Law 66 (2017): Property Taxes – part 1

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Law 66 (2017): Property Taxes – part 1

Law 66 (2017) was finally published on October 17, even though it had been approved by the Legislature almost a full month beforehand.  This law introduces two impactful changes to property taxes, as well as giving property owners a moratorium until December 31, 2017.  I will deal first with the Moratorium, and then will get into the details of the changes introduced by Law 66.

Moratorium (in effect already):

Effective immediately, Law 66 (2017) brought into effect a moratorium on penalties and interest due on property taxes. Property in Panama is taxed yearly, payable in 3 equal parts (April 30, August 31 and December 31 each year). Failure to pay on time automatically incurs in a 9% interest per annum, plus penalties. Many property owners opt to simply allow the tax  and interest to accrue until they are ready to sell the properties, as the Tax Department has not been effective in collections. We are seeing this change with the modernisation and computarization of the Tax Department.

Also note:
if you pay your property taxes each year (a single annual payment, rather than in 3 parts) before the end of February, you can receive a 10% discount on the total amount of tax due.

Apply for Moratorium:

This moratorium is easy to apply for (it must be applied for, it is not “automatic”) through the Tax Department’s online system: eTax2. Basically, you log into the property with it’s tax ID number and NIT (password or code) and then simply press the button that appears for (Moratorium).  This will provide you with the total amount which is due, excluding the penalties and interest, so that you can proceed with the payment.  This has to be done for EACH property individually through the system, it cannot be done through the owner’s tax ID.  If you do not know your property’s tax ID or NIT, then you need to get this through the online system or set it up so that you have access to this before you can apply.

It is imperative that payment of the taxes be made before the end of the year if you want to take advantage of the cancelling/exemption from the penalties and interest which may be due.

This moratorium ends December 31, 2017.

Law 66 (2017) – the principal changes introduced:

The principal changes which are introduced by Law 66 are a reduction in property tax rates. Until this Law, Panama’s property tax was as high as 2.1% – which means that a property worth $500,000.00 could pay as much as $10,500.00 in property tax each year (almost $1,000.00 a month). Obviously, a $2,000,000 property would pay $42,000.00 a year. Under the new law, coming into effect on January 1, 2019, the maximum rate, even for commercial or industrial property is 1%, less than half the previous rate.

Primary Residence / Family Home

Until now, any home or property valued at least than $30,000.00 paid 0% property tax in Panama, and then above that taxes were due on a sliding scale, starting at 0.7%. This 0.7% is now the highest rate for a family home or primary residence (starting January 1, 2019). The $30,000.00 exemption is still recognised on all properties (as long as the total value of the property – land + improvements – remains under $30,000.00.  However, over the $30,000.00, where the property (land and improvements) is worth less than $120,000.00 and is your family home (as defined by the Family Code) or primary residence (for a single person or others who don’t qualify as “family”), then you are entitled to the 0% property tax rate.

If your property is worth MORE than $120,000.00, then there are 2 brackets:

  1. over $120,000 but less than $700,000; and
  2. over $700,000.00

Law 66 (2017), property taxes, tax rates, tax exemption, primary residence, ,family home, homestead, moratorium, exemption, property tax

For a property (land and improvements) valued at less than $700,000.00 the applicable tax rate will be O.5%.  Over $700,000.00 the applicable tax rate will be 0.7%.  These, however, are sliding scales, which means that from $0.00 to $120,000.00 you apply the 0%, then from $120,000 to $700,000 you apply the 0.5% rate, and then whatever the value is over $700,000, you apply the 0.7% rate.  See the following example:

Law 66 (2017), property tax payable, property value, tax rate, calculate tax payable

It will be necessary to present documentation to the Tax Department certifying that this property is your family home or primary residence for this special tax rate to apply under Law 66 (2017). It will not be automatic and it will not be retroactive (if you forget to apply and then apply later).

Second residence, holiday homes, commercial & industrial properties

For those properties that do not qualify as a family home or primary residence, the tax rates are also reduced as of January 1, 2019.  The applicable rates are the following:

  • 0.0% – up to $30,000.00
  • 0.6% – from $30,000.00 to $250,000.00
  • 0.8% – from $250,000.00 to $500,000.00
  • 1.0% – over $500,000.000

As explained for primary residences, this is sliding scale, so calculation is necessary for each range of values.

What about my Tax Exemption that I already have?

Law 66 (2017) also contemplates those cases (primarily new condos and homes) where they have an existing property exemption on the improvements (such as the 20-year exemption). In these cases, the properties are grandfathered into those exemptions until they expire.  So, if you property exemption on the improvements is in place until 2025, the new tax rate will come into effect for you in 2025, rather than on January 1, 2019. The land (in the cases of such condos) will continue to pay the 1% rate that is applicable until such exemption expires.

