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Investors Offshore Special Reports: Panama

Sponsored by Gerli Wren & Co.
20 April, 2012


Ask most people around the world their thoughts on Panama and you would probably be met with the same one word reply: canal. However, after a small amount of further investigation you would find that this country at the gateway of Central and South America certainly isn't as one dimensional as that. Aided by stable, pro-business governments using the invaluable canal as a catalyst, Panama's friendly tax and regulation system has helped to established the country as one of the most modern and respectable business and financial centres outside the established 'onshore' countries, and ranks as probably the most important trading and business hub in the region.

Around 400 miles long and between 30 and 115 miles wide, Panama appears on the map as a narrow isthmus running from east to west, forming an important land bridge between continental South America and North America, dividing the North Atlantic and Pacific Oceans. Its strategic advantages in terms of trade were recognised as far back as the first Spanish colonisers, prompting them to establish their first permanent settlement in the New World at Panama City in 1513.

Panama remained a Spanish colony for approximately three hundred years to 1821 before it was annexed by Colombia. This state of affairs endured until 1903 when the US helped win the modern day country its independence in return for a slice of land that would eventually see the Americans building and operating the famous canal, completed by the Army Corp in 1914.

However, over the last two decades, the United States has gradually scaled back both its military presence and political influence in Panama, and a second treaty signed by the former President Torrijos (father of the more recent President) and US President Carter in 1977 set in train a 25-year transition period that saw the administration and running of the canal pass back to the Panamanians.

Panama's Economy

Alongside the Canal, another legacy from the country's interdependence with the United States that has played an equally vital part in Panama's recent economic successes has been its peg to the dollar at par. Since there is no government-controlled central bank printing notes, Panama has had very little problem with inflation, unprecedented in the region, and with the dollar the effective currency in all but name (the balboa is the 'official' currency), investor confidence has not been the issue that perhaps it has in other parts of the region. However, high international commodity prices, combined with Value-Added Tax (VAT) and minimum wage increases, have pushed inflation above historical averages, with inflation in 2011 projected to be above 6 percent, according to the International Monetary Fund's (IMF) annual review of the Panamanian economy, published in April 2012.

Under President Torrijos, Panama enjoyed something of a boom; growth was 8.1% in 2006, exceeded 10% in 2007 and was 8.3% in 2008. The rate of growth fell to 2.3% in 2009; but Panama’s economy rebounded quickly following the 2008–09 global crisis. Supported by strong fundamentals, political stability, and prudent fiscal management, real GDP growth rates have been among the highest in the region. Macroeconomic stability and policies to foster greater social inclusion have reduced unemployment to historic lows.

Following the 2009 slowdown, output grew by 7.5% in 2010, and is expected to have grown by 10% in 2011. Construction, commerce and transportation have been the most dynamic sectors, while canal traffic has been buoyed by strong demand from emerging Asia and South America. Crucially, the strength of the financial system also helped to buffer Panama against the worst effects of the financial crisis in 2008/9. Robust economic growth and steady fiscal consolidation have also contributed to lowering the public debt ratio, which fell from 43.3% of GDP in 2010 to 37.8% in 2011.

The IMF suggests that Panama's macroeconomic outlook is "favourable", with future growth likely to be underpinned by the vast Panama Canal expansion project, and other large public investment projects.

The IMF also commended Panama’s success in establishing a strong banking center, which has become an important regional hub. However, to compete globally and in a broader range of investment and wealth management services, the Fund believes that the country will need to upgrade its financial sector supervision and infrastructure.

GDP per head was USD13,600 (2011 est) at Purchasing Power Parity and unemployment levels are at 4.5% (2011 est). As of 2011, Panama's GDP at Purchasing Power Parity was valued at USD50.25bn.

The Canal

Obviously, it is hard to understate the importance of the canal in terms of its advantages both for world trade and as an asset for Panama (even though the canal itself is technically neutral territory). Around 12% of the United State's seaborne trade in tonnage terms passes through the canal every year, which in total sees 13,000 ship movements annually, carrying 192 million tons of cargo. And by navigating the 40-mile waterway, a cargo vessel bound from Japan to the eastern seaboard of the United States can reduce its journey by some 3,000 miles. By the end of 2010, more than 1 million vessels had transited through the canal since its opening 1914.

