Panama is one of the smallest countries in Latin America, yet despite its size, it has a lot to offer. There are a huge variety of business benefits and opportunities to attract Foreign Direct Investment (FDI). Firstly, the country itself is politically stable, has a strong and growing economy and its strategic location is perfect for trade. The Panama Canal enables greater and easier access to not only the Latin American markets but also markets worldwide.
Secondly, the country offers a reputable range of services including legal, banking and financial services. The well-established services sector contributes to approximately 75% of the country’s GDP. And finally, the country has a lot to offer foreign investors, namely its trade liberalization policies, numerous Free Trade Agreements (FTAs) and Free Trade Zones (FTZs). It has an FTZ in Colón – the world’s second largest – and has numerous FTAs with countries such as Canada, Chile, USA, and Mexico. There are many reasons to incorporate a company in Panama but one of the most attractive aspects of doing business in Panama for both entrepreneurs and businesses is the incredibly low VAT rate of only 7%, on most goods.
Evidently, Panama is an ideal country to do business in. In order to set up a company here, either an onshore or offshore company, businesses must ensure that they chose the right type of entity to suit their company needs. This is an important decision because once you have formed a certain type of company, there are obviously legal limitations to what types of business activity you can do. There are several types of companies that can be formed when looking to register a business in Panama, but the three most commonly used are:
- Corporation (Sociedad Anonima – S.A.)
- Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.)
- Private Interest Foundation (Fundacion de Interes Privado)
Entity Type 1 – Corporation (Sociedad Anonima – S.A.)
Doing business in Panama and deciding to form a Corporation is relatively straightforward, provided that certain requirements are obeyed. Company formation is the first of four steps to incorporating a Corporation in Panama (the other three being: Commercial License, Opening a Bank Account and the Alteration of the Company Statues).
There are some key characteristics of forming this type of entity that must be noted. Most importantly, shareholders are only responsible for their own assets and for any of their own contributions. There is also no legislation detailing the minimum social capital of the company, however, a minimum of USD$10,000 is recommended. An S.A can be incorporated within a period of (2) – (3) weeks (without a bank account), as long as the business complies with the following fundamental requirements:
- Have a minimum of three directors
- Have a president, secretary and treasurer (also to be named dignitaries)
- Have (2) Subscribers (can be a person from the board of directors or one of the appointed dignitaries – established in the Social Pact (El Pacto Social). Each subscriber must agree to subscribe to at least one share, at the time of registration)
- Elect a company legal representative (this can be one of the directors)
- Appoint a resident agent (it is obligatory by law to have a Panamanian lawyer)
- Register a company fiscal address
- File monthly and annual tax declarations
- Have a minimum of one shareholder
- Make annual account payment to the Public Registry.
Entity Type 2 – Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.)
Forming a Limited Liability Company is the first of four steps to company incorporation in Panama (the others steps are the same as for an S.A). Incorporating an S.R.L can be completed in a period of (2) weeks (without a bank account). From an investors point of view – an S.R.L can seem like the most attractive company because it means that you are not personally liable for any funds or debts that the company has. Outlined below are the principal requirements for forming an S.R.L in Panama:
- Have a minimum of one administrator
- Elect a president, secretary and treasurer (also to be named dignitaries)
- Have (2) Subscribers (can be a person from the board of directors or one of the appointment dignitaries. Each subscriber must agree to subscribe to at least one share, at the time of registration)
- Appoint a legal representative (this can be the president, an associate or one of the administrators – established in the Social Pact (El Pacto Social)
- Elect a resident agent (it is obligatory by law to have a Panamanian lawyer)
- Register a company fiscal address
- Prepare and submit annual tax declarations
- Have a minimum of two shareholders or associates
- Make annual account payment to the Public Registry
Entity Type 3 – Private Interest Foundation (Fundacion de Interes Privado)
There are certain legal advantages in forming a Private Interest Foundation that are attractive to foreign businesses. Although setting up this type of company will take a minimum of three weeks, the entity will be exempt from all taxes and contributions in Panama (one exception being the Annual Quota payment). If this entity is to be used for commercial development then a license and tax declarations will be required by law. Listed below are a few key characteristics and requirements of a Private Interest Foundation:
- Does not issue shares like other types of companies do
- Includes a Private Protectorate Document from a notary
- One beneficiary and one protectorate must be designated from the Foundation Council
- Not subject to judicial orders on the seizure or confiscation of assets
- Recommended shared social capital of the company USD$50,000 (not obligatory)
- A fiscal address is required
- A company legal representative (a Panamanian lawyer) is required
- The aim/purpose of the foundation and the period of time (indefinite or definite) that you wish the company to be open for, must be stated
- In the case of dissolution – name the recipient/destination of the assets of the foundation and the type of liquidation process
- A bank account must be set up (this process can take a minimum of four weeks). Some references must be supplied from the founder and protectorates.
Once you have undergone the formalities of setting up a company here, you can begin commercial operations in Panama.
Panama is an attractive jurisdiction to do business in, with great tax advantages and a stable business environment. If you are interested in the exciting opportunities available and would like local support, do not hesitate to get in contact with Biz Latin Hub Panama’s Senior Lawyer, Mr. Dennis Acosta here.
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