Beatriz Cabal of Galindo Arias & López in Panama City provides an introduction to the jurisdiction
The Republic of Panama is a relatively small country, ideally located in the middle of the American continent and surrounded by the Pacific and Atlantic oceans. Panama, since its beginnings as a nation, partly due to its size and also taking advantage of its strategic location, exploited these characteristics and developed a large economy of service.
Besides the Panama Canal, this economy of service has one of its best examples in the Panamanian banking system, which has been designed to offer foreign and local investors multiple advantages, such as the paring of the Panamanian balboa to the US dollar in a one to one ratio and the lack of legal restrictions for the free movement of capital. These advantages, among other things, have allowed Panama to maintain the largest financial sector in the entire Latin-American region with more than 100 banks.
Panama’s territoriality principle of taxation is also a large factor in the economy, since income is only subject to tax as long as it is derived within Panamanian territory (exclusive source taxation). In accordance with this territoriality principle, the following activities are considered as “foreign source income”, and thus not subject to income tax in Panama: a) trading of goods located outside Panamanian territory; b) directing and conducting, from an office located in Panamanian territory, transactions with effects outside Panamanian territory; and c) dividends derived from corporations that carry out the abovementioned activities.
Reinforcing its position as an international services economy, since 2010, Panama has agreed and signed more than 15 double taxation treaties for the avoidance of double taxation, creating a unique treaty network in Central America.
With the purpose of attracting further investors, Panama developed several special investment regimes which have certain common benefits, such as tax exemptions or reduced tax rates, flexibility on the hiring/dismissing process for workers and special visas for foreign workers. The most important special regimes to date are the Headquarter of Multinational Companies (Sede de Empresas Multinacionales), Panama Pacifico Special Economic Area, the Colon Free Trade Zone and various other free zones in the country.
The Headquarter of Multinational Companies is designed to attract international multinational companies to establish their headquarters in Panama and it is used to offer different types of services (back-office, administrative, etc.) from Panama, to other entities of the multinational group located abroad. The Panama Pacifico Special Economic Area was designed to attract companies interested in offering services and manufacturing products, especially in the high-tech area, to be produced in Panama and to be sold abroad. The Colon Free Trade Zone, the largest Free Trade Zone in Latin America and the second largest in the world, is mostly used for the import and export of merchandise. Finally, there are several Free Zones (Zonas Francas) established in different areas of the country, and are used for the manufacturing of products in Panama, to be sold locally or abroad.
There is also an Investment Stability Law, which allows companies that invest at least $2 million in two years and in certain activities such as tourism, industry, free trade zones, telecommunication, and energy, among others, to apply for the benefits of the law. This law provides protection against increases or modifications on municipal and state taxes, as well as changes to the custom or labour regime.
In an effort to obtain larger benefits and improve its competitiveness among its peers, Panama is party to several free trade agreements, with diverse countries like Mexico, Singapore, Canada, Chile, Peru, the United States as well as with the European Union, to name a few. These free trade agreements allow nationals of these countries to access the Panamanian market with clearer rules and in some specific cases, even to access business opportunities that were reserved only to Panamanians in the past.
From a practical standpoint, any investor that plans to start doing business in Panama must operate by means of a Panamanian corporate entity. The investor can choose between a corporation (sociedad anónima) and a limited liability corporation (sociedad de responsabilidad limitada), which are the two most common corporate entities, or by registering a foreign entity before the Panamanian Public Registry. Subsequently, an Operating Permit must be obtained before the Ministry of Commerce, as well as proceeding with the registration before the municipal authorities where the business is physically located. Once the investor is ready to hire its employees, the corporation must also be registered before the Social Security Administration.
It is important to note that Panama does not have any restrictions or limitations for foreigners who want to invest or acquire real estate in the country, nor does it offer nationals any provisions or regulations that offer different legal benefits than to foreigners.
In summary, Panama is an excellent option to consider for any potential investor since it has built a strong legal platform to support and safeguard such investments, while simultaneously maintaining a steady growth for the country.
Beatriz Cabal
Associate Galindo Arias & López
Panama City
About the author
Beatriz Cabal is an associate at Galindo, Arias & López, where she provides legal counsel to local and multinational corporations in the energy, pharmaceutical, telecommunications, and media industries; advising key market players either starting or expanding their operations in Panama and the region. Having vast experience in corporate, commercial, and administrative law, Beatriz has actively participated in some of the most relevant M&A, public bids, and project financing transactions including Marsh & McLennan Companies’ acquisition of Seguros Morrice & Urrutia, Covidien’s spinf-off of its pharmaceutical business in Panama, and UEP’s project financing for the development of the largest wind energy project in Central America, to name a few.
Education: New York University School of Law and National University of Singapore, Singapore (Dual Degree LL.M. in Law and Global Economy, 2008); Santa Maria La Antigua University (Postgraduate Degree, Labor Law, 2008); Santa Maria La Antigua University (Bachelor of Law and Political Science, 2006).