Panama is known all over the world thanks to the Panama Canal, a unique hydraulic structure connecting the Pacific Ocean with the Caribbean Sea and the Atlantic Ocean. However, the interest of foreign entrepreneurs to this country is rather related to business opportunities and the advantages of company formation in Panama. The authorities of this jurisdiction have created favourable conditions for international business.
Imperial & Legal has thoroughly revised all the opportunities that a foreign businessman gets when deciding to open a company in Panama and has highlighted the most interesting ones.
5 reasons to do business in Panama
Access to global markets
A shipping canal connecting two oceans, a favourable geographical location, as well as political and economic stability have helped Panama to become one of the important trade centres in the world. According to statistics, more than 75% of the country’s GDP is generated by foreign trade and a developed services market.
In addition, Panama has free trade agreements with a number of other countries which contribute to the favorable conditions for those who plan to work with foreign customers.
The Republic of Panama has become a home port for more than 300,000 international companies and funds. The country is a magnet for venture capitalists and entrepreneurs with promising business projects.
Tax benefits
The Republic is a safe tax haven for international companies. In this jurisdiction, corporate income tax is assessed on a territorial basis – foreign income of corporations registered in Panama is not subject to taxation.
If your company will offer its products and services in the local market, you will enjoy Panama’s favorable tax regime, as well as the incentives available in the country’s free economic zones.
High level of confidentiality
Often, foreign entrepreneurs choose Panama for company registration to ensure that their assets and identity have reliable legal protection. The fact is that this state has very strict laws on corporate and banking secrecy.
Information on commercial and banking transactions conducted through a Panamanian firm will remain confidential. In Panamanian offshore corporations, only their own management decides whether or not information about beneficiaries and directors will be made publicly available.
Developed banking sector
The development of the banking sector in Panama is connected with offshore companies registered in the country. Panama uses both its own local currency and US dollars, with the Panama Balboa exchange rate being equal to the dollar.
There is no currency control in the country, so foreign counterparties can trade in any foreign currency.
Easy to register a business and administer it
To register a company in Panama, it is not necessary to come to the country and block a significant amount of money as payment for the share capital.
Moreover, corporate laws simplify business documentation and reporting as much as possible if all sales are made abroad. There are no restrictions on the nationality and tax affiliation of owners, shareholders and directors of Panamanian offshore business structures.
Both the assets and share capital of your company may be located abroad. Foreign entrepreneurs are not obliged to hold an annual general meeting of shareholders at their place of incorporation.
In short, opening a new company in Panama can be relatively easy and quick, and its maintenance will cost a businessman a smaller amount than in other popular offshore jurisdictions.
Types of companies in Panama
First you need to decide which type of company is best for your business. When making a decision, consider not only the specifics of the business, but also the tax benefits and other opportunities each of the legal forms provides. Our corporate lawyers will thoroughly study your needs and suggest the best solution. As a rule, foreign businessmen choose from several popular options.
Joint Stock Company / Sociedad Anonima / SA
Joint Stock Companies are one of the two most popular legal forms for registering an offshore business in Panama.
To start such a company, at least 2 founders are required. An active Sociedad Anonima must have at least 1 shareholder, either an individual or an organisation. Panamanian laws do not regulate the citizenship or tax residence of the owners of joint stock companies.
The shareholders of the corporation are liable for its debts only to the extent of the value of their shares. Panama SA is authorised to issue different classes of shares: registered shares, bearer shares, and shares with or without stated par value.
There is no requirement under Panamanian corporate law to pay the authorised capital of a joint stock company either before or after its incorporation. However, in our practice, a joint stock company is usually registered with an authorised capital of $10,000.
A Panamanian corporation is managed by a Board of Directors, which is usually appointed at a general meeting of shareholders. There must be at least 3 directors on the SA Board of Directors. The functions of a director may be performed by the owners of the business, or by hired employees. Unlike many other offshore jurisdictions, there is no requirement to appoint any local residents as directors of a firm in Panama.
Another important person in a Panamanian joint stock company is its local registration agent. The registration agent must reside permanently in the Republic of Panama. He not only helps remotely register an offshore company, but also provides you with a legal address and keeps important corporate documents in his office. Therefore, the key quality of a Panama incorporation agent should be reliability. Imperial & Legal works only with proven registration agents with a good business reputation.
