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Panama Tax Haven – Business Environment &Secrets of Latin America

Once regarded as the Western Hemisphere’s primary financial and trading tax haven, Panama’s status as a banking and free trade zone sanctuary was severely curtailed in the late 1980’s because of the infamous Noriega affair but has since recaptured its prominent position as one of the most attractive and successful offshore jurisdictions. By the mid-1990s, Panama’s economy had made an impressive recovery and virtually all of the refugee funds that left the country had returned while exchange reserves had been restored.

The business community is back to normalcy and new records are being set in several segments of the economy, including peak revenues from the enterprising Colon Free Zone and from Canal Zone shipping traffic. However, the United States Embassy in Panama and several major multinationals in the United States have criticized the Panamanian Government for its “monopolistic” markets and “unjust” treatment of United States investors doing business in Panama.

Gross national product has been averaging an annual increase of 6% in the past few years while the construction industry has been growing by 60% annually. By 2001, activity in the Colon Free Zone had grown to exceed US$19 billion and handover of the Panama Canal by the United States, Panama successfully faced the challenges of running Canal traffic efficiently, widening the 51-mile long waterway so as to permit large modern ships to sail through, and successfully developing 535 square miles of land on a commercial rather than the previous nonprofit basis.


Economic Comeback

After the successful invasion by the United States military forces to restore democracy to Panama and the return of the previously-elected government of President Guillermo Endara to control country, Panama embarked upon rehabilitation of its economy without the hindrance of General Noriega’s presence. One of the first steps taken by the Government was passage of a law creating incentives for development of small and micro businesses, exempting them from income, property and other taxes. The Government has also approved a revised program to establish export processing zones in which a 20-year exemption from income tax and exemption from restrictive clauses of the Labour Code are some of the benefits being offered. The zones were designed to attract Asian capital. Foreign investment is flowing back, with China, Hong Kong and Taiwan investing heavily in the first stage of a major infrastructure and computer project now that the Asian currency crisis of 1997 has been tamed.

Since Noriega’s unlamented departure, about 50,000 new companies have been formed. The resurgence of Panama’s stature as a tax haven was helped by more than a billion dollars of aid and the repatriation of hundreds of millions of dollars of refugee funds, which had sought other sanctuaries. The standstill in offshore banking transactions and loss of business confidence in Panama’s financial status primarily were responsible for the transfer of domiciles of hundreds of United States and European multinationals to more politically stable tax sanctuaries at that time where the redomiciliation laws welcomed the arrival of companies from other nations. However, the estimated US$30 billion in offshore funds that left Panama has now returned.

The traditionally strong shipping industry had suffered severely by the transfer of some maritime registries to such other flagship carriers as the Bahamas, Bermuda, the Cayman Islands, British Virgin Islands, Liberia, Singapore and Vanuatu but has steadily recovered. Lifting of the embargo by former President Bush, allowing Panamanian ships to call at United States ports, finally stopped a heavy outflow. Panama’s New York City Office of Consular and Maritime Affairs, the only one outside the country empowered to handle safety inspections and issue licenses, is as busy as ever. Partly because of the political turmoil in Liberia, for the first time Panama has outranked Liberia not only in total number of registered vessels but also in total gross tonnage. The Panama registry has recorded more than 70 million gross tons compared with Liberia’s one-time high of 51 million. Even before political strife descended upon the Republic, other shipping alternatives, including pipelines, airlifts and inter-modal sea-to-rail transport, and growing competition had caused deep concern in the Panamanian maritime industry.


Banking Recovery

Lifting of sanctions and unfreezing of US$400 million of blocked assets by the United States also eased the road to recovery. United States banks have reopened and issued new lines of credit for trade. Unemployment has dropped from 31% to 12%. The trade deficit of US$350 million is more than offset by some US$800 million of servicing income. Bank deposits have doubled since 1990.

