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Panama 2017 | EXECUTIVE GUIDE | REVIEW: LEGAL

Alvaro Aguilar-Alfu of Lombardi Aguilar Group runs down all the main legal issues to consider when looking to invest in Panama.

The Republic of Panama was formed when it seceded from neighboring Colombia in 1903. The Isthmus set itself to enact from the start innovative legislation that would encourage the arrival of foreign investors, a process that continues today. The Corporation Law of 1927 based on the Delaware legislation of the time and the Negotiable Instruments Law of 1917 translated from the US basic law are still in effect today. However, increasing globalization and the emergence of new technologies brought about the enactment of new laws with the resulting challenges and benefits.

The Constitution is the supreme law of the country, with fundamental principles and freedoms such as:
• Foreigners and nationals are equal before the government, with participation of foreigners in labor, property and protected industries subject to regulation by law.
• Individuals may do everything which is not expressly prohibited by law, while public officials may only act as authorized by law.
• Taxes and imprisonment penalties may only be imposed as described in a law enacted before the occurrence of the act that gave result to their imposition.
• Expropriation is an extreme measure for emergency cases, subject to fair compensation.
Laws are enacted by a legislature for enforcement by the executive power through regulatory decrees or specific regulations. Illegal actions of administrative officials are subject to appeal before their superior officer. Disputes between parties are resolved by local courts or—when previously authorized by law—by administrative officials. Laws and administrative decisions are subject to judicial review by the Supreme Court.

Setting up a business presence

Business may be conducted as individuals or companies. Forms of companies include:
• Corporations (or Sociedad anonima): This is the most popular form of business entity. The entity is managed by at least three directors and receiving investment from shareholders whose names are privately registered.
• Limited Liability Companies (Sociedad de Responsabilidad Limitada): The entity is managed by at least two administrators and comprised of limited liability partners publicly registered.
• Limited Liability Partnerships (Sociedad en Comandita): The entity is comprised of one general liability partner with limited liability partners.
• Civil Partnership (Sociedad Civil): The entity is comprised solely of general liability partners.
• Branch (Sucursal): Foreign companies for tax purposes may prefer this option by domesticating or registering to do business under said branch, which is part of the foreign entity.
• Private Interest Foundation (Fundación de Interés Privado): These entities can be formed for charitable or non-governmental purposes to hold assets for the benefit of individuals or the public.
These entities must be registered with the Public Registry (www.registro-publico.gob.pa), where information about their directors has always been available to the public, media and authorities for transparency purposes since 1917. Exceptions are:
• Joint Venture (Sociedad Accidental): An agreement under which at least two entities can enter into for a specific purpose, for which taxes on an optional basis can be paid through the venture as a separate taxpayer when registered with the Directorate of Revenue (www.dgi.gob.pa).
• Trusts (Fideicomiso): An agreement under which a settlor places assets under control of a trustee licensed by the Panama Superintendent of Banks (www.superbancos.gob.pa) for a specific purpose. Registration is mandatory when real estate or ships in Panama are trust assets. Taxes can also be paid through the trust as a separate taxpayer when registered with the Directorate of Revenue.
A Panama law firm must be appointed as Resident Agent by entities registered in the Public Registry and trusts. Dissolution and winding up must be in writing with registration being mandatory for registered entities. A complementary liquidation procedure before the courts is optional for entities that managers feel such procedure may be beneficial for satisfaction of creditor assets.

