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General Information
The Economy
Banking and Finance
Corporate
Structure
Immigration
Investment
Climate
Investment
Incentives
Panama Investors Monthly - November, 1996
The Republic of Panama with an area of approximately 29,700 sq. miles (76,900 sq. km.),located between Costa Rica and Colombia, forms the narrowest and lowest portion of the Isthmus that links North and South America.
Shaped like an elongated letter "S", which extends west to east some 420 miles (676km), the country has a width that varies between 31 and 115 miles (50 and 185 km.) and has a coastline of 490 miles (788 km.) on the Atlantic Ocean and 870 miles (1,400 km,) on the Pacific Ocean. The Panama Canal, which joins the Atlantic and the Pacific Oceans, is about 50 miles (80 km.) long. Because of the lateral nature of its extension and its curved contour, directions are often surprising. A transit through the Panama Canal from the Pacific to the Atlantic involves traveling not to the East but rather to the North-West; in Panama City the sun is seen to rise out of the Pacific Ocean.
The Isthmus of Panama was discovered in 1501 by Rodrigo de Bastidas and Vasco Nunez de Balboa, who had a leading part in the establishment of Santa Maria La Antigua del Darien in 1510, the first permanent settlement on the mainland of the Americas. In 1513, Balboa led an expedition, in Panama, that discovered the Pacific Ocean. Panama city was founded by Pedro Arias Davila on August 15, 1519, almost a hundred years before Jamestown, the firs permanent English settlement in North America was founded. Panama was a Spanish colony until 1821 when it became part of the Gran Colombia of Simon Bolivar. In 1903, Panama broke its alliance with Colombia and became an independent republic.
The executive branch of the Government is composed of a President and two vice-presidents, democratically elected for a five year term by direct vote.
The population of Panama is approximately 2.8 million, about 52 percent of which is urban.
Spanish is the official language of the country, but many of the people in Panama City and Colon speak English. Most businessmen, top government officials and executive staff are fully bilingual.
The predominant religion is Roman Catholic. However, there is no prohibition against the practice of any religion, and churches of other denominations are to be found in the country.
More than 80% of the population over ten (10) years of age is literate. School attendance is compulsory between the ages of seven (7) and fifteen (15) or until the six grades of primary school have been completed. The educational system provides for the free schooling of all children. An excellent parallel private school system exists primarily in Panama City.
A separate system of primary and secondary schools is maintained by the Department of Defense of the U.S. government, primarily or dependents of U.S. military personnel and for children of employees of the Department of defense and other U.S citizens working for the Panama Canal.
The main universities are the University of Panama, a state institution, with six campuses. And the University of Santa Maria La Antigua, a Catholic institution. The Canal zone College offers a three-year program of accredited courses.
Panama's time is five hours behind Greenwich Mean time (GMT). Thus, Panama is on Eastern Standard time (EST); it does not have daylight saving time.
Most private business offices are open from 8:00 a.m. until 5:00 or 6:00 p.m. It is customary for all offices and stores to close for the lunch period for at least one and a half hours. Banks are open from 8:00 a.m. to 1:00 p.m., Monday through Friday. Office hours for government offices vary and it is advisable to check prior to visiting any government office.
If a holiday falls on Sunday, it is observed on the following day. The executive branch is authorized to designate days of national mourning on which all offices and commercial businesses are closed.
the metric system is the official unit of measurement in Panama. However, many units of the English system, such as pounds, ounces, gallons, inches, and yards, are used.
One of the smallest nations in Latin America, in area and population, Panama overcomes the limitations of its size by reason of its location which links the Northern and the Southern hemispheres and provides a transit route between the Atlantic and the Pacific oceans. Therefore, Panama's economy has historically been oriented toward domestic and foreign trade and services.
The economic downturn of the Noriega Regime's final years was replaced by a strong economic recovery and continued growth during the 1990-1994 period. This sustained growth is expected to continue into the next century. Both successive democratic administrations have reoriented the economy by encouraging private sector investments, enacting profound fiscal reforms that have led to public sector budget surpluses, actively negotiating the refinancing of its foreign debt, privatizing heretofore public sectors and enterprises and advancing the country's insertion into multilateral and regional trade pacts.