Shipping then, has grown to be one of the most important industries in Panama, which has the world's largest registered merchant fleet, and a recent investment programme has seen billions of dollars used in the building of four more container ports and the widening of the canal to accommodate more 'Panamax' ships.

In October, 2006, 79% of Panamanian voters approved a USD5.25bn plan to expand the Panama Canal even further. Panama's then President Martin Torrijos said that the vote on expansion of the Canal was the most important national vote since Panama gained its independence.

Under the expansion plans, two 3-chamber locks are being constructed at both ends of the canal. This will create a third lane of traffic wide enough to handle the largest of modern container ships and tankers. New approach channels will also be prepared, whilst existing channels will be dredged to ensure large craft can enter the system.

The project will take about seven years and employ up to 8,000 people. In December, 2008, President Torrijos and Panama Canal Authority (ACP) Administrator/CEO, Alberto Aleman Zubieta, signed a USD2.3bn agreement with leaders from five multilateral and development agencies to finance the waterway's expansion project. The final three bids to undertake the dredging and excavation of the Pacific Access Channel entrance were received from international contractors in August 2010, representing the last major expansion programme contract to be awarded. Once completed, the new access channel will also link the new Pacific Locks with the Gaillard Cut (the narrowest stretch of the Panama Canal).

The expansion project was said by the Panama Canal Authority to be 15% complete by October 2010 and the canal's expansion is said to be on schedule following the recent completion of the permanent concrete works for the new locks, and the Authority hopes that work on the waterway will be completed by the end of 2014. The third phase of the dry excavation project in the construction of the Pacific access channel was completed in October 2011.

On October 19, 2011, Panamanian President Ricardo Martinelli witnessed a new milestone in the expansion project with the filling of a segment of the new access channel that will allow the transit of Post-panamax vessels between the new locks and the Culebra Cut.

Panama Canal Authority Board of Directors Chairman and Canal Affairs Minister Rómulo Roux said at the time that the expanded Canal "will be able to meet the demands of world trade and will change shipping patterns which will translate into more opportunities for Panama and the region".

Panama Canal Authority Administrator Alberto Alemán Zubieta added that "the Canal continues to focus on enhancing the value of Panama as a world trade route as our country offers all kinds of geographic and competitive advantages. Today´s act of filling part of the channel is one more step in that direction."

On December 31, 2009, Panama celebrated the tenth anniversary of nationalized operations at the Canal. A statement from the Canal noted that “the canal has long stood as one of the world's most recognized and respected engineering marvels and a crucial link in the global supply chain. Building on this, the decade of Panamanian stewardship and leadership has been evidenced by change, achievement and growth. By nearly every measure, the Canal's role in world trade and value to global commerce has increased significantly in the past 10 years.”

After a decade of Panamanian management, Zubieta spoke of his vision for Panama's hopeful future: "Reflecting over the past decade, I am proud of what we have achieved," he said. "Proud of the employees of the ACP, proud of our accomplishments and proud of Panama. We have achieved goals that some thought were daunting and overcome obstacles that, at times, seemed insurmountable."

Ship Management and Maritime Operations

Panama has the largest merchant marine fleet in the world, whether measured in terms of total tonnage or in terms of number of vessels. The registry was founded in 1925 and has no restrictions either on the nationality or domicile of owners or on the age, size or type of vessel. In fact, it accepts many types of vessel that are not counted as such by other registries, such as drilling rigs.

There was a total of 8,900 vessels registered in Panama, totalling over 222.5 million gross tons, in 2011, making it the world’s top ranking open registry flag.

The registry forms part of the Panama Maritime Authority, and has offices in London, New York, Houston and New Orleans. Provisional registration is effected through lawyers in Panama, but the provisional registration documents can be issued by Panamanian consuls. They are valid for six months, renewable. A considerable amount of information must be supplied, comparable with other registries. Permanent registration with a renewable 4-year navigation patent will follow issue of the provisional documents and completion of documentation.

Provisional registration for 6 months costs USD500, and USD50 for renewal; the renewable provisional 3-month radio licence costs USD150 per quarter.

