Anyone doing business in the Panamanian market or planning to launch there will have to adhere to financial regulatory compliance in Panama if they wish to maintain their good standing with local authorities and avoid legal inconveniences.
Panama is emerging as a regional hotspot for commercial activity and increasing opportunities for foreign businesses. The country famously offers globally competitive conditions for company formation and tax compliance, projecting it as a leader in Central America for investment and economic growth.
It’s crucial for businesses to understand their obligations for corporate compliance in Panama. Understanding and complying with local law means being able to expand into Panama as quickly and smoothly as possible, and undertake your commercial activities with confidence. Financial regulatory compliance is an important element of corporate compliance and is a key part of any corporate secretarial services package offered by third-party providers. Corporate secretarial services are widely referred to by the abbreviation ