Top Ten Reasons to Move your Latin American Headquarters to Panama Dec 06, 2011 Top Ten By María Carolina Arroyo Carin Stelp This resource is sponsored by: By María Carolina Arroyo and Carin Stelp, Arias, Fabrega & Fabrega Any company considering opening an office overseas has a lot to think about and a lot of choices as to where they may go. With this in mind, Panama has recently made a concerted effort to make the country more appealing to global corporations and to take advantage of its geographic location, political stability, and historical status as the crossroads of the world. The result is a number of legal regimes that make doing business in Panama attractive for everyone, but particularly for foreign corporations by providing tax, labor and immigration benefits to them. In combination with an already business-friendly environment and an open and welcoming society, these regimes make Panama an ideal choice for your Latin American Headquarters. Here are ten reason we believe moving your Latin American headquarters to Panama is a solid business decision. 1. Special incentive laws. Panama has a number of laws that provide incentives to companies establishing themselves in the country, regardless of their line of business. Regional Headquarters. Any kind of company can establish its global or regional headquarters in Panama to provide operational, administrative and other back office support to the company s other offices around the world under the multinational headquarters license. To date, more than 60 international companies have established operations in Panama under this license, including Procter & Gamble, Caterpillar and Adidas. Panama-Pacifico Special Economic Zone. Panama-Pacifico, a 1,400-hectare international business park, provides incentives to companies that carry out a wide range of activities such as back office operations, offshore services and
logistics services, among others. Companies operating out of Panama-Pacifico include 3M, BASF and Dell Computers. Colon Free Trade Zone. Companies that engage in the tracking and distribution of goods can establish operations in the Colon Free Trade Zone, which is located at the Caribbean entrance of the Panama Canal and is the largest free trade zone in the Americas. The Colon Free Trade Zone allows for the tax free importation and exportation of goods. Manufacturing and Export Zones. For companies whose activities are targeted overseas but that don t necessarily engage purely in the import/export business, or that don t wish to set up operations in Colon, a newly implemented law allows for the establishment of a free trade zone anywhere in the country. Companies that establish operations in one of these free trade zones may engage in a wide range of activities, from manufacturing to the provision of services; however, only activities targeted outside the country or to other companies located within the free trade zone qualify for tax incentives. Call Centers. Companies operating call centers can also operate in Panama under legislation that provides tax exemptions on income earned from international calls. Technological Zone. The City of Knowledge is an international center for education, research, and technological innovation, which includes a business incubator that provides benefits to companies working in the areas of communications and IT, biosciences, environmental management, human development and business management. Petroleum Storage and Refinement Zone. Companies that engage in the import, export, storage, refinement and selling of oil and petroleum derivatives can operate within one of the Petroleum Free Zones in the country, which are enclosed areas that are designated for petroleum-related activities and provide tax benefits on the importation, exportation and sale of oil. 2. Establishing a legal entity in Panama is easy. The three most common vehicles for doing business in Panama are local corporations, local limited liability companies, and branches of foreign corporations, all of which are quick and easy to set up. Corporations are by far the most common vehicle. There is no required minimum number of shareholders, and corporations may be wholly-owned by a single shareholder, who may be an individual or a legal entity. In recent years, limited liability companies have gained popularity as vehicles for doing business in Panama, especially for U.S. tax payers as they, unlike corporations, are considered pass through entities for U.S. tax purposes. A third option is to open a branch of a foreign corporation in Panama. There are very few significant differences between operating in Panama through a local subsidiary and through a branch of a foreign corporation. The primary difference between the two the vehicles is in their dividend tax treatment. Any of these three business vehicles can be set up quickly and easily by executing articles of incorporation and filing them at the registry of companies. The process takes about one week. 3. Significant corporate tax benefits. Panama s taxation system is mainly territorial inasmuch as, generally speaking, only income earned from Panama sources or with respect to assets located in Panama is taxed. This territorial principle partially accounts for the successful development of Panama as a base for international operations. Corporate income tax for most companies is paid at a rate of 25%, while dividend payments are taxed at a rate of 10% if the earnings arose from Panama-source income and 5% if the earnings arose out of foreign-source income. Companies operating under one of the special incentive regimes described in item 1 above receive significant tax benefits Multinational headquarters are exempt from the following taxes:
- Income tax as long as services are provided to subsidiaries or affiliates located outside of Panama. - Sales tax for services provided to persons outside of Panama. Companies established in the Panama-Pacifico Zone are exempt from the following taxes: - Income tax - Dividend tax - Import duties (unless goods are sold within Panama) - Export duties - Sales tax exemption for specific business activities - Taxes on the movement or storage of fuel or other hydrocarbons - Real estate property tax - Capital gains tax on company share transfers - Stamp taxes Companies established in the Colon Free Trade Zone receive the following tax benefits: - Exemptions on income tax on income earned on export and re-export operations - Reduced 5% dividend tax - Exemptions on import duties Companies established in other manufacturing and export zones are exempt from all direct and indirect taxes, fees, contributions and charges, with the exception of employment related taxes, until January 1, 2016. As of that date, companies will be exempt from all taxes except for a limited number of taxes, such as income tax on leases and a reduced 5% dividend tax. Call centers are exempt from all direct and indirect taxes, fees, contributions and charges with respect to international calls, except for fees charged by the National Public Services Authority and employment and social security contributions. Companies operating within the City of Knowledge benefit from the following tax incentives: - Exemption from import taxes on all machinery, equipment, furniture, vehicles, devices and other materials necessary for the project s development - Exemption from sales tax on machinery, equipment, vehicles, devices and consumables necessary for the project s development - Exemption from property taxes - Exemption from any taxes, fees, duties, or levies imposed on the remittance of money abroad when the transfer of such funds is related to the purpose of the project or operation - Zero taxes, including income tax exemptions, on all operations or activities of companies producing, assembling or processing high-tech goods within the Technological Park Petroleum free zones are exempt from all taxes, tariffs or other tax obligations levied on the importation, exportation or re-exportation of crude oil or its derivatives, or on raw materials, supplements or additives, machinery, equipment, materials, parts or other goods provided that they are imported into or exported out of the PFZ in relation to exportation or re-exportation activities. In addition, the sale or delivery of petroleum is not subject to income tax or other contributions provided that the petroleum is not destined for the Panamanian customs territory. 