Under Law no. 4 of 1983 (as amended) ongoing annual registration fees are based on tonnage (GRT) as follows:

  • Up to GRT2,000 - US500
  • Over GRT2,000 up to GRT5,000 - USD2,000
  • Over GRT5,000 up to GRT15,000 - USD3,000
  • Over GRT15,000 - USD3,0000 plus USD0.10 per GRT to a maximum of USD6,500

Duties (Consular Tasa) are also payable based on tonnage as follows:

  • Up to GRT1,000 - USD1,200
  • Over GRT1,000 up to GRT3,000 - USD1,800
  • Over GRT3,000 up to GRT5,000 - USD2,000
  • Over GRT5,000 up to GRT15,000 - USD2,700
  • Over GRT15,000 - USD3,000

There are also annual Tasa charges dependent on tonnage covering inspection and regulatory costs.

A separate scale of duties exists for barges, pontoons and vessels operated other than for profit.

There is also a separate regime for pleasure vessels under which registration is on a renewable 2-year basis; a single fee of USD1,500 (USD1,000 for a Panamanian individual or corporation) is payable every two years. Pleasure vessels are exempt from duties and other Tasa charges.

The registry forms part of the Panama Maritime Authority, and has offices in London, New York, Houston and New Orleans. Provisional registration is effected through lawyers in Panama, but the provisional registration documents can be issued by Panamanian consuls. They are valid for 6 months, renewable. The following information must be supplied:

  • Present and previous name of the vessel;
  • Foreign owner's name and address;
  • Previous registry;
  • Name of builder; place and date of construction;
  • Type of vessel; number of decks, masts and funnels;
  • Material of hull;
  • Details of previous usage;
  • Length, width and height; gross and net tonnages;
  • Type and number of engine, number of cylinders, horsepower; name of manufacturer;
  • Speed;
  • Details of qualified radio accounting agency;
  • Name of classification society; IMO number.

On provisional registration, a renewable 6-month Provisional Patente of Navigation is issued, along with a renewable 3-month Radio Permit. Permanent registration with a renewable 4-year Patente and Radio Permit will follow issue of the provisional documents and completion of the following documentation within 30 days of provisional registration:

  • A power of attorney in favour of a Panama lawyer as legal representative;
  • A notarised Bill of Sale or Builder's Certificate;
  • Deletion certificate from a previous registry;
  • International Tonnage and Class certificates;
  • Special inspection report if the vessel is over 20 years old

The Banking Sector

The Panamanian banking industry grew during the last quarter of the 20th century into a regional banking centre for Latin American and the Caribbean, due to a variety of factors including the absence of exchange controls, the rapidly increasing volume of trade being conducted through the country (and through the Colon Free Zone in particular), liberal banking legislation and tight secrecy provisions. At the end of 1997 more than 100 banks were licensed in Panama, from more than 20 countries and with assets of about USD23bn; however the country responded to international pressure by tightening up on banking regulation, and a number of banks closed their offices in 2000 and 2001. By mid-2005, 80 licensed banks remained, of which 30 had international licences. Assets amounted to USD7bn.

Thanks to new financial regulation, Panama is once again developing itself into an important centre for banking. The legislation introduced a new licensing system for the industry and stricter compliance procedures, whilst subsequent laws and decrees have established modern anti-money laundering, fraud and terrorist financing rules. These initiatives helped to secure Panama's omission from the FATF (Financial Action Task Force on anti money laundering) 'blacklist' of non-cooperative jurisdictions in 2001, and have transformed the nation into one of the world's most reputable international banking centres.

By 2007, the banking sector had rationalised further as foreign giants sought a piece of Panama's fast-growing services economy. Four deals at the latter end of 2006 had a major impact on the competitive environment of Panama's banking industry; these included HSBC's acquisition of Banco del Istmo - Panama's largest bank - for USD1.8bn, and Citibank's purchase of Grupo Financiera Uno, Latin America’s largest credit card issuer, for USD1.1bn. By the end of 2007 total consolidated assets in the banking sector reached USD69bn. The majority of assets are domestic - as opposed to offshore - a large chunk of which is accounted for by demand by wealthy expats, particularly from the US, for loans on second homes.

Banking assets grew steadily through 2011: in January 2012, the total assets of Panama's banking centre stood at USD81.4bn, almost USD9bn higher than in January 2011. Domestic deposits were USD30.5bn in January 2011 and USD33.65bn in January 2012. Foreign private banking represents the largest proportion of Panama's banking assets, followed by domestic private banking.

