THE THICK OF IT

Panama 2014 | EXECUTIVE GUIDE | REVIEW: LEGAL

Angel Cohen Richa y Asociados takes us through some of the ins and outs of Panama's business scene, including arbitration and company structures.

Panama's economy is experiencing a period of unprecedented growth, fueled largely by a spike in FDI entering the country. Investors and foreign businesses have continued to seek out Panama as an FDI destination, driving the investment rate to around 30%, significantly higher than the region's 22.7% average. One of the major factors allowing Panama to maintain its growth levels is the prevalence of M&A activity. Many major multinational corporations have established regional offices or headquarters in Panama, taking advantage of the tax, immigration, and employment incentives granted to potential investors. The insurance, industrial services, telecoms and media, and dairy sectors were also major FDI destinations.

In view of the aforementioned, Panama has unified efforts to promote international investment by implementing different mechanisms to attract foreign investors. It has more than 40 laws and decrees that offer advantages to the investors in terms of tax and operations. Some of the areas that are beneficiated from those regulations are tourism, mining, insurance, agro-industries, petroleum, free zone, infrastructure, and construction. Besides, Panama offers to foreign investors the possibility to apply for any of the following trade alternatives:

2. Special Economic Area Panama-Pacific

3. Multinational Company Seat

4. Processing Zone

Coupled with the laws and decrees that offer advantages to the investors in terms of tax and operations, there exist relevant Panamanian laws and regulations governing business combinations.

Business combinations in Panama are usually structured as stock or asset purchases, tender offers, or mergers, but other techniques can also be used. One example is the capitalization of stock of two operating companies to a holding company incorporated for that purpose with joint participation in the holding company. In the case of publicly traded companies, combinations usually involve a two-step process that begins with a tender offer (either for stock, cash, or a combination of both) followed by an actual merger. Several recent bank mergers have followed this format.

ARBITRATION

Panama has a long tradition in arbitration beginning in 1917. The practice of arbitration was limited to a reduced number of lawyers and businessmen.

The impulse for arbitration

The first step the Panamanian Chamber of Commerce and Industry took to give an impulse to arbitration in Panama was to lobby before the Executive and the Legislative Branches of the Government of Panama to adopt the new arbitration law (Decree Law No. 5 of 1999) and the second was establishing a Center for Dispute Resolution; this center adopted a set of regulations to govern the procedures it administers. In parallel, the Panamanian Construction Chamber (CAPAC) followed the same path; thus, there are presently in Panama at least two reputable institutions vigorously promoting arbitration in Panama with tremendous success amongst lawyers and businessmen. Both dispute resolution centers have been approved by the Panamanian government and are authorized to administer arbitration procedures. Their list of arbitrators includes the most prestigious lawyers of Panama.

Types of arbitration procedures

Depending on whether arbitration procedures are administered or not by any one of the Centers for Arbitration they are called institutional or ad-hoc, the latter being those where arbitrators are appointed by the arbitration agreement with the exclusion or involvement of any third party or Court of Justice. The arbitrators may be specifically instructed to render the award in accordance with the law, but if they have no specific instructions by the parties then as per the provisions of the law they decide based on equity.

COMPANY STRUCTURES

A company's structure and vehicles in Panama must fulfill the same basic requirements in order to organize and operate businesses. Individuals may engage in permitted business activities in their own names or through legal entities. The following are the different types of legal entities that exist in Panama. The most common corporate vehicles used by foreign companies in Panama are as follows.

Corporations

Panamanian corporations (SAs) limited by shares are the most commonly adopted form of legal entity in Panama, engaging in all types of legal business enterprises all over the world including financial, banking, insurance, agro-business, tourism, trading, transport, consumer goods, and warehousing.

Partnerships

The responsibility of the partners is unlimited, unless the partnership instrument provides that the partners will be liable only for a sum that cannot be lower than their contribution to the partnership.

There are different forms of partnerships:

a) Simple limited partnerships, which are limited partnerships with both general and limited partners. General partners share in the management and are jointly and severally liable for the partnership's debts. Limited partners are liable only up to the amount of capital that they have invested;

b) Joint-stock partnerships, which are limited partnerships, similar to simple limited partnerships, but with the partners' capital represented by shares; and

c) Limited liability companies (LLCs), where the liability of the partners is limited to their individual capital participation.

Branches

Foreign investors commonly organize subsidiaries as corporations or limited liability companies, or register the foreign company itself in Panama as a branch. Both methods result in taxation in Panama only for local operations.

Non-corporate

While corporate vehicles, specifically SAs and LLCs are the most common vehicles used by foreign companies in Panama. The following non-corporate vehicles are also available:

Trusts

Trusts are regulated in Panama by Law No. 1 of January 5, 1984. Parties to a trust can include all types of clauses, provided they do not violate the law, morals, or public interest. They can be created by means of a private document, except for real property trusts located in Panama.

Offshore trusts, which are those in which the beneficiaries (which can include the settlor under Panamanian law) do not derive income from a Panamanian source as defined by the Fiscal Code of Panama, are tax-exempt.

Private foundations

Private foundations provide a flexible vehicle for use in asset protection and estate planning. They may be formed by one or more natural or juridical persons either personally or through third parties. The foundation becomes a legal entity once the foundation charter has been recorded at the Public Registry. Private foundations are prohibited by law from having a profit-oriented goal. Nevertheless, they may engage in commercial transactions on a non-regular basis provided all proceeds derived therefrom are used exclusively for the purposes of the foundation.

Panama actively encourages foreign investment, and with few exceptions, the government of Panama makes no distinction between domestic and foreign companies for investment purposes. Panama continues to enjoy the strongest economic growth in Latin America. It benefits from stable and consistent economic policies and a government that consistently supports trade and open markets. International indexes generally rate Panama as one of the best countries in Latin America for business and investment.