Panama

GENERALLY

Panama is a Central American nation of 2.3 million inhabitants noted for its canal which connects the Pacific to the Caribbean. The official language is Spanish, but English is widely spoken. Panama's time is five hours behind Greenwich Mean time (GMT), and is on Eastern Standard time (EST), although it does not have daylight saving time.

Panama has a constitutional republican form of government modeled heavily on that of the United States. The President is elected directly, as are the 72 members of the National Assembly. The Supreme Court is the highest court. Each province has a Governor and a provincial council.

The International Airport, which is within 20 miles of Panama City, provides service to all major cities in the both North and South America, and Europe. Panama’s telecommunications system is excellent, and most courier services, such as DHL, are available.

International Memberships and Treaties

Panama is member of the following international organizations: United Nations; Organization of American States (OAS); Conference of Non-Aligned Nations; International Maritime Organization; Interamerican Development Bank; International Bank for Reconstruction and Development (Worldbank); International Monetary Fund; and the Latin American Economic System (SELA).

Panama subscribes to a Cooperation Agreement with the European Economic Community (EEC), the General Treaty for the Economic Integration of Central America (SEICA), and is negotiating to become a full member of the General Agreement on Tariffs and Trade (GATT). Panama also have preferential bilateral trade agreements with most other Central American states and Mexico, and also many of the former "Eastern Bloc" countries.

Currency

The Balboa ("PAB"), the unit of currency, is at par with and equivalent to the U.S. dollar. The U.S. dollar is the circulating medium since Panama does not print any paper currency of its own. U.S. currency and coins and Panamanian coins are circulated freely at face value. There are no exchange controls, except that money-laundering laws control transactions in excess of US$10,000.

Banking and Finance

Panama issues three types of banking licenses: General Licenses for banks which engage in business both in and out of Panama; International Licenses for banks which engage in business exclusively outside of Panama; and Representation Licenses which are issued to foreign banks which establish a branch office in Panama.

Banks operating under a General License are required to keep paid-in capital of US$1 million and pay an annual tax of US$25,000, and banks operating under an International License are required to maintain assets of at least US$500,000 in Panama and pay an annual tax of US$15,000.

All banking operations are regulated by the National Banking Commission which has the power to investigate any bank to determine its solvency. There are, however, very strict safeguards against the National Banking Commission utilizing its powers to ascertain financial information about any particular client of the bank, or of any client’s particular transactions.

As a general rule, banks in Panama practice secrecy and confidentiality, which is enforced by the Panama Banking association. Panamanian banks can offer numbered accounts.

Panama’s unfortunate usage as a money haven for narcotics trafficking has given rise to several laws meant to deter and punish money laundering. There is a US$10,000 cash reporting requirement, and Panama is party to a Mutual Assistance Treaty relating to money laundering from drug-related transactions.

The Panama Stock Exchange (PSE) was created in 1988, and is regulated by the National Securities Commission. To attract foreign investment, shares traded on the PSE are exempt from income and capital gains taxes.

Panama Taxes

Income tax is levied on all revenues generated from Panama sources. The following forms of income are not subject to income tax because they are not considered to be produced in Panama.

• Billing the sales of merchandise or goods from an office established in Panama for an amount higher than they were billed to the office established in Panama, provided the merchandise or goods move exclusively abroad.

• Transactions conducted from an office in Panama, but perfected, consummated, or having effect abroad.

• Distributing dividends or partners' participations when they originate from income not produced within Panama, including income arising from the activities mentioned immediately above.

Panama is not a party to any Double-Tax Agreements (DTAs). Panama does have agreements to share information relating to tax evasion with other nations, including the United States.

Panama Foreign Trade

Panama has been a transshipment point for world trade literally for centuries. And, the Panama Canal established Panama as the preeminent Central American trade port. Panama’s laws reflect the importance of foreign trade to her economy.

The Colon Free Zone, located on the Caribbean side of the nation, is the largest re-export center in the Western Hemisphere, reaching US$9.6 billion in 1993. Firms located within the Zone are exempt from import duties and other restrictions. There are no taxes within the zone for the export of capital or the payment of dividends, and there are reduced income tax rates imposed on re-export sales.

Panama has very few trade restrictions, except those which relate to retail trade within the country. Foreign trade is so interwoven into the fabric of Panama’s economy that there are very few differences in treatment between Panamanians and foreigners.

Panama Exports

Panama offers three excellent tax incentives for exports:

• Total exemption from import duties, taxes, levies, or any other charges on the importation of machinery, equipment, and spare parts to be used in the manufacturing process, as well as raw materials, semiprocessed goods, containers, packaging materials, fuels, and lubricants to be used in the manufacturing process.

• Total exemption from income tax on profits arising from exports, with the exception of the extractive industries.

• Total exemption from taxes on exports as well as from taxes on sales or on the capital or assets of the company, with the exception of license fees and property taxes.