Panama's geographic location and configuration is often considered to be its principal natural resource. Geographical circumstances have historically made the Isthmus a transit zone and have resulted in a concentration of income in the terminal cities of Panama City and Colon where the economy is based upon trade and services. Thus, the economy of Panama is dominated by the service sector, which accounts for approximately 62% of the gross national product; agriculture and fishing account for 16% and manufacturing 13%.
The major agricultural products are bananas, a leading export, and rice and corn, which are primary food staples. Shrimp, gold, sugar, and beef are also exported.
Mining still accounts for less than 1% of Panama's gross domestic product. However, a number of mineral deposits have been discovered, the largest of which are Petaquilla (copper-gold) located in the Colon province, Cerro Colorado (copper) located in the Chiriqui province, Chorcha (copper-gold) located in the Chiriqui province near the Costa Rican border. Gold deposits have been discovered in recent years; the Remance and Santa Rosa projects are already in production with an estimated export output of US$35 MM per year and others like Cerro Quema and Molejon are estimated for 1996-1997.
Service-oriented businesses are preeminent in Panama's economy. Two of these, the Colon Free Zone and Banking contribute, respectively, to the country's gross domestic product.
Cristobal, Balboa, Manzanillo and certain other ports in the country have facilities for stevedoring, warehousing, and transshipping cargo and for accommodating regular oceangoing freighters and passenger ships. The port of Bahia Las Minas, the site of the oil refinery of Refineria Panama, S.A., handles and receives oil tankers and other vessels. Airlines operating through the International Airport, located approximately 17 miles (27 km.) from Panama City, provide service to all major cities in North, Central, and South America and Europe. There is also scheduled air service between certain of the cities and towns in Panama. International telephone, telex, fax and other telecommunications services are excellent.
The Balboa, the unit of currency, is at par with and equivalent to the U.S. dollar. As Panama has not issued paper currency, the U.S. dollar is the circulating medium. U.S. currency and coins and Panamanian coins are circulated freely at face value.
There are no requirements for the registration of capital and no tax on the transfer of funds into the country. There are no controls over the repatriation of capital or retained earnings. Thus, the absence of exchange controls and restrictions has generally been an advantage in attracting foreign investments to Panama.
There is now a reasonable demand for qualified personnel possessing executive and technical skills. Also, there is competition for bilingual accounting and clerical personnel.
The cost of living has shown a stagnant trend in recent years. Although charges for certain personal services and some goods produced locally may be slightly lower, the cost of imported goods, which is an important factor, is higher than in the United States.
Panama is not a member of the Central American Common Market. Panama has, however, signed bilateral agreements with countries in Central America whereby certain items may be imported from or exported to these countries without any customs duties being imposed.
Panama's principal exports are petroleum products, bananas, shrimp, sugar and gold. Principal imports are fuel and lubricants, machinery and transportation equipment, manufactured goods, chemical products, and food products.
Panama's import and export trade is concentrated in the Western Hemisphere. Countries in this hemisphere account for approximately 75 percent of both imports and exports.
Panama's traditional trading deficit is offset by surpluses earned in the service industry. The country has had net deficits in its balance of payments, which have been financed by credit from international sources assisted by the banking industry in Panama. As Panama does not have its own paper currency or a central bank, the country owns no official foreign exchange reserves.
Panama has a number of laws designed to provide incentives to encourage the development of local industries and to attract foreign capital. The new Panamanian government is conscious of the immediate and future economic needs of the country.
Panama is a respected beneficiary of Eximbank, OPIC, EDC and other foreign investment insurance and financing facilities. On April 1992, Panama signed a Bilateral Investment Guarantee Agreement with the Republic of China (ROC) for the mutual protection of investments against nationalization and expropriation. Similar agreements have been signed with the United States, France, Germany, the United Kingdom and Italy with the objective of reducing the investment risk element of foreign direct investment in Panama.