Final notes: first home buyers & mortgage holders

Two more interesting notes:

  1. First home buyers: for the first 3 years will have an exemption on the property value up to $300,000.00 (not just $120,000.00) on their primary residency / family home. At the end of the 3 years, the usual rates will apply.
  2. Mortgage holders (banks, mortgage companies, trust companies)  will be responsible for charging the home owner (as part of their monthly payments) their property taxes due and paying these in directly to the tax department on behalf of the property owner.

We originally wrote about this topic as Bill 509, before it had come into effect or was published.

November 2017 public holidays

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November 2017 public holidays

Please note that our office will be closed the following dates in November 2017, for public holidays:

  • Friday – November 3 – Separation from Colombia
  • Monday – November 6 – November 5th is Colon Day, and as this falls on a Sunday, the public holiday is celebrated on Monday
  • Friday – November 10 – Panama remembers its Primer Grito de Independencia – its first cry for independence from Spain
  • Tuesday – November 28 – Independence from Spain

November 2017 public holidays – their meanings

In November, Panama celebrates a month of national festivities. Throughout November 2017, all around the country the flag and patriotic symbols are displayed (offices are draped with the flag or colors, most cars fly a small flag inside). There are four days of great historical importance for Panama in November.

The 3rd, 5th, 10th and 28th of November are public holidays, and as the 5th falls on a Sunday in November 2017, marches will be done on the Sunday, but the 6th will be a day off. The 2nd and 4th are also days on which school bands march and there are generally parades in all towns.  The celebrations these days are due to the separation of Panama from Colombia, the “cry” of independence and the independence from Spain, respectively.

In case you are unaware of the meaning of each of these public holidays, the following is a very short summary of what each day represents:

Separation from Colombia

Known as Separation Day, this holiday celebrates the independence of Panama from Colombia in 1903.  Panama came under Spanish control with the arrival of settlers in the 16th century. From 1538 until 1821 Panama was governed as part of the Viceroyalty of Peru. On 28 November 1821, Panama become independent from Spain as the region was a department within the Republic of Greater Colombia. In 1903, Colombia and Panama disagreed on whether the U.S. should be allowed to build a canal across Panama. With the support of the U.S., Panama broke away from Colombia on 3 November 1903.

Colon Day

Celebration of Colon Day is connected with the history of independence of Panama from Colombia. The USA assisted Panama in separation from Colombia, but the latter didn’t want to recognize independence of Panama. Officially Panama declared its independence on November 3, 1903, but the battle didn’t finish. The government of Colombia ordered the Army to march on Panama City. On November 3, 1903 the Panamanians had to stay their grounds in the city of Colon, that is a strategic place near the Caribbean Sea.

Primer Grito de la Independencia

This public holiday commemorates the beginning of Panama’s struggle for independence from Spain in 1821. Rufina Alfaro was a young woman who lived in a small village near Los Santos. On November 10, 1821 she led a group of Panamanians, shouting “Viva la Libertad” (Long live liberty).

People armed with sticks and stones seized Spanish barracks without spilling a single drop of blood. After the uprising, citizens of Azuero Peninsula declared their independence from Spain. Apparently a letter was also penned to the legendary Simon Bolivar, asking him for assistance in getting independence and complaining about the Spanish Governor.

Independence Day

On November 28th, Panama celebrates Independence from Spain. On November 28, 1821, eighteen days after Primer Grito de Independencia, Panama was declared a sovereign entity. This declaration said that Panama was free from the control of the Spanish Monarchy. It immediately thereafter decided to join “Gran Colombia” (fearing that Spain might attempt to retake the country).

Shelf companies, Arrears, Registered Agents & Compliance

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Shelf companies, Arrears, Registered Agents & Compliance

Cleaning up after Panama Papers

How could Panama, after the fiasco of the Panama Papers, clean up its act easily and in the stroke of a pen? One way to get rid of shelf companies, non-compliant clients, and those that are in arrears is:

From my perspective, striking off all of these companies takes care of a number of problems. Firstly, these companies were at least 3 years in arrears. Secondly, the client is not in contact with the registered agent. This means the registered agent has not got up to date due diligence from the client. Thirdly, in 2015 bearer shares were abolished. Companies were left with registered shares only, unless action was taken.  In all likelihood, this was not done.  Fourthly, the company probably doesn’t have financial records. Finally, shelf companies are virtually done away with, unless the provider has kept them up to date.  Hopefully all of these changes make Panama a better place to incorporate and run business from, legitimately.

If you think your corporation might have been struck off by mistake, and it holds assets (real estate or a bank account), you need to reactivate your company. For legal assistance with Panama Corporation, please do not hesitate to contact our office.