PANAMA FOUNDATIONS

The Panamanian entity which is of most interest is the Private Interest Foundation, which is very similar to the Liechtenstein Anstalt ("Establishment"), but which can be formed for substantially less cost. Panama created this entity in 1995, and it presents a serious alternative to standard offshore trusts and corporations. Indeed, it is possible that the Panamanian Private Interest Foundation may soon surpass the Anstalt as the entity-of-choice for sophisticated offshore practitioners.

Formation

A Panamanian Private Interest Foundation is "constituted" by the adoption, by the founders, of a "Constitution". The founders may be individual persons, trusts, corporations, nominees, agents, etc. A single founder is permissible.

An initial "endowment" of capital is required, to be exclusively destined to the purposes expressly provided in the founding instrument. Subsequent increases to capital may be made either by the founders, or any other persons.

To obtain a Constitution, the founders must subscribe to the forming instrument which must contain the following information:

• The name of the foundation, which must include the word "Foundation"

• Foundation capital of not less than US$10,000

• The names and address of the initial Foundation board members

• The domicile of the Foundation

• The name and domicile of the Foundation’s resident agent, which is usually an attorney, who must "authorize" the foundation instrument before it is registered with the Public Registry Office

• The purposes of the Foundation

• The procedure to appoint the beneficiaries of the Foundation (the founders may be beneficiaries)

• A reservation of the right to modify the foundation instrument

• A statement of the duration of the Foundation

• The "destiny" (intended usage) of the Foundation’s assets, and the liquidation procedure upon dissolution

The foundation instrument can contain any other lawful clause which the founders deem convenient.

The Foundation is deemed to be formed once it is filed with the Public Registry Office.

Purpose

Private Interest Foundations must seek non-profit purposes. However, they may carry out commercial activities which further the Foundation’s purposes.

Taxes

Private Interest Foundations are taxed essentially the same as a Panamanian corporation. The Foundation’s activities are exempt from any kind of taxes, duties, charges or fees so long are they relate to activities and assets outside of Panama, and do not result in any income from Panamanian sources.

Capital

Once the Foundation has been registered, the founders must formalize the transfer of capital to the Foundation. Importantly, once capital has been contributed to the Foundation, the founders retain no interest (unlike shareholders). Transfers of capital to the Foundation are irrevocable. Foundation capital may not be attached or garnished, except as a result of the acts of the Foundation itself in pursuit of Foundation purposes. This creates an absolute barrier between the creditors of a founder and the capital which is contributed to the Foundation.

Management

One the Foundation is constituted, it is managed by a board. The board must have at least three (3) members, whose duties are to further the Foundation’s purposes. The Foundation instrument may also provide for various supervisory groups (custodians, auditors, etc.) who are appointed by a majority vote of the founders.

Change of Domicile

Panamanian Foundations, and their assets, may be moved to another jurisdiction. Similarly, Foundations created outside of Panama may change their domicile to Panama and thereafter be treated as a Panamanian Foundation.

Anonymity

Every Panamanian Foundation must have a Panamanian attorney acting as its resident agent, and that attorney is required to keep certain information relating to the founders so as to defeat money laundering.

Secrecy and Confidentiality

All members of the Foundation’s board, as well as all auxiliary groups, must keep the activities of the Foundation secret and confidential, except as otherwise provided by law. This duty extends to all persons who are involved with the Foundation, such as notaries and bankers. Violation of this duty subjects the violator to civil and criminal penalties.

PANAMANIAN CORPORATIONS

Types of Business Entities

Panama’s legal system is based on civil law, as opposed to common law. Nonetheless, because of its traditional close U.S. business ties, Panama in 1927 adopted a Corporation Statute which is similar to the old Delaware corporation statute.

In addition to the corporation (sociedad anónima), Panama has several types of modern business entities: the limited liability company or "LLC" (sociedad de responsabilidad limitada); the limited partnership (sociedad limitada); and the limited partnership (sociedad limitada por acciones).

Incorporation Requirements

The following information must be contained in the Articles of Incorporation:

• The name of the corporation, which must end in "Corporation", "Corp.", "Incorporated", "Inc." or, commonly, "S.A." It cannot end in "insurance", "re-insurance", "trust", "mutual fund" or "bank".

• The main objects of the corporation. This can either be very general (e.g., "international business purposes") or very specific (e.g., "exporting of widgets to Cuba by way of Jamaica").

• The amount or authorized capital, indicating the amount of shares into which such capital is to be divided. It is not necessary to state the amount of capital if the shares are of no par value, but the number of shares to be issued must be disclosed.

• Whether or not the shares are to be bearer shares.

• The names and addresses of at least three (3) directors, which may be nominees. There is no requirement that the beneficial owners of the corporation be revealed.