Limited Liability Company / Sociedad De Responsabilidad Limitada / SRL
Here are the characteristics of a limited company:
- an SRL can have from 2 to 20 founders;
- such a firm can only issue registered shares;
- the stated amount of the company’s charter capital is usually between $2,000 and $500,000;
- personal data of all founders, as well as information on their share in the authorised capital of SRL are recorded in the Panamanian State Register;
- if a company has fewer than 5 shareholders, it doesn’t have to conduct an annual shareholders meeting.
SA and SRL are similar in many parameters. SRL shareholders are also liable only up to the value of their shares. For your limited liability company to be successfully registered in Panama, you will need to:
- an official address in Panama;
- professional registration agent;
- a shareholder-appointed Board of Directors consisting of at least 3 executives.
Private Interest Fund / Fundacion de Interes Privado
The Panamanian Private Interest Fund is a specific legal form of doing business with the formation of a legal entity. It gives one or more investors (Panamanian or foreign companies and individuals) a number of legal advantages in the asset management process.
Such funds are often set up by foreign entrepreneurs to restructure or protect their assets, or to distribute inheritances correctly.
A private interest fund registered in Panama:
- Exempt from all taxes and fees, except for the annual registration renewal fee;
- Doesn’t issue shares like other Panamanian companies do;
- Cannot be subject to court orders to seize or confiscate assets;
- Doesn’t have to make public the nominal amount of its authorised capital in any way. (It is usually recommended that $50,000 should still be stated as the capital of the company. In addition, the foundation must have so-called initial assets worth at least $10,000).
Three key figures in Panama’s private interest fund:
- The founder of the fund who invests their assets.
- The Fund Council, the governing body of the company.
- Beneficiary in whose interests the fund operates.
Any Private Interest Fund must have at least 1 founder and 1 beneficiary.
In addition to the founders, board and beneficiaries, each private interest foundation must have a legal representative residing in Panama. This function is usually performed by the registration agent.
The memorandum of association of the Fundacion de Interes Privado must specify its official address, purpose and period of existence (if the foundation is established for a limited period of time).
As a general rule, the Panamanian government does not require corporate and tax reporting from such organisations. However, if your foundation plans to engage in commercial development, it must obtain the appropriate government licence and file regular tax returns.
Panama partnerships
This unincorporated legal form of doing business is used by foreign investors much less frequently than corporations.
Entrepreneurs in Panama most often register:
- General Partnership / Sociedad Colectiva General.
- Limited Liability Partnership / Sociedad en Comandita.
- Partnership with limited liability shares / Sociedad En Comandita Por Acciones.
General partnership
It can be formed by two or more partners, an individual or legal entity. This legal form is most often used to create professional associations. All participants of such a partnership bare joint unlimited liability for the debts of their company. At the same time, all of its founders can participate in the management of a general partnership, unless otherwise stated in the charter documents.
Limited liability partnership
There should be at least 2 partners in such a firm:
- General. They participate in the management of the partnership and liable for the debts of the company with all its assets;
- A limited partner. They do not participate in the management of the firm. In the event of bankruptcy, they lose only the money or property that was contributed during the establishment of the partnership.
Partnership with limited liability shares
Such a commercial organisation has a capital divided into shares. And all participants of the partnership are divided into:
- General partners who have decision-making power in the firm and risk all their debts in the event of bankruptcy;
- Shareholders who are liable for the organisation’s debts only to the extent of the nominal value of their shares.
If you would like to learn more about the business benefits of Panamanian partnerships, book a consultation with a member of Imperial & Legal.
Corporate taxation in Panama
Income tax
Company income tax is calculated in Panama on a territorial basis. Only profits earned within Panama are taxed.
The fixed corporate tax rate in the Republic of Panama is 25 per cent.
The taxable base is determined in one of two ways:
- As net profit. The total profit of a business minus its costs.
- An alternative calculation of the taxable base. 4.67% of gross profit (excluding company expenses) – the so-called CAIR (Calculo Alternativo del Impuesto sobre la Renta).
Generally, the Panamanian authorities apply CAIR by default when calculating the firm’s amount to pay corporate tax.
The alternative method of calculating the taxable base is disadvantageous to the entrepreneur if:
- his company hasn’t started making a profit yet;
- the current rate of return in his business is below 4.67%.