“A Proposal for Economic Reconstruction” in the hands of the Government includes substantial amounts of United States financial aid. The United States Congress initially approved US$420 million of aid to Panama, but withheld US$80 million until Panama signed of mutual legal assistance treaty covering tax evasion in addition to money laundering. After negotiators reached a compromise, the treaty covering drug dealing and money laundering but not related to purely fiscal matters generally was disappointing in attaining the objective as the Government was not as cooperative as hoped in clamping down on money laundering and drug abuse. Although Panama was one of the first Caribbean nations to adopt a money laundering law in 1994, the Administration has been under constant pressure from the United States, OECD, FAFT, and other world organizations critical of the Caribbean Islands for being lax in tightening laws against crime, drug smuggling, and money laundering. In fact, Panama was declared a “harmful” tax haven in the OECD Report, placed on the “black list” of the Financial Action Task Force, and graded “uncooperative” by the Financial Stability Forum.

Finally, in 2000 Panama adopted four stringent decrees to further screen out perpetrators of those unsavory devices used by money launderers around the world. These measures were: (1) Legislative Assembly Law No. 41 of October 2, 2000, entitled “Capital Laundering” and amending the Penal Code by imposing harsh penalties of up to ten years imprisonment for publicly breaching the secrecy of information or carrying out unlawful transactions related to capital laundering; (2) Legislative Assembly Law No. 42 of October 2, 2000, setting down Measures for the Prevention of the Crime of Capital Laundering; (3) Ministry of the Presidency Decree No. 136 of October 3, 2000, creating the Financial Intelligence United for the Prevention of Capital Laundering; and (4) Executive Decree No. 213 of October 3, 2000, amending the 1984 Decree relating to the practice of trusts and making it compulsory for banks and certain financial institutions to render information on “suspicious transactions” (see section on Banking and Foreign Exchange for additional details).


Tax Advantages

Historically, one of the major factors responsible for the 35,000 holding company and tax sanctuary operations established in Panama by foreign business-men has been the relative tax freedom. Panama does not assess any income tax income produced from sources outside the country, including the proceeds of sales made outside of Panama. This territorial method of taxation was only one of the many advantages of incorporating in Panama. Income earned within Panama, including the proceeds of sales made within the country, is subject to Panamanian tax.

The normal corporate tax starts at 30% on income up to 100,000 balboas (US$100,000) and graduates to 42% on income over 500,000 balboas (US$500,000). Corporate dividends and earnings of branches of foreign corporations are subject to a 10% withholding tax. Interest paid or credited to the account of a foreign lender is subject to a 6% withholding tax. Interest on bonds, notes and other registered securities is taxed a flat 5% withholding tax unless traded on a registered exchange in Panama. Royalties paid to a foreign movie or television production company or distributor also are subject to a 6% withholding tax. Companies also must withhold a 10.75% social security tax on employees’ salaries.

Tax rates begin at 3,000 balboas (US$3,000), and individual income is taxable at 52% between 3,000 balboas (US$3,000) and 3,250 balboas (US$3,250) or a tax of 130 balboas (US$130), then falls to 4% between 3,250 balboas and 4,000 balboas (US$4,000), rising to 33% between 50,000 balboas (US$50.000) and 200,000 balboas (US$200.000), and then dropping back to 30% over 200,000 balboas (US$200,000), at which the tax amount payable is 59,905 balboas (US$59,905). The first 3,000 balboas of income are not taxable. Employees also must pay a 7,25% social security tax on wages and salaries withheld by the employer.

Foreign companies, which do not buy or sell goods in Panama or the Colon Free Zone, are exempted from the 10% dividend withholding tax. Headquarters companies rendering services to companies and offices outside of Panama are exempt from income tax but pay the 1% business tax levied on declared capital, with the maximum 20,000 balboas (US$20,000). Income derived from transfer of shares in companies established under Panama law engaged exclusively in activities abroad is tax-free as it is considered to be foreign-source income.


Small Business Concessions

Under Law 31 of 1991, special rules were adopted for small enterprises or micro-businesses earning less than US$200,000 in gross income annually. The first US$100,000 of income is taxed at personal tax rates and the next US$100,000 of income earned by the micro-business is taxed at corporate tax rates. The micro-business is exempt from the retained earnings tax and withholding tax on dividend distributions.

In addition to the favorable tax situation, some of the other reasons for which Panama’s corporate law is considered to be desirable are that there are no minimum capital requirements nor is there a time limit for issuing shares. Moreover, there is no requirement to file either tax returns or financial statements annually and it is not necessary to maintain a share register. Capital can be in United States dollars or any other currency and foreigners can serve as directors and/or shareholders.