Pressure is however being maintained on Panama to adopt international standards of tax transparency and information exchange. Panama was among 35 jurisdictions identified by the OECD as far back as June 2000 as meeting the technical criteria for being a tax haven and threatened with listing as 'uncooperative'. This resulted in a written undertaking in April 2002 by the then minister of Economy and Finances, Norberto Delgado Duran to the OECD, that Panama would comply with OECD standards of tax transparency, in particular adopting the principles of exchange of tax information.

In April 2009, following a key G20 summit in London, Panama was identified by the OECD as a country which had committed to, but not yet substantially implemented, the internationally-agreed standard on tax transparency and was placed on the Organization's 'grey list' having signed, at that point, no OECD-endorsed tax agreements. The country has quite recently, however, entered a number of Double Tax Treaties and Tax Information Exchange Agreements (TIEAs). Key among them is the TIEA with the United States, signed on November 30, 2010 by US Treasury Secretary Tim Geithner and Panama’s Vice President and Minister of Foreign Affairs, Juan Carlos Varela.

"Today, we are ushering in a new era of openness and transparency for tax information between the US and Panama," Geithner declared at the time of the signing ceremony. "This bilateral agreement to provide for the exchange of tax information between our two countries reflects the commitment of the US and Panama to the importance of transparency of tax information."

The TIEA entered into force on April 18, 2011 and provides the US with access to the information it needs to enforce US tax laws, including information related to bank accounts in Panama, regardless of whether the requested party has a domestic tax interest in such information. The agreement also permits the US and Panama to seek information from each other on various types of national taxes, in both civil and criminal matters, for the tax years beginning on or after November 30, 2007.

It is specified in the TIEA that the US federal taxes covered are income taxes, taxes related to employment, estate and gift taxes and excise taxes. The taxes imposed by Panama in the agreement include income tax; real estate tax; vessels tax; stamp tax; notice of operations tax; tax on banks, financial and currency exchange companies; and insurance tax.

Information exchanged pursuant to the TIEA shall be used for tax purposes, although the information may also be used for other purposes as permitted under the provisions of the Treaty on Mutual Legal Assistance in Criminal Matters between the US and Panama, as long as the tax authorities of the country providing the information consents to such use in writing.

Panama also signed a number of OECD-compliant double taxation agreements in 2010, including with South Korea, Singapore, Luxembourg, Spain, the Netherlands, Qatar, Portugal, Italy, France and Barbados (although this treaty does not meet the agreed standard). Double tax agreements were signed with France and Ireland in 2011.

Panama's removal from the OECD 'grey list' was secured in July 2011 following the signing of the tax agreement with France, which brought the number of agreements signed by Panama that adhered to the international standard to 12. Commenting on the decision, OECD Secretary General Angel Gurria said: “Panama has worked hard to achieve this milestone and has made remarkable strides toward complying with the international standards in a very short time. This is very welcome and shows the Global Forum is achieving its aims.”

Panama's Minister for the Economy and Finance, Frank De Lima confirmed in January 2012 that the government will continue to seek out tax information exchange agreements with other nations in the coming year. It was said at the time that preparations were taking place for the negotiation of a tax agreement with Germany, while talks were ongoing with the United Arab Emirates and the United Kingdom in the early part of the year. Talks were also due to commence with Hungary towards the negotiation of a tax agreement.

"These agreements are good for attracting investment into the country and improving Panama's image in the international arena," De Lima explained.

Offshore Companies

The term 'offshore' is not used in Panama legislation; since taxation is on a 'territorial' basis, ie only Panama-sourced income is taxed, an entity which has its activities or assets outside Panama will automatically escape taxation. There are more than 120,000 corporate entities in Panama, of which the majority are 'offshore'.

The Corporation (Sociedad Anonima) is the most frequently used corporate form in Panama, and is the usual choice for an offshore operation.

Corporations are formed under the Law No. 32 of 1927 and the Commercial Code (Decree-Law No. 5 of 1997, Article 5).

A corporation is formed by two subscribers (or nominees in the case of absent foreign subscribers) who execute the Articles of Incorporation (Statutes) before a notary and then record them at the Public Registry Office. All commercial and industrial businesses must have a Notice of Operations in order to engage in business unless they are specifically exempt. Following incorporation, only one shareholder is necessary. Shares can be of various classes, can have par value or not, may be registered or bearer. There is no minimum capital, and no paying-up rules, except that no-par-value and bearer shares must be fully-paid when issued.