Panama's geographic location, its function as an international commercial center, and the growth of the Eurodollar market are some of the most important elements contributing to Panama's growth as an international financial center. Other reasons for this success include:
During the last 20 years, Panama has grown rapidly as an international banking center. As of December 1991, this center surpassed US$ 20,300 million in assets representing a 12 percent growth over 1990 figures. As of December 1994, there were 109 banks operating offices, and directly providing 8,928 jobs. Major banks from all over the world operate from Panama. Countries represented include: Argentina, Bahamas, Bolivia, Brazil, Canada, Cayman Islands, Colombia, Costa Rica, China, Dominican Republic, Ecuador, France, Honk Kong, India, Korea, Israel, Japan, Spain, Switzerland, Taiwan, The Netherlands, United Kingdom, United States of America, and Venezuela.
The National Banking Commission is the entity responsible for the control and surveillance of the banking system. The Commission functions as an agency of the Ministry of Planning and Economic Policy, and is chaired by the Minister.
The following are some of the Commission's functions:
Except for official banks, no one can engage m banking business without having been previously authorized by the National Banking Commission. Three types of license exist:
Every general licensed hank doing business in Panama is required to meet the paid-in capital of US$1 million established by the National Banking Commission. The paid-in or assigned capital of general licensed banks must consist of unencumbered assets, maintained at all times in the Republic of Panama. Banks that engage exclusively in business abroad (international licensed banks) must maintain at all times in Panama an amount of US$ 250,000 in assets free of liens and in any form authorized by the Commission to guarantee the proper fulfillment of their obligations.
A bank established under international license is free to accept all types of foreign deposits (demand and time deposits) that are payable to the following: (a) Panamanian and foreign citizens residing abroad; (b) foreign legal entities (banks, corporations, etc.) residing abroad; (c) legal entities organized in accordance with Panamanian laws that do not earn tangible income in Panama (offshore companies); or (d) banks operating in Panama (having a general license), provided that the funds were obtained from foreign sources.
Banking secrecy is a principle and practice acknowledged in Panama's financial center, where banks exercise the greatest discretion and reserve in the handling of their customer's transactions. Besides, under Panamanian law, banks can offer their clients numbered accounts.
Notwithstanding the foregoing, Panama has enacted several laws to prevent and punish money laundering arising from or connected with narcotics trafficking. Money laundering is defined by special legislation as a crime punishable with considerable imprisonment and another regulation established the US$10,000 cash reporting requirement. On 1991, Panama signed with the United States, a Mutual legal Assistance Treaty only for money laundering from drug related operations. This treaty has been ratified by Panama and pending ratification by the United States. In the meantime, Panama's Banking Association has issued a strong code of ethics for banks as an additional measure to control bank clients.
Since 1970, the Republic of Panama regulated the public offering of securities through Cabinet Decree No. 247, a special legislation, which also created the National Securities Commission. This legislation has experienced a few positive amendments and today it is the cornerstone of the securities market in Panama.
Nevertheless, very sporadic transactions took place and most dealings related only to government debt instruments until the enactment of Decree No. 44 of 1988, which authorized and regulated the incorporation of stock exchanges, and based thereupon, a group of international bankers and Panamanian businessmen created the Panama Stock Exchange (PSE).
The PSE is a corporation organized under the laws of Panama in 1990 with a fully subscribed paid-in capital of US$1,400,000.00. Its shareholders are important foreign and local banks, insurance companies, industrial groups and entrepreneurs. No shareholder owns more than 2.5% of the outstanding shares, except the National Bank of Panama with 5%. Since its early beginnings, the PSE recognized its dual role for the nation's economy; to contribute in the development of a local capital market and to multiply its objectives by becoming a regional exchange, catering to the emerging capital markets of Central and South America.