Reduction on Exterior Operations

In order to qualify for tax reduction, the law states that the taxpayer must declare the income and pay the tax in a foreign country, which does not permit a credit of the total or part of the tax paid to Panama. However, companies operating the Colon Free Zone have an option to pay their taxes to Panama or to the country of the parent corporation of the Panama entity. Thus, the exterior operation profits earned on export shipments from the Colon Free Zone are not subject to tax. Reduced rates on income derived in the Colon Free Zone from manufacturing operations by taxpayers whose financial year began on or after May 1, 1975, are imposed at 2,5% up to 15,000 balboas (US$15,000), 4% between balboas (US$30,000) and 100,000 balboas (US$100,000), and 8,5% over 100,000 balboas (US$100,000). Colon Free Zone companies are exempt from withholding tax on distributions of export profits. Reinvested earnings may be taxed. Individuals are permitted to discount from their tax on income payable to exterior operations in the Colon Free Zone 0.5% of the net taxable income if there are from 30-100 national workers permanently employed, 1% of net taxable income if from 101 to 200 national workers are permanently employed, and 1.5% of the net taxable income if 200 or more national workers are permanently employed. Beginning as of January 1, 1976, individuals deriving 80% of their income from exterior operations during the first five years of operations may qualify for a 95% rebate on taxes payable provided that a minimum of 30 national workers are permanently employed.

The rebate is reduced by 5% during the three years following the 20% deduction permitted in the first four years. Wage payments may not exceed 15% of the salaries in collective contracts and the increase in number of workers employed may not produce an expansion of more than 10% in fixed assets.


Agricultural and Other Exemptions

In the agricultural sector, farmers with gross income under US$100,000 are exempt from all income and real estate taxes. Investments in agri business qualify for a 30% tax deduction but the funds must remain invested for at least three years. Companies in the tourist industry that sign an agreement with the Government receive a full exemption from income taxes for a period of 13 years. In addition, income from investments in tourism or related activities and on the importation of materials, implements, furniture, vehicles, boats and equipment required for tourism is granted an exemption of 20 years.

So-called “small enterprises” or “micro-businesses” (companies whose gross earnings are less than US$200,000) are exempt from the retained earnings tax and are taxed as a natural person on the first US$100,000 and a corporate body between US$100,000 and US$200,000. Headquarters companies rendering service to companies and offices outside of Panama are exempt from income tax but pay the 1% business tax levied on declared capital, with the maximum 20,000 balboas (US$20,000). Air transport companies may opt to be taxed at 3% of gross receipts of Panamanian source income or normal taxes.

All sales of urban real estate with the exception of newly-constructed buildings are subject to the 2% tax on real estate transfers, including capital gains from real estate sales. Royalties, rents and annuities paid to non-resident individuals or legal entities are subject to withholding taxes at the normal individual or company rates. Capital gains from securities transactions are exempt from tax if registered with the National Securities Commission and a minimum of 25% of the assets of the stock of the selling company is located in Panama.

Panama does not impose any tax on income accumulations. Inheritance and gift taxes, which are applied only on property located in Panama, range from 4% to 33.75%, with a 20% discount upon payment. These taxes are not levied on securities of a Panamanian company having the bulk of its assets outside Panama. There is not estate tax in Panama but all real estate transfers are subject to a 2% tax. Bearer shares are subject to a 20% withholding rate. Royalties paid to non-residents by companies operating in the Colon Free Zone are not subject to withholding tax. All imports outside the Colon Free Zone are subject to a 7% surtax of their Freight On Board value in addition to the normal import duties. In addition to the value-added tax of 10% on alcoholic drinks, 6% for syrups, mixtures and extract compounds, and up to 0.05 bolivar per liter for alcoholic drinks.


Retired Individuals Program

The “Retire to Panama – and Live” program inaugurated in 1970 with the issuance of Cabinet Decree No. 260 and Executive Decree No. 146, allows indefinite residence in Panamanian territory to retired and pensioned individuals who are at least 45 years old or cannot work because of a physical disability. Applicants for a tourist-pensionee-visa must prove to the Panama Government Tourist Institution (PAT) that they have a permanent income of 400 balboas (US$400) monthly plus 75 balboas (US$75) for each dependent family member.

They must certify annually to PAT that their income has remained the same or increased; in case of a decrease, the visa may be cancelled. Another requirement is a medical certificate from a local doctor stating that the applicant is not suffering from mental or contagious diseases. Visas are issued without payment of deposits, levies or migration fees.