Strict regulations now apply to bearer shares: the registered agent must keep the bearer share certificate in safe custody and must notify the Registrar about such shares. There must be at least three directors, and their names must be in the Articles as filed; changes to directors must also be filed. Each corporation must have a resident Panamanian agent (a lawyer), named in the Articles; there are no other filing requirements unless the Articles are changed or the corporation is merged or dissolved.

Law No.2 of 2011 introduced new 'know your customer' requirements, whereby all registered agents operating in Panama must keep and maintain information on their clients in order that they can be properly identified upon request by the authorities. These new rules also cover the identity and location of holders of bearer shares.

Panamanian law also allows the following types of company to be formed:

  • Foreign Corporation: A foreign company can be registered in Panama by depositing the following documents at the Public Registry Office:
    • A notarised Spanish translation of the Articles of Association;
    • A Board minute authorising the Panamanian registration;
    • Copies of the most recent financial statements;
    • A certificate from a Panamanian Consul confirming that the company is organised according to the laws of its place of incorporation;
    • Notification of the allocation of capital to the Panamanian operation.
  • General or Limited Partnership: A General Partnership is permitted under the Commercial Code. The partners have unlimited liability.
  • Civil Partnership: The Commercial Code and Law No 24 of 1966 also govern the Civil Partnership (sociedad civil), which has legal personality, although the liability of the partners is unlimited. This type of partnership is often selected by professionals such as lawyers and accountants.
  • Foundation: The Private Foundation Law 1995 governs private foundations in Panama. Unlike the common law trust, the foundation is an autonomous legal entity with no members or shareholders. It is generally used for the protection of assets and no business activities are permitted. Panamanian law specifically excludes the operation of foreign 'forced heirship' rules or judgements against foundation assets. Panama itself has abandoned these typical civil law provisions in its own legislation.
  • Trust: Panamanian trust law was updated with Law No 1 of 1984. Panamanian trusts (Fideicomiso) must be expressed in writing, so cannot be constructive. Trusts can be stated to be revocable but otherwise are irrevocable. The settlor, trustees and beneficiaries need not be Panamanian nationals or resident in Panama. A Panamanian lawyer must act as an agent for the trust. Trusts may be settled in respect of existing or future property; additional property may be included after the settlement either by the settlor or a third party. Unlike foundations, trusts are not protected by specific provisions against foreign inheritance laws, judgements or creditors. However, purpose trusts are allowed for.

Licenses are required only for financial institutions. Corporations do not have to disclose beneficial ownership, and Trusts and Foundations need not disclose the names of their beneficiaries. Limited Partnerships do however need to disclose the names of their members.

In 2007 Panama inaugurated a headquarters company regime (sedes de empresas multinacionales, or SEM) which offers tax breaks to encourage multinational companies to set up various types of service companies (see Panama Tax Regime, below).

Panama's Tax Regime

For firms carrying on business outside of the special zones (see below), general taxation is imposed on a territorial basis, meaning that taxes only apply to income or earnings derived from business undertaken within the country's borders. The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama, so dividends paid out of such earnings are free of taxation.

The rate of income tax in Panama has been reduced in stages from 30% as a result of a fiscal bill passed in the first months of 2010. A 27.5% rate applied from January 1, 2010 until January 1, 2011 when it fell to 25%. However, companies in the energy, telecoms, financial, insurance, banking and mining industries continued to pay corporate tax at 30% until 2012, when it dropped to 27.5% The rate for these companies will fall to 25% in 2014. Companies with turnover of less than PAB200,000 per year pay income tax at individual rates.

There is a withholding tax of 10% on dividends paid out of taxed income. If less than 40% of taxed income is distributed, then Undistributed Profits Tax of 10% becomes payable on the undistributed balance; this therefore amounts to a maximum of 4% tax. In effect this is an advance withholding tax, and it is creditable against the 10% tax on later distributions of the taxed profit.

The 2005 reform package introduced a 'minimum income tax' provision, under which the net taxable income of a legal entity will be the higher of the amount resulting from application of the ordinary Income Tax rules (gross income minus deductible expenses minus deductible allowances equals net taxable income), or 4.67% of gross income. Whenever the effective income tax rate exceeds 30% of the net taxable income earned by a taxpayer, a waiver may be obtained from the Tax Administration and no presumptive taxation will apply. The same will apply in the event of losses for taxable purposes. The waiver may be granted for a maximum period of 4 fiscal years (the year for which the waiver is granted and the 3 subsequent fiscal years). The minimum alternative tax was replaced in 2010 by a new minimum estimated tax for companies with revenues exceeding PAB1.5 million.

In 2007 Panama inaugurated a headquarters company regime (sedes de empresas multinacionales, or SEM) which offers tax breaks to encourage multinational companies to set up various types of service companies. SEM companies are exempt from VAT on services rendered to non-Panamanian taxpayers, and are exempt from income tax on profits from such services. Expatriate employees of SEM companies also receive tax privileges. In order to achieve SEM status, group assets must be worth at least USD200 million. A minimum initial capital of USD2 million is required if the group's main office is to be in Panama. On July 1, 2010, the other following tax changes became effective:

  • Value-added tax (ITMBS) assessed on the provision of goods and services, was increased from 5% to 7%;
  • Excise taxes on cars was further increased to make the effective increase of 5% (inclusive of extra ITMBS) for cars in the USD8,000-12,000 price range;
  • An annual tax on total assets held by banking institutions holding a general license, ranging from USD75,000 to USD1m, was introduced. Banks with international licenses will a fixed tax of USD75,000; and
  • Income of international transportation companies derived from freight, passage, cargo and similar services originating from or destined for Panama are subject to a 1% turnover tax in Panama. As from July 1, 2010, related taxes paid in a foreign jurisdiction are deductible against other income related to international transportation.

Real estate in Panama has normally been subject to an annual tax based on assessed value at rates between 0.75% and 1%. The tax reform package which came into effect in 2010 extended this annual tax to a number of property types which were previously exempt. There is also a 2% real estate transfer tax.

Capital gains tax is generally paid at a flat rate of 10% in Panama by both companies and individuals. However, some changes to the tax treatment of real estate were introduced in January 2011, including a 3% advance capital gains tax on certain real estate sales levied on the higher of the sales price or the value of the property.

An individual is considered resident if he is present in Panama for more than 180 days in any one tax year. Individuals are taxed on wages, income derived from the carrying on of a commercial or agricultural business, and investment income. In 2012, the first PAB11,000 of income is exempt from income tax. A 15% rate applies on income above PAB11,000 and below PAB50,000; and a 25% rate applies on income above PAB50,000. There is a 12.5% withholding tax on the gross income of non-residents providing services to Panamanian residents for periods of less than 183 days in a calendar year.

The Colon Free Zone

Recent governments have sought to take full advantage of the country's financial stability by offering significant tax breaks for firms setting up in a growing number of 'free trade zones' occupying sites formerly used as bases by the US military. The largest of these is the Colon Free Trade Zone, situated at the northern end of the canal in close proximity to the major ports on the Caribbean coast, which offers firms exemption from tax on all import and export movements.

Companies in the Colon Free Zone, or in other Export Processing Zones, are treated in the same way as companies with external operations, ie they are exempt from income tax on external (i.e. re-export) operations. They are also exempt from paying sales taxes, import taxes and municipal taxes. However, a fiscal package introduced in 2005 aimed at reducing Panama's indebtedness included a 1% turnover tax to apply to all operations in the Free Zones, and a 1.4% turnover tax which may apply to some other types of companies. Furthermore, under a 2009 law, an exemption from dividends tax was removed for free zone companies. They must also pay an annual franchise tax of PAB300.

In addition, Free Zone companies benefit from an absence of certain bureaucratic requirements such as licensing and guarantees. Overall, this generous incentive regime has attracted around 2,500 merchants generating exports and re-exports estimated to be worth in excess of USD16bn per year.

A draft law establishing a simplified and comprehensive scheme for establishment and operation in the free zone was approved by the Executive in December, 2010. Minister for Trade and Industry, Roberto Henriquez, explained that the initiative seeks to adapt national legislation to meet WTO standards. The bill encourages new investment in high-tech companies, logistics and environmental services as well as higher education establishments and research centres.

Seeking to capitalise on the success of the Colon Free Trade Zone, the Panamanian government in 2003 announced plans in partnership with the World Bank's International Finance Corporation to transform the American military's Howard airforce base into a special economic zone equipped with high-tech logistical and telecommunications facilities with similar tax advantages for firms locating there. It is hoped that the project, now called Panama Pacifico, will attract some USD600 million in investment and create 20,000 jobs over two decades.