Arrears

The corporations that were struck off by the Tax Department owed $30 Million plus in government fees. These are unpaid annual renewals.  Not only was the government not paid, most likely the registered agent in Panama was not paid. I doubt directors were paid. Prior to the amendment of Article 318-A of the Tax Code in 2016, companies were not automatically dissolved until 10 years after they stopped paying annual renewal fees. That was 10 years that the company continued to exist without being in contact with anyone in Panama.

Unfortunately, even so, the Tax Department lacked efficiency in notifying the Public Registry of such arrears and publishing the dissolution notices. In my 20 plus years in Panama, I have only seen this 10-year notice list published once. Under the 2016 amendment, after 3 years, the Tax Department notifies the Public Registry to put these companies as “struck off”, unable to carry on any business, and two years later, if they are not reinstated, they automatically move to involuntary liquidation and dissolution. And so, in 2017, some 40,000 plus companies are struck off.  In 2019, unless reactivated, these companies are automatically “dissolved”. Hence, banks worldwide are requiring, many on a yearly basis, a Certificate of Good Standing for companies.

Registered Agents

Many registered agents will heave a sigh of relief with this list of 40,000 companies that are struck off. Those are 40,000 companies that the registered agents of Panama no longer have to be concerned about with respect to Law 2 (2011) and Law 23 (2015), as long as they had their KYC in place at the time of incorporation, or at least until 2013 or 2014. After Panama Papers, it’s time for a massive clean up! Some firms are doing this voluntarily, but the economic cost is onerous.

Law 2 (2011) provides the registered agent the option to resign from all companies where they have lost contact with the client and are not able to update due diligence. This requires preparation of public deeds (notary costs) and filing at the public registry (also cost).  All up, about $100.00 per corporation. If you have 10 companies, that’s $1,000.00; for 100 companies that $10,000.00. And that’s 40,000 companies that Registered Agents will not have to resign from.

Since February 2016, all Registered Agents in Panama were required to have the KYC documentation in place for all active corporations under their management, irrespective of the date of incorporation. Additionally, registered agents are paying the costs of physical space (warehousing or offices) for all these files, as well as being administratively responsible for the companies under Law 2 (2011) and Law 23 (2015). Automatic striking off and then dissolution will liberate this space and cost for registered agents.

Bearer Shares: December 31, 2015

On December 31, 2015, by Law 47 (2013) companies which had not expressly elected to place their shares in custody, had their Articles of Incorporation changed to prohibit the used of bearer shares. If a company, on December 31st, had bearer shares, these shares were automatically cancelled. For companies which were active and properly managed, that meant that before (or on) December 31st, they passed a corporate resolution to exchange the bearer shares for registered shares. Those companies that didn’t comply were left without shareholders. Bearer shares were cancelled, but not replaced. Striking these companies off, and dissolving them in two years time, is a good way to clean up those companies that are not compliant.

Accounting Records:

As of January 1, 2017, all companies in Panama are required to keep accounting records.  These records do not need to be filed. Tax returns are not required. But the registered agent must receive from all active companies a written confirmation of where and how such accounting records are kept. Obviously, for those companies that are not up to date, and in contact with the registered agent, this information is not on record.

Shelf companies

A shelf corporation or aged company is a corporation that has had no activity. It was incorporated, with a board of directors (nominees) appointed, and left with no activity: put on the proverbial “shelf”.  One of the problems with these companies is that they have no shareholders or beneficial owners: they are waiting to be purchased. Then, when sold, shares are issued – “appropriately dated”. Powers of attorney may be issued “appropriately dated”. Contracts could be signed “appropriately dated”.

The issue is not one of the company being eight years old, and new board of directors being appointed, and shares being issued with current date. The problem with the shelf company is that transactions could be back-dated to reflect having taken place around the time of incorporation, even though at that time, the client didn’t even own the company.  Of course, Panama Papers focused mostly on “shell companies”, rather than shelf companies.  Shell companies are those who were not actually trading, but just shells used by the client for hiding an asset or transaction.

This doesn’t mean that all shelf companies will have been blotted out with this change: if the provider who had the shelf corporation was up to date in all the government fees, the company will still exist. But in terms of compliance, it’s hard to find any legitimate way that the company could still exist and be in compliance. Shares for a new company should be issued within 30 days of incorporation. Who is the shareholder? And if the Registered Agent is required to keep all records regarding the beneficial ownership of the company from incorporation onward, there is no leeway for issuing shares to another person from the date of incorporation.

Striking off: Panamanian Corporations

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Striking off: Panamanian Corporations

Wednesday, October 4th, the Ministry of Economy & Finance (read: Tax Department) published in the Gazette 174-page list of companies which have been struck off the register.  This striking off is done in accordance with Article 318-A, subsections 2, 3 & 4 of the Tax Code.  Article 318-A of the Tax Code deals with the payment of annual renewal fees (franchise tax) for corporations, foundations & LLCs.