Individuals who obtain visas are entitled to the following benefits: (1) duty-free importation of household and personal goods up to a value of US$5,000; (2) duty-free importation once a year of a motor vehicle, including a mobile house or trailer; and (3) exemption from inheritance and donation taxes. Executives of multinational companies receiving a minimum of US$1,000 monthly are eligible for a US$3,000 import duty exemption on household goods and for visa procurement fees. Visa holders are ineligible for employment unless they work for the Government or obtain authorization to enter private enterprise from the Ministry of Labor and Social Welfare. Investment in Panama is permitted. Whereas in Costa Rica pensionades are exempt from income taxes, in Panama they are liable to taxes amounting to 7,5% on the minimum required income of 4,8000 balboas (US$4,888) and rising to 56% over 200,000 balboas (US$200,000).


INVESTMENT AND CAPITAL INCENTIVES

To lure United States operations into the Republic, Panama also offers extensive tax and other investment incentives. Under the Investment Incentives Act of 1970, industries located in Panama that produce manufactured goods for the domestic market may be granted income tax exemption on the excess of 20% of profits reinvested in fixed assets for expansion of plant capacity or production of new products. These above qualifying companies also may take 12.5% of annual depreciation of the value of equipment minus residual values, or at a fixed percentage of the declining balance. A company qualifying as above also may deduct from income tax an amount equal to 10% of salaries of non-administrative personnel and 50% of the cost of utilities for industries located in eight designated areas of the interior of Panama.

A revised Incentives Act passed in 1986 also grants industries located in Panama and producing manufactured goods for the domestic market a five-year 100% exemption from import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process. Partial exemption also may be granted on import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process.

Partial exemption also may be granted on import duties and fees on raw materials and semi-processed products including containers and packages, as well as lubricants and fuels not available locally in sufficient quality or quantity or at competitive prices. Under Law No. 3 of 1986, enterprises located in any of the 12 designated districts in the interior of the country and which produce goods for domestic consumption are exempt from income tax for the first five years and pay 50% of the tax for the next three years on income from local sales. The exemption is 100% on income from buildings and land owned.

Manufacturing companies in Panama’s Colon Free Zone that produce for export may be granted 100% tax exemption from income, export, sales and capital taxes for five years and are subject to the reduced rates of 2.5% to 8.5% on export income earned in the Zone after the tax holiday expires. An enterprise that exports a portion of its production receives the same benefits as a firm exporting its total production on a pro rata basis. A foreign company operating in Panama that is liable to taxes on its Panamanian income in the country of its parent corporation may opt to pay the income tax liability to Panama and qualify for a preferential loan equal to the amount repayable in five years at half the going rate of interest.

Moreover, manufacturing companies that produce for export may be granted for the duration of the contract 100% exemption from import duties and similar charges on imports of machinery, equipment and parts, raw materials, semi-processed products, and other materials including containers and packages, fuels and lubricants. All of the above exemptions are for periods of up to 15 years, with the exception of those in eight priority development areas, which are granted 20 years exemption. Under Decree No. 5 of January 19, 1979, companies engaged in assembly operations are exempted from income tax if a specific amount of Panamanian labor is employed. Companies established under Decree No. 5 of January 19, 1979 to engage in assembly operations are liable to 3% of the exempt taxes on imported machinery and equipment. During the term of the contract the company is entitled to a 10% exemption of import duties on the import of machinery, equipment, spare parts, raw material, oil and lubricants used in the assembly operations.

Under the legislation passed in 1986, it is no longer necessary for investors to sign a “Contract with the Nation” approved by the Ministry of Commerce and Industry. Instead, investors register in the National Industry Official Registry maintained by the Ministry paying a 10 balboa (US$10) registration fee, valid for ten to fifteen years depending upon the district in which ventures are planned and an annual 50 balboa (US$50) fee. In addition, an industrial company that receives a five-year income tax holiday is entitled to the exemption from the profits tax on exports, customs duties exemptions on machinery, equipment and spare parts, and special reduced depreciation rates.

In addition to substantial investment of Panamanian private capital, Hong Kong, Taiwanese, South Korean, and Japanese businesses are exploring Panama as a location for the development of light industries, tourism, and marine activity.