Fiscal benefits for companies located in Panama Pacifico are established by Tax Law 41 of 2004 and include exemption from all indirect taxes, income tax and dividend tax. Panama Pacifico companies also benefit from relaxed labour and immigration laws, including for overtime pay, compulsory rest days, employment contracts and visa rules, with three- to five-year work visas allowed instead of the usual one-year visa. The scheme also offers a five-year investment visa for those investing more than USD250,000 in the zone.

The first set of offices at Panama Pacifico, which have been ready for occupation since November 2009, are now 100% leased. The first phase of the project is not due for completion, however, until 2016 and more than USD400m is expected to be spent on real estate development during this phase. Phase one will see the construction of: a 'town centre' featuring retail outlets, offices and residential units; an international business park featuring high-end offices; the 'PanAmerica Corporate Centre' for logistics, distribution and light manufacturing activities; and an exclusive residential neighborhood, including low- and medium-density luxury homes and apartments in a country club resort setting, known as Kobbe Hills. Future phases may include the development and expansion of the existing airport, and an additional commercial center – Forest Business Park –adjacent to the Pan-American Highway. The Puente Verde neighborhood is planned on the north side of the project and will start construction in a future phase.

In February 2011, Dell officially launched a USD13m expansion project in Panama Pacifico. The investment includes the construction of a new 5,000 sq.m building and improvements to current installations located in the Panamá Pacífico area. The investment was expected to create around 500 new jobs, increasing the company’s workforce in the country by approximately 25% over two years.

In April 2012, Panama Pacifico announced that real estate in the new River Valley neighbourhood would go on sale. Once completed, River Valley will consist of 345 homes including single-family detached homes, townhomes and low-density condominiums. A gentle stream runs through the center of the new residential area, and will include attractive walking paths and play areas around it, for the residents enjoyment, as well as a private neighborhood pool. Residents will also benefit from having a new private school in the neighborhood, as well as being located across the street from the new sports park, the construction of which is die to begin in June 2012.

A 'Technopark' has also been established at the former US Army base at Fort Clayton on the Pacific coast which has attracted the likes of Microsoft, Oracle and Cisco. Now known as the City of Knowledge, this business park also offers companies tax and immigration benefits and direct access to the land portion of five international fiber optic cables that go across Panama. The City of Knowledge hosts research centres, educational institutions, and companies in the software development, telecommunications, multimedia, logistic applications, outsourcing and IT security industries.

Panama has placed a great deal of emphasis on building up a modern, hi-tech telecommunications infrastructure, with firms having ready access to high-bandwidth fibre-optic networks, marking the country out as Central America's e-commerce hub. Its promoters are also keen to point out that unlike other countries in the region, Panama is less prone to natural disasters such as hurricanes and earthquakes, minimising the risks of frequent and prolonged down time.

The US Free Trade Agreement

After many years of delay, President Obama signed the US/Panama Free Trade Agreement (FTA) into law in 2011. The US and Panama signed the agreement on June 28, 2007, and Panama's parliament approved the deal on July 11 that year. However, the US ratification of the FTA stalled after Obama arrived in the White House in 2009 and the Democrats won a Congressional majority in the previous year's elections.

The formerly Democrat-controlled Congress refused to ratify the deal until concerns over Panama's perceived status as a 'tax haven' were addressed by the country's government. While the balance of power in Congress has shifted towards the Republicans, the Obama administration refused to send the agreement to Congress until Panama had confirmed that these and other issues, including concerns over labour rights in the country, had been dealt with.

“President Obama has made it clear that any trade agreement we present to Congress must be consistent with our key values and in the clear interests of Americans," Deputy United States Trade Representative Miriam Sapiro told a Congressional trade hearing in March 2011. "The Administration has therefore been working hard with Congress and stakeholders since it came into office to identify specific steps that Panama could take to improve its protection of internationally recognized labour rights.”

The Republicans, who took control of the House of Representatives in January 2011, have repeatedly implored the administration to send the FTA to Congress, warning that every day of delay is a potentially missed opportunity for American businesses.

The Republican leader in the United States Senate Mitch McConnell, the Republican ranking member for the Senate Finance Committee Orrin Hatch, and 42 further Republican senators, wrote to the Democrat Senate majority leader Harry Reid in March last year in a bid to pressure the Democratic leadership to present America's three pending FTAs, of which Panama is one, to Congress forthwith.