This is the third such list it has published this week. The first was published on Monday. A second on Tuesday, and a fourth list was published today, just before I published this article! I almost missed that list. It’s an amazing 40,000 companies that are not in good standing. It’s estimated that these companies owe some $36 Million in government fees alone.

Effects of striking off:

Subsection 2 of Article 318-A establishes that failure to pay this annual renewal fee for 3 years consecutively results in striking off. Subsection 3 establishes the following effects of being struck off:

  • blocked from initiating legal action, doing business transactions or transfering assets;
  • unable to make claims or exercise rights;
  • blocked from filing corporate changes of any type.

Nonetheless, if your corporation is struck off, you may do the following:

  • request reactivation (paying an additional $1,000.00 penalty fee for reactivation);
  • defend any legal process begun against the company;
  • continue with any legal processes which started before striking off.

Automatic dissolution after striking off:

It is important to note that you only have a 2-year period after it is struck off to reactivate it, otherwise striking off leads to automatic dissolution at the Public Registry.  Consequently, the company will be considered to be wound up.  This means that any company that is in arrears for 5 years or more, is automatically dissolved (previously this was a 10-year period).

The lists of companies can be found in the following gazettes:

What do you need to do?

If you a corporation that owns property or has assets of any kind, and you have not been paying the annual renewal fees, then you have 2 years to reactive the company if it is on these lists. You need to pay all outstanding government fees and the $1,000 reinstatement fee (and registered agents and directors fees, if applicable). Otherwise, in 2 years from now, the Public Registry will dissolve the company automatically.

This is the first time any such list has been published since the amendment was introduced in 2016. Therefore, it contains companies that have not paid for five or even seven years, and not just those who owe 3 years in fees. This is the moment to bring your Panamanian corporation back into good standing if you are actually using it or you need it.

 

Finally, if you have any questions regarding your Panama Corporation and striking off, please do not hesitate to contact our office.  Our staff would be happy to assist you.

Bill 509: 2017 – Panama Property Tax changes

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Bill 509: 2017 – Panama Property Tax changes

For about a year now, Panama has debated decentralized government. It will use property taxes to assist local city councils in this endeavour. Resistance to change has been very vocal, especially as scaremongering occurred: You will lose your homes. If you fail to pay your property taxes, your home will be taken from you. This is just another measure of expropriation. At the end of August, Bill 509 was sent back to first debate for re-drafting after a public outcry. It went through a lengthy second debate. Last night, Bill 509 was approved by the legislature in its third debate. It now awaits signing into law by the President, Juan Carlos Varela. We expect it to be sanctioned by the President and published, as there is no pressure for veto or further debate.

Bill 509 – 2017

The principal debate centered on an article removing the tax exemptions enjoyed by Free Trade Zones. “Free Trade Zones” refers to Processing Zones, Baru, Colon FTZ, and Panama Pacifico. Most of the Chambers of Commerce in Panama objected to modifying their tax treatment. They alleged it is important to have legal certainty for foreign investors. Although these changes were forward looking, they modify all of the special laws which had established these Free Zones. A key concern is investment: private investors in infrastructure will be scared away if changes are made. The Free Trade Zones have been hit hard in recent years by other economic factors, some of which have decimated sectors of the business.

Property Taxes:

primary residence, family home, Bill 509, Panama property taxes, property tax, real estate, property purchase, land tax, tax exemptions, Panama lawyers, Panama real estate lawyersFor home owners, however, Bill 509 promises a large reduction in property taxes. In some cases, a reduction down to 0%. For most, the reduction will be 75%, and for some of the higher valued properties, only a 50% reduction.  As it stands, Bill 509 establishes the following tax rates for primary family residences:

  • 0% for homes valued under $120,000.00
  • 0.5% for homes valued between $120,000 and $700,000
  • 0.7% for homes valued over $700,000.00

These new tax rates apply as of January 1, 2019. This is because before that date, property owners must present to the Tax Department their affidavits regarding this being their “primary residence” or “family home”, to establish it as the residence that receives these new rates.

However, a property owner with more than one property, will be eligible for these new tax rates only on their primary residence. The following rates apply to weekend or holiday homes, investment, rental, commercial or industrial properties:

  • 0% – less than $30,000 (this stays the same)
  • 0.6% for properties valued between $30,000 to $250,000
  • 0.8% fo properties valued between $250,000 to $500,000
  • 1.0% for properties valued over $500,000.00

Even for properties in the highest bracket, this is a reduction from the highest existing tax rate on properties of 2.1%.

Bill 509: improved collections

One of the changes that Bill 509 introduces that will assist with collections is that it appoints banks & mortgage financing companies as tax collectors. This does not apply to first time home buyers, but does apply for all other purchasers. Banks will add the property taxes due to the monthly fees, interest and principal calculated and will include the tax in the monthly payments. The bank will then remit the property taxes to the respective tax office.