During 1991, the PSE formulated tax incentive recommendations to the Government to exempt income and capital gains tax from all securities traded at authorized stock exchanges and implementing legislation was passed at end of said year, thus, creating a tax-free environment for foreign and local investors.
On the regulatory side, the PSE works hand-in-hand with the National Securities Commission in order to create a seamless and reliable regulatory framework. Common work with the Commission had led to improvements of disclosure requirements for new offerings as well as disclosure and reporting requirements for brokers/dealers. The most recent example took place on May 1993, when the Commission issued a ruling approving the listing at the PSE of foreign companies and close/end mutual funds already trading in exchanges elsewhere.
During 1992, the PSE began undertaking specific actions intended to attract foreign issuers and investors to Panama. Two elements have been key; one, to attract capable and knowledgeable institutions to become players in the market; and the other, to develop financial structures and instruments that could provide effective and imaginative solutions to such investors and issuers, maximizing Panama's regional advantages.
Taking advantage of Panama's international monetary and tax environment, the PSE is committed to being an attractive niche for international issuers and investors appealing to their particular characteristics of size, scope, and capital needs which would be better served here than in larger and more distant markets. This approach already proved successful for the commercial banking community of Panama in the seventies and eighties.
Drawing from the extensive Panamanian legislation on corporations, banking, securities and trusts, a number of interesting financial structures have been developed to securitize transactions or to serve as depository receipts of foreign securities seeking registration and trading in Panama.
The following are some of the benefits granted to financial leasing contracts:
The lessor must normally engage in leasing contracts and be the owner of the leased goods. Goods, such as ships, airplanes, machinery, equipment, vehicles and any other movable goods capable of being specifically described can be the subject or leasing contracts. The contract must be signed for a term of no less, than three years.
International leasing contracts are also granted incentives like total exemption from income taxes, stamp taxes, and sales taxes. For depreciation purposes, the lessee can be considered as the owner of the equipment, so that both the lessor and the lessee can simultaneously depreciate the equipment. Parties can also agree upon the transformation of a local contract into an international, or vice versa.
Authorization to operate will be issued for:
Local risks are defined as those related to persons or real property physically located in Panama; vehicles registered or licensed in Panama; tort liabilities derived from damages incurred in Panama, and the transportation or merchandize which final destination is Panama. All other risks are presumed to be foreign, unless proven otherwise.
Currently, there are 26 reinsurance companies: of which, 17 have general reinsurance license, 5 have international reinsurance license, and 4 have reinsurance administrator license.
The two (2) most advisable forms to structure a foreign investment are a Panama Subsidiary Corporation (Societe Anonyme or Aktiengesselltschaft) or a Branch of a Foreign Corporation.
Panama Subsidiary Corporation
A foreign corporation may have branches or offices and engage in business within Panama, after filing the required documents for its registration at the Mercantile Registry.
Upon incorporation, either the Panama Corporation or the Branch, shall obtain licenses to engage in its commercial, industrial or other business as well as complying with other legal requirements applicable to the particular investment or proposed project.
Immigration conditions are of particular interest to the individual or corporate foreign investor. In this regard, Panama regulations provide flexible conditions for obtaining Executive, Technical, Expert or Investors'Visas.
The democratic government of the Republic of Panama, composed by outstanding members of the business and political sectors, has undertaken as its main priority the country's economic recovery through the promotion of foreign investments.
Panama offers a unique business climate for foreign investors. Major factors to be considered are:
Panama has a number of laws designed to encourage the development and expansion of local and export industries. Under said laws, considerable tax and other investment incentives are awarded to investors. These incentives granted are primarily in exports, manufacturing, mining and tourism sectors. In addition, tax incentives are granted to the reinsurance industry, the banking industry, and for the establishment of facilities in the Colon Free Trade Zone as well as the recently created Petroleum Free Zones.
