Prohibited Shortterm rentals:
Panama City Airbnb Listing
Since November 2012, it is illegal in Panama City to rent out your home or apartment for less than 45 days. Law 80 (2012) applied fines to those offering short-term rentals in the City district. The Tourism Authority enforces this law strictly. These fines range from 5,000 to $50,000.000. This prohibition includes advertising the property online : for example: an Airbnb listing, sublet.com, or vacationrentals.com. Note, this only applies to the District of Panama.
HOA & Condomium Association rules:
Outside of the Panama City district, it is legal to offer the short-term rentals, such as an Airbnb listing. But, HOA or Condomium Association rules for buildings and housing subdivisions regulate what is permitted by their owners (which may restrict use of this nature). So, even for properties outside of Panama City, HOA rules may prohibit using the property for short term rentals. In these cases, the HOA association is responsible for enforcement, rather than the Tourism Authority.
So, in some cases, it may be beneficial to register your property as a tourism activity, such as a B&B, in order to avoid problems with your neighbours or the tourism authority. Of course, that will depend on the size of your property/home and whether you can comply with the requirements for registration. So, if you have a home in the provinces (rather than in Panama City), you might be able to register with the tourism authority as a B&B, and then get your Airbnb listing to assist in getting it filled, if you intend to run it as a business, rather than occasional lodging when you are not using your holiday home. Not all homes will be eligible, as the tourism authority requires a minimum of 3 rooms which must be separate from the rooms that the family uses habitually.
Registration with Tourism Authority:
For some properties, benefits exist for registration with the Tourism Authority of Panama under Law 80 (2012). However, the deadline to completed registration outside of the District of Panama is December 31, 2020. Tourism is a priority, in the national interest. “Tourism” includes agrotourism, ecotourism, rafting and adventure sports and other tourism activities.
Outside of the District of Panama City:
New Hotels and buildings:
To this end, the national tourism registry offers tax incentives for building new tourism establishments. These incentives apply to:
- import duties on construction materials & furniture and fixtures;
- property taxes on the land and improvements built for 15 years;
- duties for docks and airports built by the tourism company (which may be used by the State at any time without cost), for 15 years;
- income tax on interest on loans (available to the creditors who loan money for construction);
- income tax from the lodging business (hotel, motel, b&b, hostal, etc.) for first 15 years;
- capital tax for 5 years (this is a tax in the annual tax return of companies on paid in capital);
- loans made to the tourism business. These loans are exempted from the withholding of Law 4 (1994), and are not considered personal or commercial loans.
Existing tourism businesses:
For existing tourism businesses, with up to 50 rooms, who are not registered and receiving tax breaks, registration with the Tourism Authority results in shorter tax breaks. These incentives are:
- import duties on construction materials & furniture and fixtures for remodelling (for 5 years from the time of registration);
- property taxes on the land and improvements built for 10 years;
- income tax from the lodging business (hotel, motel, b&b, hostal, etc.) for 5 years;
- loans made to the tourism business. These loans are exempted from the withholding of Law 4 (1994), and are not considered personal or commercial loans.
Basic registration requirements:
The registration form must be completed and handed in to the Tourism Authority. This form is quite basic, asking information regarding the tourism operator, the investment being made and the property on which the lodging will or has been built. The following documents must also be submitted:
- Blueprints, stamped by the local city council (when you are requesting tax exemptions on the construction).
- If applicable, certification of approval by the environmental authority.
- Certification regarding the financing for the project – signed by a CPA.
- Public registry certificate – for the company that will own/operate the project
- ID of the legal representative
- Public registry certificate for the property on which the project is being built
- Feasibility study, signed off by an economist.
- Market study: the type of lodging offered, supply and demand, marketing
- Total investment to be made: income which is expected to be earned, operating costs, financing, payment terms, debt servicing, income/loss statement
- Financial evaluation: net income; IRR (internal rate of return); present value; cost benefit ratio; sensitivity analysis; and breakeven.