Bill 509 also establishes that there will be no appraisals carried out on property values until 2024, allowing 5 years at current property values. Nevertheless, I would expect that after 2024, there is a general move by the tax department to get updated appraisals on all properties for the purpose of collections.

Good news: Moratorium

For anyone that owes property taxes, the good news is that there is a moratorium until December 31, 2017 to get up to date. This moratorium ensures that you only pay the actual taxes that you owe – they are writing off the interest and penalties if you pay all of the property taxes that are owed. For some property owners, this will be thousands of dollars in savings.

Gray & Co. will provide an update once the law has been sanctioned & published. We are also available to assist clients in getting up to date with the payment of their property taxes, taking full advantage of the moratorium that is being offered.

In 2018, our office will be available to assist clients in registering their primary residence under this new law in order to take advantage of the new tax rates.

Foreign professionals working in Panama

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Foreign professionals working in Panama

It would seem that drafting and knowing how to write is everything. A better draft or ability to write clearly could have avoided many problems.  At the beginning of September, there was furor among Panamanian professionals. The Ministry of Commerce published a resolution authorizing Multinational companies to hire foreign professionals… or so they said. I read headlines such as: “Opening to foreign professionals will impact the middle class”. The negotiations regarding TiSA (Trade in Services Agreement, a proposed international trade treaty) caused this furor, particularly with Panama’s measures to qualify. Panama participates in the TiSA negotiations with 23 members of the WTO. These negotiations continue in December 2017, after being stalled by the US.

Multinational – requirements for headquarters in Panama

The licensing commission for Multinational Company Headquarters issued a resolution for Multinationals. This resolution indicated the new qualifying requirements. One of the requirements is to have 2,500 professionally qualified employees. However, this resolution indicated that said professionals needed to be qualified in their countries of origin, without needing to be verified by respective professional boards in Panama. Specifically, this resolution indicated that the foreigner would be considered qualified if they had a Bachelor’s Degree, a Master’s Degree or Doctorate, or were duly licensed to practice in their qualifying country.  The reactions from professional guilds were hat this would affect not only the working class, but also the middle class.

This discussion seemed to miss the purpose of the requirements entirely. Multinationals are not required to have 2,500 professionally qualified employees in Panama in order to qualify. They must have 2,500 professionals in their offices, worldwide, in order to qualify. It is therefore obvious that such professionals would be duly qualified in their respective nations, and not Panamanian nationals. The second major requirements is a capitalization of 200 million US dollars.  The new resolution sought to establish that for those multinationals that did not qualify with a consolidated capital of 200 million, they could qualify if they had the 2,500 professionals worldwide. After reviewing the wording of the resolution, Panaman’s Law Society (Colegio Nacional de Abogados) requested that it be redrafted.

Foreign professionals in Panama

Panama is a small market: we have a population of only 3.9 million (depending on which day of the week you count). This means that the professional workforce also has its limitations when there is unexpected growth in some industries. Studies have shown that Panama does need foreign professionals to meet these labor needs. Official sources indicate that Panama lacks some 159,000 specialized professionals for the needs of the country. But there is also resistance to allowing foreign professionals to come work in Panama, with the fear that “they will steal all the good jobs”.

Of course, for the executives and employees of Multinationals who have qualified under the special licensing rules: there are special rules and exceptions. It is possible for a multinational company to hire a professional, duly qualified to do the job internationally, have them working in Panama, and they simply are not allowed to sign off on documents in Panama (i.e. a lawyer could work in-house for a multinational, but would need a Panamanian lawyer to sign off on any legal documents for Panama).

Salaries in Panama

It is important to understand the idiosyncrasies of the Panamanian labor market. Salaries for highly qualified jobs pay less than in North America or Europe. Executives of the multinationals are among the highest paid employees in Panama: these jobs are highly coveted. English and Spanish are essential: for working internationally and locally in Panama. One of the biggest constraints to foreign employment is the 10% and 15% limits established for work permits and immigration: a Panamanian company can only have 10% maximum of its workforce (averaged out over salaries, not just the number of employees) as foreigners. For highly technical staff or experts in a field, this increases to 15%. Additionally, some professions are exclusively reserved for Panamanians: for example, medicine, dentistry, nutrition, pharmacy, accounting, psychology, architecture, journalism, and law.

