Inside the Republic of Panama | Country Overview: 2007

Outline

Facing the world, a mediator country, capable to play a balance role in the international relations and to capably represent the region and also the continent.

Situated on the Isthmus between North and South America, the Republic of Panama is flanked by the Atlantic and Pacific Oceans.  The official language is Spanish, but a high percentage of the population speaks English as well.  The economy of Panama is based primarily on private enterprises and depends heavily on the services sector, which is closely geared to international trade and external factors.

Today, more than ever Panama provides a considerable number of services to the world financial community, making the country in a top financial center worldwide.

Panama also has one of the most favourable commercial secrecy laws worldwide. These ensure a client’s privacy when dealing with the top-level Firms in the country. While, legal changes in Europe and the Caribbean have caused a loss of banking privacy, Panama is rapidly becoming the number one offshore financial centre of the globe.

Known as the “Bridge of the Americas” and “Crossroads of the World” Panama has become the prime location for financial migration between the two continents and the two oceans.  Our country has several other interesting attributes that make it the most attractive financial centre for the worldwide business community.

Advantages of Panama

Since the time of the Spanish conquerors trough the California Gold Rush of 1849 and then the Panama Canal, banking has always played an important role in Panama.  In it, some of the largest and best known banks operating internationally support Panama’s bank secrecy laws. 

The banking law contain provisions intended to guarantee banking confidentiality.  In fact, these laws forbid banks to disclose details of their client’s transactions to both national and foreign authorities.  This secrecy is the major determinant of Panama’s success as the most important financial centre in Latin America. 

Other factors have also played a part, including the absence of any currency restrictions, the free circulation of the US dollar as legal currency, the free international movement of capital, convenient taxation law focused on the offshore businesses, and the lack of a central bank in charge of currency insurance.  Despite the unusual monetary system, foreign investors in Panama enjoy convenience of using a wide variety of currency for business.  This is largely due to the international use of the canal and financial sectors, as well as a rapidly expanding tourism industry.

Panama Banking

Long recognized as a commercial hub of the Americas since it was a converging point of world steam-ship lines, Panama has similarly developed into a banking and foreign exchange center.  The Panama Banking superintendence supervises closely the banking activities in order to maintain a high rated, reputable financial centre.

More than 30 countries have been represented with commercial banks in Panama due to the 1970 banking law that guarantees free movement of funds and lower taxes.  The total number of companies registered has soared to more than 450,000.

More than 6,000 Panamanian are employed by the banks, with approximately 80 foreign banks operating in Panama.  Net assets of foreign banks grew by $8 billion in the last 5 years and their level of liquidity is quite high. 

Of the more than 100 banks officially registered, more than 70 provide full domestic and foreign services, 29 are licences strictly to conduct international operations and the remainders are representative offices. It is important to point out that offshore banking operations are exempt from Panamanian income tax.

In a world moving toward greater globalization, Panama’s flexibility in dealing and experiencing a multitude of financial factors including banking, taxes and trade, establish it as a prime location in which to conduct local as well as global business.

Panama Taxation Law

More than a tax heaven, Panama is a International Financial Centre and as a result, it is especially attractive to foreign investors.

Panamanian tax law is rooted on the territorial principle. As for income tax, the territorial principle applies so that income generated outside of the country is tax-exempt, although the individual or corporation generating the income is domiciled in Panama. There are some certain earnings that are exempt form income tax because they are considered to be of foreign source.

Historically, one of the major factors responsible for the 35,000 holding companies and tax sanctuary operations established in Panama by the international financial community has been the relative tax freedom.  Panama does not asses any income tax on income produced form sources outside the country, including the proceeds of sales made outside of Panama. This territorial method of taxation is only one of the many advantaged of incorporation in Panama.

Political & Economic Stability

The government of Panama welcomes foreign investment and holding companies. Since the last decade Panama has passed a series of major constitutional reforms designed to strengthen the democratic process.

The economy of Panama has remained stronger in the last decade and inflation is only 2.3%, one of the lowest in all of Latin America.

Gross national product is growing by 2.6% annually while new employment remains at 5%.  The unemployment rate has dropped from 31% to 13%.

Tourism earnings rose 10.5 percent to $338.9 million. In an effort to attract foreign investors in tourism, the Government has outlined a strong development plan to improve resort facilities and infrastructure on the Atlantic and Pacific coasts.

Total annual trade passing through the Colon Free Zone exceeds 10.2 billion. The Colon Free Zone accounts for 5% of gross domestic product while Panama Canal traffic, represents 10% of GDP.

Investment Factors

A positive attitude toward free enterprise, together with the fact that the US dollar is legal tender in Panama, has led to an increase in foreign investments. 

Moreover, the development of institutions and instruments to regulate business activities in Panama has been consistent with its trade and service oriented economy, which is closely connected to the international market and geared to using Panama’s geographic position.  Consequently the aim of the legal and institutional framework is commercial, and service activities in Panama. There are very few requirements regarding the nationality of investors and no converting currencies or transferring funds.

There are very few limitations on foreign investments as well, especially for international business operations based in Panama.  To attract foreign investment into Panama, the government has developed the necessary institutional and infrastructure facilities, efficient public administrative machinery, extremely favourable and flexible policy guidelines, and attractive fiscal and non-fiscal incentives.

Historically, the policies of the Panamanian government toward foreign investment have been so open that there has never been any need for a formal statement of policy in this subject. Legislation hardly establishes any differences in treatment between nationals and foreigners.  Similarly, all foreign investors regardless of their country origin are treated equally.

Type of Business Entities

Panama’s legal system is based on civil law, as opposed to common law. Nonetheless, because of its traditional US ties, Panama in 1927 adopted a Corporation Code, which is similar to the old Delaware Corporation Statute.

In addition to the corporation (IBC), Panama has several types of modern business structures. The Panamanian entity that has captured the attention of many investors is the Private Interest Foundation, which is very similar to the Liechtenstein  Establishment, however, it can be formed with substantially less cost in our country.

Panama enacted in 1995, a law to govern the establishment of this entity, and its presents a serious alternative to standard offshore trust corporations.  Panama Foundations of Private Interest represent a practical legal tool helpful for careful and prudent family estate planning or for asset protection and privacy purposes.

In short, Panama offers the offshore investor and the worldwide financial community a complete range of significant advantages. Please, do not hesitate in contact us for any further assistance or if you require legal assistance in Panama. Our Firm, Mata & Pitti will be glad to assist.