Ship Registration Fees

Registration of vessels, which may be done by Panamanian attorneys or management servicing companies, is subject to a tax computed on the basis of US$1 per net ton up to a tonnage of 100,000 tons with a minimum of US$250. For tonnage exceeding 100,000, the charge is US$0.50 per net ton while the rate is US$0.20 per net ton for tonnage exceeding 500,000 tons. If several vessels belonging to the same owners or the same group of companies are registered at the same time, the tonnage of the various vessels may be added together and the sliding scale of rates applied. The annual tax is US$0.10 per net ton and other fixed charges are approximately US$700.

The fee for the registration of the bill of sale, computed on the basis of US$0.20 per net ton, plus a 20% surcharge, is based on the above rates. There also is an annual service charge, in lieu of consular service charges, payable by all vessels, ranging from US$750 to US$2,300, and an inspection fee costing from US$300 to US$800, plus small certificate fees of from US$5 to US$80. Consular services are available in most major ports around the world. Offices are able to temporarily register ship ownership under the Panamanian Ship Registry within 24 hours, giving owners six months to present all the documents in Panama. Under this system, mortgage holders may also establish their claims on ships through worldwide Panamanian consul offices. Shipping income derived by Panamanian flagships are subject to a 6% withholding tax while representative offices must withhold 5% of expenses of public companies.


Panama Banking Law (Decree Law No. 9) 1998

Panama’s revised banking law came into force in June 1998 with the stated intent of strengthening and modernizing bank regulation up to Basle Committee standards while maintaining an autonomous regulatory environment. Panama’s banking industry hopes that the position taken by the Superintendent of Banks created in the Law will be made with complete impartiality in view of the fact the appointment is made by the President’s office without the right of the Assembly to advise and consent, making such a power potentially easy to abuse. The Banking Superintendency replaces the old Panamanian Banking Commission and is granted not only greater supervisory powers but also the ability to authorize the transfer of shares in a bank when such a transfer affects the control of it. A Superintendant also possesses the capacity to authorize mergers or consolidations of banks and the inspection of the economic groups of which the bank is part.

A restriction is imposed by the Law on the granting of credit facilities to one natural of juridical person where such facilities or warrants exceed 25% of the bank’s capital regardless of whether the loan is totally guaranteed with money deposited in the bank. These sweeping changes were designed to improve confidence in the banking system and to encourage deposits from foreigners. Allowances will also be made for foreign regulatory authorities to file requests for information and make inspection visits to the offices of foreign banks located in Panama for the purposes of regulation and supervision. Agreements are to be facilitated between foreign regulatory authorities and the Banking Superintendency as well.

Other provisions include the following that are designed to improve depositor, investor and consumer protection:

    • The effective interest rate of all loans must be specified;
    • Abusive clauses in banking agreements will be addressed;
    • Banks are required to file additional audited statements; and
    • The bank liquidation process will be simplified.

Banking confidentiality is also guaranteed by the new Law.

Fees for banks located in Panama and those that have representative offices will be paid on the following basis:

    • General licenses – 30,000 balboas (US$30,000) plus a sum of 35 balboas (US$35) for each million on total assets up to a maximum of 100,000 balboas (US$100,000) – (25,000 balboas (US$25,000) under previous laws).
    • International licenses – 15,000 balboas (US$15,000)(same as under previous law).
    • Representative licenses – 5,000 balboas (US$5,000).

There are also conditions for minimum capital requirements to carry out the banking activities based on Basle standards, minimum assets to be maintained in Panama, description of activities incompatible with those of banking and a number of other requirements enacted.


Anti-Money Laundering Laws Strengthened

Although Panama was one of the first Caribbean countries to adopt strict anti-money laundering measures, its provisions did not satisfy the three international groups that in 1999 issued “report cards” on offshore jurisdictions’ performance. Not only was Panama described as “harmful” by the Organization for Economic Development and Cooperation (OECD), but it also landed on the “black list” issued by the Financial Action task Force, and was graded “uncooperative” and not up to international standards by the Financial Stability Forum.