The minimum wage in Panama is between $500.00 to $700.00 (lower for some areas of the economy, such as domestic help). Normal working hours are 8-hour days (9 hours including lunch hour) and overtime for more than this. Additionally, there are special rules regarding shifts starting or ending before 6.00 a.m. or 6 p.m., and there are not rules regarding flexi-time (which basically ensures that employers avoid it, because the Labor Code specifies that the employee is always right). So, if you had an employee that worked 12 hours Monday and then 4 hours Tuesday and they alleged that 4 hours of the time worked on Monday was overtime, the employer could be liable to pay this. There are companies working with flexi-time, but it is outside of the archaic constructs of the Labor Code.

Real costs versus “salary”:

Additionally, Panama offers 30 days (calendar, not working) holiday pay each year and additionally pays the 13th month. When you calculate the cost of an employee (contingent liabilities plus Social Security costs), you should expect this to cost about 1.41 times the actual declared salary. So an employee earning $600.00 a month, with contingent liabilities calculated, costs about $850.00 a month. An employee earning $700.00 a month costs the company about $1,000.00 a month, with contingent liabilities.  These are rough estimates.

Average salaries:

According to figures released in August 2017, the following are average salaries:

  • $2,435.00 – Multinationals
  • $1,085.00 – Mining companies
  • $1,063.00 – Education (includes universities & private training)
  • $1,029.00 – Doctors, medicine & health
  • $985.00 – Finance (banking sector)
  • $681.00 – Average monthly salary

Of course, as mentioned, these are the averages.

New resolution:

On the 12th of September, the same MICI office that had issued the “problematic” resolution mentioning 2,500 foreign professionals, issued a new resolution. This resolution left the previous one without effect, and presented different requirements for Multinationals wishing to be established in Panama.

These requirements are:

  1. capital of 200 million USD or more
  2. presence in 40 countries or more

There is no mention in the new resolution of the number of foreign professionals working for the multinational.  The new resolution is Resolution No. 20-17 (Sept. 11, 2017).

For more information regarding the requirements to establish Multinational offices in Panama or for foreign professionals to work in Panama, please do not hesitate to contact our office.

 

 

Onsite inspections: Anti-Money Laundering Solution and Anti-Terrorism enforcement

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Onsite inspections: Anti-Money Laundering Solution and Anti-Terrorism enforcement

AML rules & enforcement

In July 2017 the Indendance for the Supervision & Regulation of Non-Financial Persons adopted resolution JD-REG-001-17. This resolution sets the procedures for onsite inspections, reviewing procedures and documentation for compliance with Law 23 (2015).

Background

As explained in a previous post, Law 23 set up the Intendance and regulated the types of businesses and professionals supervised by the Intendance. This included companies in the Free Trade Zones and Panama Pacífico. Likewise, it included real estate developers, realtors, lawyers & accountants.  In particular, Law23 adopts measures to prevent money laundering and financing of terrorism. Article 13 of the Law charges the Intendance with supervising and regulating “non financial persons”.

Artice 13 of Executive Decree 361 (2015), adopted following Law 23 (2015), establishes that as part of supervising, the Intendance will carry out onsite inspections of these non financial persons.  It also provides for off site inspections, where there is simply delivery of documentation and reports to the Intendance’s office.  The intendance requires access to relevant and pertinent information in order to measure the effectiveness of the controls put in place. This is particularly important in higher risk business models, to ensure compliance.  With this in mind, the Intendance established in JD-REG-001-17 the guidelines for requesting information or documents as part of inspections.

Onsite Inspections

In order to undertaken an inspection, whether onsite or offsite, the Intendance must notify in writing. The time frame for the inspection, the scope and the documentation or information being requested are required in the letter. It must also indicate the format to be used (if applicable).

The person or entity under inspection must deliver the information or documentation by the dates required, in the requested format. Originals, copies, electronic format or any other means of delivery must allow the intendance to get a clear and real view of the situation the transactions being supervised.  The intendance may request documents be translated to Spanish.

Late & incomplete compliance

Compliance which is provided late or not at all will be considered to have failed to comply.  If the information or documentation requrest is incomplete, illegible or in a format different to the one requested, sanctions may also apply.

Costs of inspection

At this time, we have no idea of what the actual cost of inspections will be, although it is understood that the Intendance (similar to the Banking Superintendent) charges the entities that are under supervision for doing onsite inspections. They are charged for the manpower required to be in their offices for the time spent there. Other indirect costs are space, internet & phone connections that must be provided, and the staff that need to be assigned to assist and provide the inhouse documentation that is being inspected and reviewed.

Our firm is able to assist with compliance manuals, preparation of policies and procedures and preparation for such inspections.

 

 

Corporate bank account in Panama: opening and operating

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Corporate bank account in Panama: opening and operating

Opening Corporate bank accounts in Panama

Last week, our post dealt with opening personal bank accounts in Panama. This week, we will look at how to open a corporate bank account. It is important to note that there is a difference between locally operating companies and offshore corporations, especially in the banking industry. Some banks in Panama will only open accounts for corporations with an “aviso de operación” – business license. That is a company that operates locally and is subject to local taxes. On the other hand, some banks will only open accounts for offshore companies. It is no longer easy to find banks that are working with both onshore and offshore business.