Taxation

Income earned by Panama taxpayers is subject to taxation independently of where it is earned or where the taxpayer is located. However, income from activities carried out under special incentive laws and foreign, non-Panama sources are exempt from taxes. Panamanian-source income is considered to be all income arising from any service or activity that benefits any person located in Panama, including fees, interests, and royalties. When said income is earned through individuals or legal entities located outside of Panama, the amount of the tax to be withheld is 50% of the amount which Panamanian-source income tax would normally be levied. Income earned either from activities or transactions performed abroad is considered to be of foreign source and therefore not taxable.
Income tax rates are of 25% of net taxable income for all types of business entities, with progressive income tax rates for individuals earning more than USD800 monthly. The following items are considered gross revenue of the taxpayer's overall income:
• Salaries, bonuses, travel allowances, commissions, and other payments for personal services, except medical insurance expenses;
• Proceeds or profits from business or agricultural activities;
• Leasing activities of any kind, interest plus proceeds from licensing of intellectual property;
• Dividends or share distributions;
• Profits earned from the sale of real or personal property, shares, bonds, and other securities;
• Proceeds or profits from public services such as electricity, telephone or gas;
• Activities of businesses operating established within free trade zones; and
• Any increase in personal wealth not justified within the relevant year.
Expenses deemed by the Tax Code as incurred for the preservation and generation of income and the protection of its source are deductible from gross income. The following are also deemed as deductible expenses or distributions:
• Donations to officially-designated local educational or non-profit charities up to USD50,000 (for individuals) or 1% of the donor taxable income (for entities);
• Dues paid to local non-profit bodies or associations or guilds;
• The difference between interest paid and interest earned on deposits used as collateral for loans (back-to-back loans);
• Employer earnings distribution among its workers; and
• Interest earned from Panama bank accounts.
Business entities with taxable annual income over USD1,500,000, are subject to Alternative Minimum Tax at the highest between 1) a rate of 25% of their net taxable income or 2) 4.67% of their gross taxable income. Individuals are levied income tax on a progressive rate: no tax for income up to USD11,000, 15% of the excess from USD11,000 to USD50,000 for incomes between USD11,000.01 and USD50,000, and USD5,850 for the initial USD50,000, plus 25% of the excess over USD50,000 for incomes over USD50,000.
Other taxes also applied to businesses are:
• ITBMS - Goods and Services Transfer Tax: applicable to delivery of all goods and services, as well as imports at a rate of 7%;
• ISC - Excise Tax: applicable to delivery of certain luxury goods and services (i.e. alcohol. cable TV), as well as their importation at rate of 7-15%;
• Real Estate Transfer Tax at rates of up to 2% payable by sellers of real estate except for the first sale of newly built improvements;
• Stamp Duty at USD2.50 for every USD1,000 of real estate value and at lower rates for several types of agreements
• Dividend Tax and Complementary Tax
• Business License Tax
Despite having been described by foreign media as a tax haven where no taxes are paid, Panama is ranked 170 in the PWC Paying Taxes Survey out of 190 economies when it comes to ease of tax compliance. Total tax rate is estimated at 37.2%, with 417 hours required to comply with 52 payments every year. Tax returns are filed online before March 15 for individual and March 30 for entities. Tax refunds may take more than a year to be approved, although written applications for tax credits take less time.
Panama has also engaged in international tax cooperation by entering into 19 double-taxation agreements and 10 tax-exchange information agreements, the majority of which are currently in force. Agreements have been signed with Barbados, Canada, South Korea, the UAE, Spain, Finland, France, Greenland, Iceland, Faeroe Islands, Luxembourg, Mexico, Norway, Portugal, the Netherlands, Sweden, Vietnam, and the UK. A US Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreements (IGA) is being enforced. Panama has not been invited to be a member of the OECD but has adopted a transfer pricing regime that basically follows the OECD transfer pricing guidelines for multinational enterprises and tax administrations.
In addition to the abovementioned investment benefits, even lower tax rates as well as special labor and immigration regimes are available to companies registered in:
• Colón Free Trade Zone of the Atlantic side for warehousing of foreign goods and their re-exportation to foreign markets;
• Panama Pacific Economic Area;
• Export Processing Zones for companies involved in maquila operations and outsourcing for foreign markets;
• Multinational Headquarters Regime for regional offices of international business groups with capital above USD500 million worldwide;
• City of Knowledge Regime for educational and research & development facilities; and
• National Tourism Registry for lodging structures and—when in special tourism zones—restaurants and tourist entertainment facilities.
A number of business sectors are subject to increased compliance and due diligence measures in order to identify ultimate beneficiaries of their clients and must report any suspicious activity, when not covered by professional confidentiality laws, in order to avoid use of their services to prevent money laundering, the financing of terrorism and the proliferation of weapons of mass destruction. These regulated businesses are law firms, pawn shops, real estate brokerages, factoring companies, leasing agencies, credit card or e-money issuing agencies, businesses in free trade zones, casinos, construction companies, custodians of bearer shares and bonds, money transfer agencies, dealers of precious metals and other bullion; jewelry dealers; saving and loans societies.
Monthly reports in specific formats must be provided regularly by these regulated businesses. Upon receipt of lists issued by the United Nations Security Council for preventive freeze of assets, a report must be issued immediately on whether said assets are held. Failure to comply with these compliance provisions are subject to fines of up to USD1 million.

Investment protection

Proper legal advice is essential to have in place before entering into an agreement to avoid litigation and improve a position in case of a dispute. The World Economic Forum's Global Competitiveness Index 2015-2016 report ranks the independence of Panama's judicial system 119 out of 140 countries. According to the US State Department Investment Climate Statement (ICS) 2016, there are frequent claims of bias and favoritism in the court system and complaints about the lack of adequate titling, inconsistent regulations, and a lack of trained officials outside of Panama City. The ICS reports that politically connected businesses have benefited from court decisions, and there have been allegations that judges have “slow-rolled” dockets for years without taking action. Resolving disputes through the Panamanian court system can take years, depending on the issue, the location, the court calendar or the judge. There are often reports of corruption, bribery, inconsistent treatment, and a lack of transparency.
Many foreign investors rely on binding international or local arbitration clauses to resolve disputes and avoid litigation before the court system. Although foreign and local arbitral awards are subject to nullification in case violations of the Panama arbitration law or lack of service, the Supreme Court has a track record better than other courts in the region for upholding awards. Panama is a member of the International Center for the Settlement of Investment Disputes (ICSID) and party to the 1958 New York and 1975 Panama Conventions on arbitration.
Free trade agreements have been implemented by Panama with Canada, Chile, El Salvador, Peru, the EU, the European Free Trade Association, Mexico, and the US, as well as a partial scope agreement with Cuba. Bilateral Investment Treaties with the UK, France, Germany, Italy, Japan, Qatar, Singapore, South Korea, and Taiwan enhance investment protection for citizens of those countries by ensuring national treatment and providing arbitration for resolution of treaty disputes.