Many foreign investors starting a business in Panama, or merely purchasing real estate for investment purposes, decide to use a corporate entity as the legal owner. This decision is a wise one.
Ownership through a corporation allows one to have flexibility in areas ranging from estate planning (if share ownership is properly structured the investor can be spared the painful and lengthy probate procedure), tax management (as an example, rules on corporate expenses are more flexible than the ones on personal ones), and asset protection and representation (shareholders meetings can facilitate granting special powers of attorney or other types of authorizations for many actions thus not requiring local presence in the country).
The first question often asked by investors is whether to use (or form) a local corporate entity or use one already existing which is controlled by individuals abroad. The general consensus is, in most cases, the use of a local entity. Although foreign corporate entities can own land and engage in business activities in the country, registration procedures (both at the Public Register and with government entities) as well as negotiation of contracts with private parties, can get complicated, delayed and/or encounter numerous other obstacles.
In any event, if a foreign entity is used, it is normally recommended to register the foreign entity in the register as a branch or, at least, to register specific powers of attorney for such, also in the Register. Both cases require a special and formal procedure that may take several weeks. As mentioned before, in the great majority of cases, the use of a local corporate entity is preferred. Although, commercial law contemplates many types of corporate forms, only two of them offer the investor the comfort of having structures similar to the limited liability companies to which he or she may be used to in their countries of origin. Such corporate forms are the “Sociedad de Responsabilidad Limitada” and the “Sociedad Anónima”. In both cases, the investors (shareholders) are only responsible for their participation on the company’s authorized capital, while their own personal assets are fully protected and out of reach from any potential creditor, the shareholder may have.
The Sociedad Anónima has many features, of which the most important are:
- No restrictions on nationality
- No requirements to disclose ownership
- No restrictions on foreign-owned investments (with few exceptions)
- No restrictions concerning ownership of shares
- No residency requirements for directors/officers
- No paid‐in capital requirements
- No income tax, if income is produced outside Panama
- Total tax exemption on any and all business activity or transaction carried on outside the jurisdiction
- No exchange control
- No restrictions on mergers, acquisitions or joint ventures
- No requirements to file annual financial statements
- No requirement to hold annual general meetings of shareholders or directors
- Total secrecy and anonymity
- Reasonable annual registration tax and resident agent fees
- Articles of Incorporation may be done in any part of the world in any language
- The accounting books for the corporation could be kept in any part of the world and in any language
- The legal representatives, holding powers of attorney to act on behalf of actions taken against the interest of the company and/or its shareholders
- Political stability due to constitutionally elected government
Companies doing business in Panama must additionally register before the tax authorities. In the event that the company is not involved in business activities in the country for the specific fiscal year (for example, when it is solely used for holding assets), formal tax registration is not required.
The normal fiscal year for companies declaring taxes in Panama is from January 1 to December 31 of each year; filings can usually be made until the end of March of the following year. A different fiscal year can be authorized for companies that are fully owned or related to foreign entities that have a different term in their countries of registration. It is important to conclude that the choice of corporate structure must ideally be made at the time the investment or business project is being created. This decision will have a major impact and specific consequences on the implementation of said project and if taken wisely, it will be one of the foundations for its success.
Panamanian Corporate Entity – Incorporation Procedure in Panama
The usual procedure is that the law firm, acting according to the information furnished by the client in the Incorporation Form sent by fax or email, will organize the corporation using standard Articles of Incorporation. Normally, within 10‐15 days thereafter, all the pertinent documents will be sent by courier to the address provided by the client. Most firms also have “Shelf or Ready Made Companies” available.
General Power of Attorney
The Board of Directors may grant a general power of attorney to any person, whether or not connected with the corporation. When said power of attorney is granted to be used abroad, it is possible not to register said power of attorney to maintain the confidentiality.
A corporation may adopt by‐laws for the regulation of its internal affairs and procedures, but it is not compulsory. Should by‐laws be adopted, it is not compulsory that they be registered. If they are registered, any amendments thereof must also be registered. By‐laws may be adopted either by resolution of the shareholders or by resolution of the Board of Directors. Consequently, the by‐laws may be amended by the corporate body, which initially adopted them.
By law, every corporation must have a resident or registered agent. Law firms charge a fee for acting as the resident agent. However, the first year of the resident agent’s fee is usually included in the cost of incorporation.
Annual Company Tax
Every Panamanian corporation has to pay an annual tax, imposed by law. The law requires corporations to pay said amount in order to remain in good standing. Good standing is taken to mean valid registration at the Public Registry of Panama.