Among the issues that banks consider are:

  • FATCA compliance
  • Cost of Know Your Client and Due Diligence
  • Profile of the account – will the bank make money?
  • Is this type of business in the normal line of business of the bank?
  • How much money will pass through the account versus how much money will stay in the account?

Requirements: opening a corporate bank account

Many of the requirements for a corporate bank account are similar to those requested for the personal bank account. But in the case of a corporate account, the bank will want all documentation taking it back to the controlling interest or ultimate beneficial owner.

Keep it simple:

Imagine, for a moment, the following structure:

UBO, corporate structure, ultimate beneficial owner, know your client, asset protection, shareholder, directors, officers, account signatory, beneficial owner, beneficiary, controlling interest, controlling person, decision makers

While this may look really “pretty” from the perspective of asset protection or estate planning, it is a nightmare for the compliance officer at the bank. Supposing that you are opening an account for the Panama corporation under the holding company, the bank needs to receive documentation for:

  1. Your Panama corporation – each one of the three directors, the account signatories, and the copies of the corporate documents;
  2. The share register that shows who “owns” the company – a holding company. Now they need the corporate documents for the holding company, with the due diligence and know your client details for each of the directors, shareholders, and officers of this company.
  3. The shareholder of the holding company: a foundation. They need the incorporation documents of the foundation, the details of each member of the Foundation Council, the Protector and possibly even the founder.  And they still haven’t arrived back at the Ultimate Beneficial Owner.
  4. The bank ultimately wants to know:
  • who has the controlling interest?
    • which person is calling the shots?
    • who is the decision, maker?

In conclusion, for the bank: simple is always better. Your asset protection or estate planning needs can be taken into account, but you should be able to explain the structure easily to the customer services representative at the bank.

In a corporate structure with multiple shareholders, you will need to provide know your client details for any shareholder or controlling person holding over 10%. Additionally, if the shareholder or holding company is a publicly traded entity, expect to provide proof of this. Make sure you have the proper authorization for establishing the subsidiary (resolutions) and authorized persons on the account.

Basic account opening requirements:

So, ignoring the complicated structure outlined above, what does the bank require?

  1. Corporate account opening forms (the bank will supply). There may be some 6-10 pages which need to be completed.
  2. Copies of your incorporation documents: articles of incorporation, resolutions.
  3. Copy of the share register
  4. Extract from the public registry – known by many as a Certificate of Good Standing
  5. Business plan – the banks are looking for something that shows what the company will be doing. Who will be the suppliers to the company? Similarly, what customers will the company have?
  6. If the company has been in existence for more than one year: financial statements and/or accounting records.
  7. Source of funds for the initial deposit and trade projections (usually provided in the actual account opening forms)
  8. Documentation (such as that provided for the personal account) for each person associated with the corporation:
    1. directors
    2. account signatories
    3. shareholders / beneficial owners / controlling interests
  9. FATCA forms – W8Ben, W8Ben-E, W9 – depending on the situation

The documents will vary depending on the bank that you choose to open the corporate bank account, but the above list and those indicated on the personal bank account page are pretty comprehensive of what is usually expected.

Factors to consider:

Once again, when choosing the bank there are a number of factors that you should consider:

  • Language(s):
    • at the bank – your customer service representatives
    • in the call center – is there a special number for English?
    • what about their online system?
  • Online banking platform
    • Is it easy to use?
    • Does it have a good security system?
    • Do you need an App on your mobile phone, a token or how are passcodes generated?
  • What are the minimum deposit / minimum balance requirements of the bank?
    • What are your cash flow requirements?

Our office is happy to assist you with your corporate bank account needs in Panama. We are also able to offer banking options in other jurisdictions. In some cases, banks in other jurisdictions are easier to work with and offer a wider range of currencies and opportunities.  Beth Gray is experienced with local and international business companies, especially the aspects of tax compliance and reporting. Betsy Moran is experienced with compliance issues, especially the AML guidelines. Joan Villanueva can assist with any relocation inquiries that you may have. Do not hesitate to contact us for more information regarding your corporate or business needs.

Personal bank account in Panama: opening requirements

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Personal bank account in Panama: opening requirements

While you don’t need a personal bank account in Panama to live here, it may lower transaction prices and make paying bills easier.

Reasons to set up a personal bank account

Many expats have differing views on whether or not you need to open a personal bank account. If you have an account in USD, it may make little difference in the bank charges. In other currencies, the bank charges could be high and might be reason enough to set up your account here.