To prevent a disastrous withdrawal of foreign investment, Parliament engaged in damage control by passing two important laws in October, 2000: Law No. 41, entitled “Capital Laundering,” amends the Penal Code to expand the scope of anti-money laundering measures to capital laundering,” which includes all serious crime ranging from drug trafficking to white slavery and extortion. Cabinet Decree No. 10 of March 9, 1994 made it mandatory for persons entering Panama to declare to Customs the amount of cash or negotiable instruments carried into the country. Since then, bank transactions exceeding U.S. US$10,000 in cash or similar exchange have hade to be registered and declared. Law No. 41 of 2000 extended these requirements to include all transactions of more than US$10,000 by the stock exchange, casinos, insurers, real estate agents, and the national lottery. Data is now submitted to the newly-created Financial Intelligence Unit for the Prevention of Crime and Capital Laundering (FIU).

Law No. 42, also of October 2, 2000, set down the bill for Prevention of the Crime of Capital Laundering. Under Legislative Decree No. 42, natural persons and corporate bodies must declare to the Financial Intelligence Unit (1) cash deposits exceeding 10,000 balboas (US$10,000), (2) cashing or exchanging lower denominations of currency for higher denominations, or vice versa; and (3) cashing checks and payment orders issued to bearers with blank endorsements and issued on or close to the same date. Presidential Decree No. 163 of October 2, 2000 amended Decree No. 136 of June 9, 1995, extending the operational capacity of the Financial Intelligence Unit by listing in detail the Unit’s functions for: (1) covering collection of information from public institutions and private entities; (2) identifying suspicious or unusual transactions by studying information; (3) exchange of information with similar enterprises in other countries; and (4) providing assistance when required to the Office of the Attorney General and Banking Superintendency.


Confidentiality Still Protected

Executive Decree No. 213 of October 2, 2000, which established the Financial Intelligence Unit for the Prevention of Capital Laundering, covers disclosure of information concerning trusts obtained by the Banking Superintendency or any other Government inspectors and introduces penalties for breaches of confidentiality in all financial matters. A public official violating this provision may have to pay a fine up to US$1,000,000.

Under a Panamanian law passed in 1994 with the help of the Panamanian Bar association, money laundering is penalized with prison sentences recently raised to a maximum of 12 years, no bail for defendants, and confiscation of assets. Bank employees are subject to criminal responsibility if found guilty of allowing any money laundering or bending the rules for extradition of offenders in drug-related cases.

Banks and other financial institutions must practice proper due diligence under Panamanian law. They are required to know their clients, monitor and report suspicious transactions of which they are aware, establish internal procedures and controls to prevent money laundering operations, train personnel properly to deter tainted transactions, and keep records of all documents and transactions for a period of five years.

The July 27, 1994 Law was further strengthened by Executive Decree No. 468 of September 19 of that year, and the Code of Conduct approved by the International Lawyers Association, which makes it mandatory for all attorneys to know their clients and to obtain sufficient information and references from clients before rendering any services. A high-level Presidential Commission operates with authority to use all means to prevent money laundering and a so-called “Drug czar” coordinates its efforts with other activities to promote anti-money laundering.

A “Financial Analysis Unit (FAU) for the Prevention of Money Laundering Obtained from Drug Trafficking” operating under Executive Decree No. 136 of June 9,1991 has been successful in compiling information from banks and other private and Government entities and individuals to inhibit activities linked to money laundering. In 2000, the FAU received increased authority to analyze all information compiled to detect suspicious or unusual transactions and movements of cash in the country from drug trafficking. Confidentiality of all financial and banking transactions is honored in order to protect the respectable status of the FAU.

Panamanian authorities have also taken drastic action to help prevent illicit money laundering operations and crime in the Colon Free Zone. In 1996, the Government issued a decree requiring all transactions in the Zone exceeding US$10,000 to be declared and it also halted receipt of such traditional payments as money orders, traveler’s drafts and third party transfers.


Incorporation Procedure

Panamanian attorneys draw up a public deed and then usually complete the incorporation process, after which they assign their rights to their clients. Getting official approval can sometimes be accomplished in as short a span as three working days but the usual period is from ten days to two weeks. Articles of Incorporation (pacto social) submitted to the Mercantile Division of the Public Registry should include: the name and addresses of the corporation, its resident agent 8either a Panamanian lawyer or law firm), officers and at least three directors with their signature powers; the corporation’s main objectives or a statement that it may pursue any legal activities; amount of capital and types of shares; and lifespan of the corporation, which can be limited but is usually stated as perpetual. By-laws can either be inserted in the Articles or registered separately.