“These agreements were negotiated and finalized more than three years ago,” the letter says. “Through these agreements Colombia and Panama committed to opening their markets to US exports and adopting rules of trade that will make it easier for US workers to export to these markets. Concluding these agreements will provide new export opportunities for US businesses and workers.”

With the Administration's concerns over Panama's tax transparency and labour laws seemingly addressed, Obama finally signed the legislation on October 21, 2011. However, discussions between the Administration and Congress on the implementing bill for the FTA have yet to be concluded.

The US-Panama FTA is a comprehensive free trade agreement that can result in significant liberalization of trade in goods and services, including financial services. It also includes important disciplines relating to customs administration and trade facilitation, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.

When the agreement is effective, US firms will have better access to Panama's services sector than it provides to other WTO Members under the General Agreement on Tariffs in Services. All services sectors are covered under the agreement except where Panama has made specific exceptions. Moreover, Panama has agreed to become a full participant in the WTO Information Technology Agreement.

Panama has also entered into a bilateral agreement with the United States resolving a number of regulatory barriers to trade in agricultural goods ranging from meat and poultry to processed products, including dairy and rice.

US industrial goods currently face an average tariff of 7% in Panama, with some tariffs as high as 81%. US agricultural goods face an average tariff of 15%, with some tariffs as high as 260%.

Over 87% of US exports of consumer and industrial products to Panama will become duty-free immediately once the agreement is effective, with remaining tariffs phased out over ten years. US products that will gain immediate duty-free access include information technology equipment, agricultural and construction equipment, aircraft and parts, medical and scientific equipment, environmental products, pharmaceuticals, fertilizers, and agrochemicals.

Once effective, nearly 56% of current agricultural trade will receive immediate duty-free treatment under the FTA, with most of the remaining tariffs to be eliminated within 15 years. Panama will immediately eliminate duties on high-quality beef, frozen turkeys, sorghum, soybeans, soybean meal, crude soybean and corn oil, almost all fruit and fruit products, wheat, peanuts, whey, cotton, and many processed products. The Agreement also provides duty-free access for specified volumes of standard grade beef cuts, chicken leg quarters, pork, corn, rice, and dairy products through tariff rate quotas.

Living And Working In Panama

Panama classifies foreigners entering the country as Tourists, Temporary Visitors, Special Temporary Visitors, Tourist-Pensioners, Immigrants and Investors.

Short-stay visas are issued freely; the Tourist-Pensioner visa is given to those who can demonstrate a designated monthly income from interest on time-deposits in a Panamanian bank; the Investor's visa is for those who invest their own capital into local business activity. Immigrant visas cover long-stay working residents.

For those thinking of living, working or setting up a business in Panama, there is no distinction made between foreigners and nationals under Panamanian law.

Residency rules meanwhile are fairly simple and unbureaucratic. Whilst there are no statutory residency rules as such, an individual is considered resident if he is present in Panama for more than 180 days in any one tax year and residence has to be officially recognised by the Government.

The labour and employment market on the other hand, is more closely controlled by the authorities and the law sets maximum percentages for the employment of foreigners in a business according to its sector. Usually the figure is 5% although foreign companies are allowed to fill senior positions with expatriates, up to a maximum of 12% of the staff. However, the Ministry Of Labour, which is responsible for issuing work permits, may be flexible on this issue and is open to negotiation for the setting of higher limits in certain instances.

This relatively light system of tax and business regulation, a stable dollarised economy and a benign political system makes Panama an attractive proposition for any aspiring expat currently plotting his or her escape from the high tax countries of North America or Europe. Those seeking sunnier climes to retire to will also be happy to hear that Panama's Pensionado Visa Program offers a variety of tax breaks and discounts on such things as car imports, furniture, mortgages, utility and medical bills.

However, perhaps just as important is that residents can enjoy a good quality of life in Panama with its tropical climate, miles of sandy beaches and picturesque mountain scenery. As the country is still a relatively undiscovered destination, real estate remains relatively inexpensive with potential for appreciation. Panama also has first class infrastructure in terms of communications ensuring that international phone calls will always connect, and internet access is reliable. Furthermore, the cost of living in Panama City is around half of that of the United States.




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