of 1970: GENERAL LICENSE A. For Banking Institutions organized in accordance with the laws of Panama, which are engaged in banking business, either in Panama or offshore. B. For Banking Institutions organized in accordance with foreign laws, which are engaged in banking business, either in Panama or offshore. Every bank organized according to Panamanian Laws, in which at least seventy-five percent (75%) of its shares are owned by individuals who are citizens of Panama or foreigners with more than 5 years of continuous residence in Panama, may start operations with a paid-in capital of US $250,000.00. This capital must be increased periodically up to the minimum capital required of One Million Dollars (US$1,000,000,00), within a maximum period of ten (10) years. INTERNATIONAL LICENSE This license shall be issued to Banks organized in accordance with Panamanian laws and to authorized branches of banks organized under foreign laws to conduct, exclusively, from an office established in Panama, transactions which are completed, accomplished or are intented to take effect outside of Panama (offshore). The newly formed Bank must maintain a guarantee deposit in the National Bank of Panama for the sum of US$250,000.00. Such guarantee deposit will be kept in the National Bank of Panama or a restricted deposit and it will not earn any interest thereon. It could be made in cash in order to acquire Banking Guarantee Bonds earning six (6) percent annually. The Bank must submit a shareholders list, names of the members of the Board of Directors and banking references from the promoters and the directors. REPRESENTATION LICENSE This license is issued to those Banks organized in accordance to foreign laws to establish exclusively representative offices in Panama.