Companies that engage in the transformation or assembly (Macula) of raw materials and semi-manufactured products and in the manufacturing of goods may qualify for certain tax exemptions. In Panama, an export is defined as any product sold outside Panama or within the domestic market if it is sold to corporations exporting 90% of their output to foreign countries. Exports also are products sold to Colon Free Zone corporations for re-export and to ships transiting the Panama Canal in route to foreign ports. Principal tax incentives to exporters are:
In addition, Tax Credit Certificates, or CATs, may be granted to firms making non-traditional exports (all products except those listed in the law) when the national content is at least 20% and the national value added is also a minimum of 20%. For corporations outside the metropolitan area, the content requirement is reduced to 10%. CATs, which may be issued to bearer or in the name of a beneficiary, are transferable and valid for four (4) years. CATs may be used to pay all national direct taxes and import duties.
Panama is now strongly qualified as a location for the establishment of export industries in the Apparel and Garment sectors due to our proximity to U.S. consumer markets, excellent transportation and productive labor force. Panama is a beneficiary of the U.S. 807 and Generalized System of Preferences (GSP) programs.
Panama is also a beneficiary of the Caribbean Basin Initiative (CBI) thus providing significant advantages and incentives to agribusiness, electronics, and other industries covered by CBI.
The new Export Processing Zones ("EPZ") Law No. 25 of November 3O~ 1992 ("Law"), which superseded the existing legislation, introduced considerable improvements, incentives and clear rules of the game equally applicable to the promoter/developer and to the export industries located therein.
The main export industries scheduled for the EPZ are:
The promotion/development and the operation of the EPZ are well-defined and the Law grants extensive power to the promoter to develop land; construct building and installations for all purposes; construct technical, medical, sporting, public service, transport and other centers; install and operate gas, energy, water, telecommunications and sewage systems, schools and other facilities; and construct and operate airports, ports, docks, cargo facilities, roads and other infrastructure, all subject to the applicable laws of Panama.
The new Law constitute the EPZ in tax-free areas. As a consequence, both the promoter/developer and the export industries as well as any activity, operation, transaction, license, procedure, transfer of movable goods and real estate, purchase and importation of all equipment, spare parts, raw materials, and all goods and services required for its operations, shall be 100% exempted from national direct and indirect taxes, duties, levies, right and charges. It is worth mentioning that all tax exemptions are granted for an indefinite period.
The new EPZ Law offers an attractive investor immigration regime with the right to a special resident passport to all foreigners who invest an amount of at least US$230.000 in the promoter, operator or export industries corporations within an approved EPZ.
Special labor law regulations are also contained in the Law applicable to employment contracts for a fixed period or work, productivity regulations, rotation of employees, vacations and others. For further advice or a complete English translation of the new EPZ Law, please contact us.
Corporations engaged in manufacturing are awarded different privileges and tax incentives, depending upon whether production is intended entirely for export (see Export Industries), for sale in Panama, or for both export and local consumption. Tax incentives granted to manufacturers are:
All manufacturing incentives are available to both individual and corporations of Panamanian or foreign nationality.
New legislation substantially modifying these incentives has been presented to the Panamanian Senate.
New regulations introduced in 1988, substantially amended the existing mining legislation, and place Panama in an outstanding position to attract foreign investments in mining through the following tax and investment incentives:
Panama offers a great potential for tourism related investments and projects, coupled with an excellent international airport, local airports and deep-water ports.
Through Law No.8 of June 14, 1994, the current government has culminated one of its more important goals, to create solid and competitive foundations and rules to promote and attract tourism investments to the Republic of Panama.
Law No.8 in its Chapter 1 establishes three basic principles that provide efficient rules of the game and guarantees to investors, to wit:
Article 4 of the law defines "touristic offer" as all activity having in objective promotion of tourism and the permanence of tourists in the country. it then proceeds to enumerate the touristic enterprises, as follows:
Chapter II regulates the tourism activities in which any touristic enterprise can engage which are summarized in:
Chapter III establishes tax incentives and benefits granted for tourism activities, which are as follows:
Law No.8 grants authority to the Panama Tourism Board, and the Cabinet to create new special tourist areas, particularly in order to develop zones with potential for tourism that need investment in infrastructure. Investments in such areas will obtain:
Concessions may be requested for islands, state owned land, landfills, areas for marinas and docks.