Another reason for setting up a personal bank account in Panama is to apply for the friendly nations visa. One requirement is that you have a personal account with no less than a mid-four figure balance. You should deposit at least USD$5,000 in the account, then.  The friendly nations visa will provide you with permanent residency, It also provides a work permit (depending on which application you make). And it allows you to eventually naturalize as a Panamanian (if having a second passport is your goal).

Paying bills online: many of the banks will allow you to pay bills online, although this is not for all utilities companies. Some still requirement payment at their office or through an approved intermediary. You can also pay your personal taxes online through some banks (such as income tax or property taxes).

Requirements: personal bank account

The requirements vary slightly from bank to bank. Nonetheless, the general requirements are the same:

  • Complete the bank account application forms, all of them
  • Your passport (the bank will make its own copy)
  • 2nd ID – such as driver’s license
  • Professional reference letter – such as from a lawyer / accountant / company you have done work with
  • Banking reference – they are looking for proof of a banking relationship of more than 2-3 years
    • If you don’t have a “bank account” but have a credit union account, this will usually work
    • They may accept an investment account letter instead of a “bank”
  • Minimum opening deposit: $1,000.00 (some banks do require less)
  • Minimum balance:
    • checking: usually somewhere between $250.00 to $1,000.00
    • savings: usually somewhere between $500.00 to $1,000.00

The forms ask for proof of source of funds: the bank is interested in knowing how you support yourself financially and where they should expect to receive income from.

If you are applying for your friendly nations visa through our office, we would be happy to accompany you to the bank for your initial interview.

Choosing a bank:

Consider the following when choosing where to apply for your personal bank account:

  1. Where you live and branches that you have close by
  2. Online banking – which ones have their website in English
  3. What online banking services do they offer?
  4. Do you / your friend / the company you work for already have a relationship with the bank?
  5. Expat opinions regarding customer service – you will be able to find complaints against every bank, but some are worse than others
  6. What is their online security platform? Will you need a widget in order to pay bills and make transfers?
  7. Number of ATM machines available in your area of town if you like to get cash out

For more information, do not hesitate to contact our office for assistance.

 

 

Non Profit supervision in Panama: AML standards

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Non Profit supervision in Panama: AML standards

Non Profit supervision: fighting money laundering

The OECD insisted, in reports on Panama’s financial center, that Panama tighten the Non Profit regulations and oversight. As a result, Executive Decree 62 (2017) regulates the creation and supervision of Non Profit organisations.  We previously dealt with setting up a Non Profit, so here I will outline the provisions regarding Non Profit supervision.

Who supervises?

The Executive Decree establishes a special deparment in the Ministry of Government. At this time,  “Department of OSFL Supervision, Follow Up & Evaluation” is part of the Legal Matters and Applications Department .  We will refer to this department as the OSFL-SFE Department.

OSFL = Organizaciones Sin Fines de Lucro = Non Profit Organizations

What are their powers?

The OSFL-SFE has 2 principal powers and objectives:

  1. Permanant risk analysis of all OSFLs legally recognised by the Ministry of Government
  2. Control mechanisms to minimise risk and follow up on the OSFL, to ensure compliance with all applicable laws

What are they supposed to do?

Consequently, the OSFL-SFE:

  • Maintains risk reports regarding OSFL’s in Panama
  • Requires reports on the funding of Non Profit entities and verify the information provided to them
  • Checks on the funding received, generated or transferred by Non Profits
  • They may report any suspicious activity to the Unidad de Analisis Financiera (the Financial Analysis Unit).

The OSFL-SFE has the following powers:

  1. Require whatever documentation they consider will allow them to supervise, follow up and evaluate OSFLs
  2. Inspect the books, records and documents of the administration, financial management and financing of the Non Profits under their supervision
  3. Request that the legal representative of any Non Profit present documents as needed for these 2 purposes

Additionally, the OSFL-SFE may visit the premises or offices of a Non Profit organization.

What should your Non Profit do?

You must keep accurate accounts, books and records of all donations received, funds raised and donations made from your Non Profit to another. At the end of each year, you report to the Tax Department 2 things:

  • Expenses: this allows the tax department to verify this information against the income tax returns of service providers and cross-check the information
  • Donations received and details of the donors – this is cross-checked against those who are claiming tax deductible donations

Consequently, your Non Profit organisation must keep update records:

  • File any change of Board of Directors at the Public Registry;
  • Update your membership records each year with any changes;
  • If your bylaws are out-dated, then you need to assign a committee to review them and bring them into compliance with new regulations and laws. Once reviewed, present the proposed changes to your General Assembly to modify your Statutes or Bylaws as appropriate. These changes must then be approved by the Ministry of Government, before they can be filed at the Public Registry.

Although it is published in Spanish, the full regulation on Non Profit supervision and organisations can be found in Gazette #28249-A.

For more information and assistance in establishing or managing your Non Profit organization please contact Betsy Moran.