4. Significant employee tax benefits. Personal income tax is between 15% and 25% depending on the income level. However, employees operating under the
multinational headquarters license, and employees with exclusive overseas responsibilities are exempt from the payment of personal income tax. 5. Immigration visas are easily obtained. There are a number of visa options available for foreign personnel, which makes it easy for foreign companies to bring to Panama their foreign executives and their families. Most company sponsored immigration visas are granted for one-year terms, renewable for up to six years. Employees must also obtain a work permit from the Ministry of Labor. However, visas for employees in companies operating under the multinational headquarters law are granted for five-year renewable terms. These employees are not required to obtain a work permit. The multinational headquarters law also grants temporary three-month visas for employees that will only be in the country for a short period of time. Panama-Pacifico also offers five-year visas. In addition there are visas available for shareholders or officers of a company that invest a minimum corporate capital of US$160,000.00 with the purpose of establishing commercial, financial or industrial activities in Panama. 6. Special incentive laws provide flexible labor laws and work visas. As a general rule, the Labor Code establishes that no more than 10% of employees in a given company may be foreign personnel. The compensation paid to foreign personnel may also not be more than 10% of the total payroll. However, under many of the special incentive laws mentioned above, this quota is increased to 15%. Furthermore, under the multinational headquarters law, foreign executives whose income is paid from outside the country are exempt from these quotas. Executives in Panama with exclusive overseas responsibilities are also exempt from the quotas. Special incentive laws also provide additional labor benefits, such as flexible work schedules, fixed surcharges for overtime, and negotiable weekly rest and vacation periods. 7. Foreign investment. Panama boasts one of the most open and welcoming economies to foreign investment in Latin America. There is no requirement that foreign investment into the country be registered in, or obtain any prior approvals from, any governmental office or agency in Panama. As a result, Panama is now Latin America s largest recipient of foreign direct investment as a percentage of its GDP. Panama affords equal, fair and equitable treatment to national and foreign investors under its laws. In addition to these principles contemplated by local laws, the country has signed a number of bilateral investment agreements and free trade agreements, which include provisions granting national treatment, most-favorable-nation treatment, and fair-and-equitable treatment to foreign investors. For example, Panama has signed Foreign Investment and Protection Agreements with the United States, France, Great Britain, Switzerland, Germany, China, and Canada, among others. Foreign investors, as well as nationals, can benefit from stability with respect to labor, tax and customs duties under the 1998 investment stability law. Under this law, investors can register investments in excess of US$ 2 million in certain qualifying businesses with the National Investment Registry of the Ministry of Commerce and Industry, and obtain a guarantee from the government that these investments will not be affected by adverse changes in laws in the areas of employment relations, taxation and customs duties for a period of up to 10 years. 8. Lack of exchange controls. Although the official currency of Panama is the Balboa, the Balboa has the same value as the U.S. dollar. The Balboa only exists in the form of coins, which are minted in the same size and denominations as U.S. coins, and the U.S. dollar is the legal tender and has circulated freely along with Panamanian coins since 1904. As a result, there are no exchange controls and capital can be moved freely in and out of the country. With its fully dollarized economy, Panama offers monetary stability. 9. Panama offers a good business environment. Panama connects Central and South America, and, as a place of transit, serves as an international commercial and
financial centre. In addition to the Panama Canal, which brings shipping to the country from all over the world, the international airport in Panama serves as a regional hub for many major airlines, facilitating travel within Latin America, as well as to North America and Europe. Panama is a politically stable country, with regular, free and open elections. The country has also not experienced the insecurity that other Latin American countries have seen in recent years, and the need for private security among professionals and executives is non-existent. Panama also provides an open, market economy with very little government intervention. Furthermore, although the official language of Panama is Spanish, English is widely spoken as a second and commercial language, particularly in the main cities of Panama and Colon. 10. Free trade agreements. Panama has signed and ratified free trade agreements with Nicaragua, Guatemala, Honduras, Costa Rica, El Salvador, Taiwan, Singapore, and Chile. A free trade agreement with Canada was signed in 2009 but has not yet been ratified. A trade promotion agreement with the United States was signed on June 28, 2007, and just recently ratified by the U.S. Congress. In addition, Panama has more limited trade agreements, or so called partial scope agreements, with the Dominican Republic, Mexico, Colombia and Cuba. These free trade agreements provide the signatory countries with investment protections, reduced import/export tariffs and strong intellectual property protections. The above described benefits are all excellent reasons to consider moving your Latin American operations to Panama. The open and business-friendly environment is unparalleled in the region, and the various special inventive laws can provide a range of additional benefits to almost any corporation, in any area of business. The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers. Reprinted with permission from the Association of Corporate Counsel (ACC) 2011 All Rights Reserved. http://www.acc.com/legalresources/publications/topten/rtmylahtp.cfm