• The names and addresses of the initial officers of the corporation, which must be at least a President, a Secretary and a Treasurer. The directors can also be officers, and the same person can hold more than one office (although this is not recommended).

Capital and Shares

There is no mandatory minimum capital, nor is there a time limit when authorized capital has to be paid in. Shares can be issued with or without par value. Multiple and preferred share classes are permitted, and shares may optionally be issued as Bearer or Nominative shares. A registration tax of US$60 is payable if the authorized share capital does not exceed US$10,000. It is common practice to specify authorized capital of US$10,000 in 100 common, voting shares having a par value of US$100 each.

Each corporation must maintain a stock register indicating at least the number of shares and the date of issuance.

Management

The corporation is formed by at least one organizer and at least one subscriber, usually nominees, who appear before a Notary Public to incorporate the company, and who thereafter elect the first Board of Directors.

The Board of Directors must have at least three directors. The directors can be of any nationality and are not required to reside in Panama. Meetings of the Board can be held anywhere in the world if allowed by the bylaws.

The Board must elect at least the following officers: a President, a Secretary, and a Treasurer. The officers can also be of any nationality, and need not reside in Panama. A director may also be an officer, and one person may hold multiple offices, i.e., a single person could be President, Secretary and Treasurer. There may, of course, be additional officers authorized by the corporation.

The corporation is required to maintain a registered agent in Panama, which person must be an attorney or a law firm.

Taxation

Registration

There is an annual registration tax of US$150.

Corporate Income

The general rule is that Panamanian companies are not taxed on income derived from sources outside of Panama; in other words, they are only taxed on business activities within Panama, if any. This is true even if the Panamanian corporation maintains its offices and employees within Panama.

Dividends

There is no tax on corporate dividends so long as the corporation’s income was derived from sources outside of Panama. If the income was derived from sources within Panama, there is a 10% tax on dividends from registered shares and a 20% tax on bearer shares.

Capital Gains Tax

There is no capital gains tax so long as the corporation’s income was derived from sources outside of Panama. If the income was derived from Panamanian sources, then the capital gains are treated, essentially, as dividend income and subject to tax on that basis.

Reporting

A Panamanian company must report all income from Panamanian sources, but it is not required to file a return if all sources of income were from outside of Panama.

PANAMA TRUSTS

Panama’s trust law is based on the common law trust, the trust statute being last amended in 1984. Panama’s trust laws are poor by offshore standards, primarily because the Rule Against Perpetuities is still enforced, and there is no such thing under Panamanian law as a discretionary trust. Panamanian trust laws fall far short of the standard set by the Cook Islands and Nevis.

Purpose

The trust may be created for any purpose not contrary to law or public policy.

Formation

The trust is created by a private trust document, bearing the signatures of the settlor and the trustees. These signatures must be notarized, however, filing or registration of the trust document is not required unless it relates to Panamanian real estate. The settlor, trustee, or beneficiary may be a corporation.

Duration

The trust must be limited to a fixed duration, unless otherwise stated in the trust document. Further, the trust document will control whether the trust is revocable or terminable by the settlor prior to expiration.

Confidentiality

The trustee and his agents must keep the trust strictly confidential and secret, or else fines of up to US$50,000 and imprisonment not to exceed 6 months.

Taxes

Panamanian trusts are exempt from all taxes, encumbrances, etc., so long as the trust only administers property outside of Panama, and income which is not from a Panamanian source, except that Panamanian deposit accounts may be administered tax-free. There are also some exceptions from taxes from Panamanian source income, such as when the income is derived from a tax-free zone or from certain public projects.

Foreign Law/Flight Clauses

The settlor and trustee may agree that foreign law will apply. In lieu of such agreement, Panamanian law will apply. The trust and all trust assets may be transferred to another jurisdiction (i.e., "Cuba clauses" or "flight clauses" are recognized).

Foreign Trusts

Foreign trusts may be brought into Panama and governed by Panamanian law so long as they comply with Panamanian formalities.

TAX WARNING FOR U.S. CITIZENS

U.S. citizens are taxed on their taxable income from wherever it is derived, anywhere in the world. U.S. citizens are also taxed on investments indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBCs. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that if a U.S. citizen does business there that he or she will enjoy only low or no taxes on the personal income made. There are simply NO personal income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is probably telling you a falsehood. Any discussion we make of an offshore jurisdiction's tax laws should be construed only according to the foregoing warning.

BEWARE OF OFFSHORE SERVICE PROVIDERS: There are some offshore service providers who will make wild claims about saving you personal income taxes, so as to convince you to set up an offshore structure. Most of these people don't know the first thing about U.S. tax law, and their representations to you will not help you, at all, if you are caught with an unreported trust, corporation, or bank account. All they really want is your money, and even if you commit tax evasion they are not subject to U.S. law, and so couldn't care less. See Hiding Money Offshore