The period of concession established by law No.8 may be of 20 to 40 years. The criteria for granting such concession is also established by the law requiring to take into consideration the sums to be invested and the social and economic impact on the area. The authority to grant concessions is reserved to the Cabinet, previous recommendation by the Panama Tourism Bureau and ratified by the Legislative Assembly's Committee on Public Property.
In sum, law No.8 brings long awaited improvements to Panama's tourism legislation such as:
Panama has the potential to become a major oil and downstream products redistribution center for two main reasons: one is the existence of the Panama Canal creating a national bunkering market as well as a transshipment point, and the other is the tact of being the narrowest isthmus between the Atlantic and Pacific oceans to pipeline oil from South America to the Far East.
The enactment of Cabinet Decree No.29 of July 14, 1992 and Cabinet Decree No. 38 of September 9, 1992 whereby a liberalization policy of the petroleum market is established and whereby other measures are taken, such as the creation of the Petroleum Free Zones, can be considered as a positive step forward, because further to the expose de motifs of the legislation aforementioned, the structural conditions and context arising from the situation to establish a petroleum policy and the market liberalization of products derived from petroleum in the Republic of Panama, as one of the indispensable factors to achieve the modernization of the economy and offer new investment for Panamanian and foreign investors, who thereby could take advantage of the country's strategic geographical position, the installed storage capacity for petroleum by- products, the human resources that the country has, the legislation in force to develop the traditional activities, and the new opportunities offered by the changing industry in order to create an international processing, distribution and redistribution center for petroleum and its by-products in Panama.
Within a Petroleum Free Zone, national or foreign corporations may perform multiple operations under a special tax regime. These operations are so wide that range from importation, storage, refining, and pipeline crude oil and by-products to building ports, dry docks and other installations for handling products as well as all kinds of activities proper or incidental to the establishment and operation of said zones.
Corporations wishing to establish a Petroleum Free Zone to perform the activities mentioned must enter into a contract with the Executive power, through the Ministry of Commerce and Industries, upon the previous recommendation of the Department of Hydrocarbons of said Ministry.
In the Petroleum Free Zone, the contractor may perform his activities in accordance to the provisions of said Cabinet Decrees, the Tax Code and the regulations established by the Security Office of the Fire Department and the Department of Hydrocarbons, including the norms and specifications of the American Petroleum Institute (API) and of the American Society Tests and Materials (ASTM) in accordance to the type of tank and product to be stored. Most of the requirements refer to contractual, investments, insurance and related obligations.
On the other hand, corporations interested only in becoming a lessee of and in setting up operations within any petroleum free zone, shall merely have to submit a copy of its lease contract with the petroleum free zone corporation, register themselves as importers of crude oil and/or petroleum by-products at, and obtain an operation license from, the Department of Hydrocarbons.
In accordance with Articles 622 and 635 of the Tax Code, crude oil and petroleum by-products shall enter into the Petroleum Free Zones without having to pay taxes, fees, levies and other duties related to their importation and may be transferred without having to pay taxes, fees levies and other taxes provided that the sale is done for the cases mentioned in said Decrees.
While the maximum corporate income tax rate currently applicable to most oil companies is 45%, the special income tax rate which will apply to those companies electing to operate from the Petroleum Free Zones will be 8.3%, plus the dividend tax is not applicable to income earned by Petroleum Free Zone corporations, for all cases referred to in the Decrees aforementioned, thus creating a very attractive tax incentive.
The strategic geographical location of Panama of considerable importance for world trade and maritime commerce is comparable only to that of Singapore in South East Asia, except for the fact that Singapore has fully developed its potential applied to the petroleum industry.
The legislation for the Petroleum Free Zones is the first serious attempt to promote and stimulate the development of a petroleum service industry in Panama.
We have available free of charge a number of booklets and executive summaries on the following subjects:
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BUSS1: January 17, 1997
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