The name of the corporation, which may be expressed in any language, must include a word or abbreviation such as “Sociedad Anonima,” “S.A.,” “Corporation,” “Corp.,” “Incorporated,” or “Inc.” to denote clearly that it is in fact a corporation. Because the name must be cleared with the Public Registry, to avoid conflict with existing companies it is advisable to submit one or two alternate names along with the preferred name. A name can be reserved for 30 days with the Public Registry. Instead of waiting to clear the name and comply with other incorporation formalities, investors can also acquire a shelf company at a somewhat higher cost.


Other Business Entities

In addition to the corporation, which is the most common form of business entity employed by foreign investors, the commercial code recognizes: (1) the general partnership (sociedad colectiva), (2) the simple limited partnership (sociedad en commandita simple), (3) the stock-issuing partnership (sociedad cooperativa). It is also possible to form a limited liability company (governed by Law 24 of 1966), joint venture, capitalization company, sole proprietorship and branch.

More documents must be registered for a branch than for a corporation so that forming a branch may be more costly and time-consuming. All documents must be stamped by a notary public and authenticated by a Panamanian Consul in the country of origin. The parent company must obtain a commercial or industrial license and must appoint a resident agent, who is authorized to act in all legal matters and appoints a manager having adequate power of attorney to carry on business and make decisions, which are not always in line with the parent company’s whishes or intentions. The agent may be a company employee or director but any legal representative is acceptable. Specialists in company, bank and trust organizations will act as agents.


FREE TRADE ZONE

One of the most efficient and sophisticated trade zones in the world, the Colon Free Zone is located on the Caribbean side of the isthmus adjacent to the Panama Canal. The Colon Free Zone has operated under special legislation as an autonomous institution since 1948. It provides facilities in the heart of Latin America where firms can warehouse, process, manufacture, repackage, display and ship their merchandise or products. They pay duty on imports only when items are shipped into the customs territory of the Republic. There are no taxes on production machinery or materials, no sales tax or tax on investments or on dividends, and there is no capital gains tax if the company keeps the asset for at least two years. Income that arises from sales to other countries gets the benefit of a reduced tax: on profits up to US$15,000 the tax is 2.5%; US$15,000 to US$30,000 profit pays a tax of US$375 and 4% on the amount above US$15,000; US$30,000 to US$100,000 profit pay US$975 and 6% on the amount above US$30,000; over US$100,000 profit pays a tax of US$5,175 and 8.5% on the amounts above US$100,000 only when items are shipped into the customs territory of the Republic. This enables them to serve the market of Panama, the Panama Canal Zone and the entire Latin American market effectively from one location.

Under Law 28 of October 22, 1995, tax credits available to exporters in the Colon Free Zone are progressively reduced until they are completely abolished by December 31, 2002. Benefits to taxpayers subject to the Industrial Promotion Law and operating under the Law may operate under the Tax Incentives Act but are subject to general income tax rules.

Imports arrive chiefly from the United States, Japan and Taiwan, while two-thirds of re-exports go to the Caribbean and Latin America, especially the Netherlands Antilles, Colombia, Ecuador and Venezuela. Relatively few of the more than 1,800 firms doing business in the free zone build their own facilities. They find it more practical to lease a building or space, or even to operate through independent public warehouses, management service firms, and other specialized organizations within the zone. Annual turnover in the free zone is currently at the rate of US$17 billion and employment exceeds 8,000 workers.

As a result of the Colon Free Zone’s continually expanding warehouse facilities for its tenants, foreign companies are able to reduce excessive inventory building for foreign markets, a costly burden in their overall profitability. For instance, by maintaining flexibility of stocks, goods may be avoided while, simultaneously, shortage of the same stock may be created due to unexpected demand by other markets. For companies, which are not in a position to build their own warehouses, the Colon Free Zone will arrange contracts of reasonable duration and at low rentals to construct these facilities to specifications of the lessee at reasonable fees. The present 178 acres of the zone, including 94 acres in Colon City and 84 acres on France Field, contain some public warehousing space but are occupied principally by buildings leased to companies or land on which firms have constructed their own buildings. Building plans must be approved by the free zone technical department. In view of the rapid expansion in turnover in the zone in recent years, the total area has been extended to 268 acres.