If you do not qualify for CAIR, you should apply to the DGI (Dirección General de Ingresos) – Panama’s Directorate General of Taxes – to have the corporate tax calculated on net profits only. The Panama Tax Authority takes up to 6 months to process such matters, so it is better to send your application as soon as the tax period ends and the tax return is finished.
Municipal tax
A municipal tax is collected at the local level in Panama. The amount of this payment depends on the gross income of the company in the reporting period, as well as on the type of commercial activity carried out. In most cases, the municipal tax does not exceed $2,000 per month.
Important: The relevant tax return must be filed with the municipal authorities of the relevant district in Panama within 90 calendar days after the end of the fiscal year.
Transfer tax
In essence, this tax is a version of the more familiar value added tax. The standard rate of Panamanian VAT is 7%.
Tobacco products are subject to an increased tax of 15%. 10% tax is applied to the hotel business and alcohol sales.
Zero rates of transfer tax on movable goods and services apply in export transactions and in areas such as transport and medical services.
Property taxes
The real estate tax rate in the Republic of Panama can vary from 0 to 0.1%, depending on the purpose and value of the property.
In addition, Panama imposes capital gains tax on the sale of immovable property. The tax rates vary significantly depending on the chosen method of calculation, the amount and circumstances of the transaction, and many other parameters.
If you need more in-depth corporate tax advice on Panama, contact Imperial & Legal.
How to open a company in Panama
Every year, offshore business entities registered in Panama pay a fixed fee to renew their registration. To ensure that this source of significant revenue for the country’s budget does not dry up, the Panamanian authorities have made the incorporation procedure as simple as possible.
But if you are not familiar with Panamanian corporate law and you do not have your own trusted incorporation agent, contact the professionals at Imperial & Legal. With Imperial & Legal, you will incorporate your company quickly and without unexpected costs.
First consultation
At the first consultation our experts will find out all your requirements and wishes in order to recommend a suitable legal form for registration, as well as to draw up a preliminary plan of further actions.
Usually at this stage our clients propose several options of the future company name, and our employees check them for compatibility. The requirements for a company name in Panama do not differ much from those in other jurisdictions – it must not be similar to or repeat the names of business structures and trade marks already registered in the country, must not be misleading and must not contain words and expressions with offensive or discriminatory contexts.
Deciding the company structure and drafting the charter documents
Next, you need to decide on the structure of the company: the amount of authorised capital, the type and nominal value of shares to be issued, and the distribution of shares between the founders. Entrepreneurs also need to select a Board of Directors and get in touch with the registration agent in Panama.
A registration agent is particularly important if you want to start a company in Panama. He or she acts as your legal representative in the country and provides you with his or her office for incorporation. Needless to say how important it is this lawyer or company to be reliable. Our company works in the Republic of Panama with well-established registration agents.
All agreements reached by the founders are recorded in the company’s articles of association. Imperial & Legal usually uses a standard form of this document, but at the client’s request we can draw up a charter that takes into account all the nuances of his business. Although a Panamanian company cannot carry out commercial activities without official registration, the moment of its creation is considered to be the signing of the charter by all founders.
State registration of the company
This is the most time-consuming stage and can take up to 6 weeks.
First, your legal representative makes an appointment with a notary in Panama who, based on your signed articles of incorporation, draws up a notarial deed of incorporation.
The public notarial deed of incorporation is the basis for registering your offshore company in the Panamanian Public Registry. We then register the new company with the Directorate General of Taxes, the municipality and the Panamanian Ministry of Commerce.
For most offshore companies with an office abroad, this is the end of the official registration process. Usually, it takes about 2 weeks for the preparatory stage (approval of the name, structure and drafting of the articles of association). It takes up to 2 weeks to organise a meeting with a notary. 2-3 weeks — to register with the State Register and another 2-3 weeks to contact the tax office, municipal officials and the Ministry of Commerce.
Our lawyers usually recommend entrepreneurs to set aside up to 2 months to open an offshore company in the Republic of Panama.
After registration
Usually, our work with Panamanian offshore entrepreneurs does not end after the data about their company gets into the State Register.
Some of our clients need to open a functioning office in Panama, and they turn to our staff to find suitable premises, executive staff and contact the Ministry of Labour.
We also help to open a current account in one of the banks in Panama and open another company for those businessmen who plan to offer products and services on the Panamanian market.
Whatever legal challenge Imperial & Legal’s advisors face, you will get the best solution that will save you time and money.