Once presented, the applicant has 30 days to provide a bond (to ensure completion of the construction/remodelling and the investment to be made) covering 1% of the investment (up to a maximum of $500,000.00). This is to ensure completion of the project, and not simply obtaining the tax benefits on the import duties and then never actually completing the project. If no construction is required, then the applicant must start operating in no more than 2 months after having been approved.
Types of Registration:
- Motel – minimum of 20 rooms, cafeteria, reception & salon, no more than 2 stories high
- Hostal – 20 to 80 beds/bunks; small reception/administration area; parking; communal kitchen area.
- B&B – 3 to 9 rooms, with at least one bathroom for every 3 rooms (may be shared bathrooms), which cannot be used by the family, offering at least breakfast.
- Aparthotel – at least 8 apartments (40 if in Panama City), each apartment with at least basic kitchen, dining room, living room & bedroom.
- Camp sites – basic infrustructure with bathrooms, showers, cooking area, and recreational areas, in addition to the camping sites. Mens and women’s lavatories. Each site should have: electric outlets, water, and an appropriate sewage system. Appropriate rubbish disposal system and bins.
- Cabins – at least 3 cabins which must each have their own bathroom/shower and closet and each must have its own cooking equipment (basic). Parking close to each cabin, as applicable. Reception area/principal entrance / administration area.
We have a number of Christmas Holidays this year, which we would like to draw your attention to:
Mother’s Day 2017
Friday, December 8, 2017 – our office will be closed.
Christmas Holidays 2017:
Our office will close at mid-day on December 22, for a Staff Christmas lunch. We will be back on the 2nd of January. During the holiday period, we will have a skeleton staff avilable for emergencies, but any routine things (such as annual renewal fees and corporate matters) should be requested before we close for Christmas.
We appreciate your cooperation and wish you Happy Holidays this Christmas and New Year’s season.
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.
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:
- over $120,000 but less than $700,000; and
- over $700,000.00
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:
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:
- 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.
- 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.
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.
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.
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).
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:
- passing a few new laws in 2015 & 2016, and
- then, in 2017, with some simple resolutions of the Tax Department strike off 40,000 companies from the Public Registry.
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.
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.
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.
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.
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.
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:
- Resolution 201-5610
- Resolution 201-5611
- Resolution 201-5612
- Resolution 201-5613
- Resolution 201-5614
- Resolution 201-5615
- Resolution 201-5616
- Resolution 201-5617
- Resolution 201-5618
- Resolution 201-5619
- Resolution 201-5620
- Resolution 201-5621
- Resolution 201-5622
- Resolution 201-5623
- Resolution 201-5624
- Resolution 201-5625
- Resolution 201-5626 (MBCL – Muren)
- Resolution 201-5627
- Resolution 201-5628
- Resolution 201-5629
- Resolution 201-5630 (Puente Hombre – Rokewood Trading)
- Resolution 201-5631
- Resolution 201-5632
- Resolution 201-5633
- Resolution 201-5634
- Resolution 201-5635 (USA – ZYXXX)
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.
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.
For 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.
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.
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.
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:
- capital of 200 million USD or more
- 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.
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).
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.
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.
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:
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:
- Your Panama corporation – each one of the three directors, the account signatories, and the copies of the corporate documents;
- 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.
- 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.
- 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?
- Corporate account opening forms (the bank will supply). There may be some 6-10 pages which need to be completed.
- Copies of your incorporation documents: articles of incorporation, resolutions.
- Copy of the share register
- Extract from the public registry – known by many as a Certificate of Good Standing
- 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?
- If the company has been in existence for more than one year: financial statements and/or accounting records.
- Source of funds for the initial deposit and trade projections (usually provided in the actual account opening forms)
- Documentation (such as that provided for the personal account) for each person associated with the corporation:
- account signatories
- shareholders / beneficial owners / controlling interests
- 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:
- 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.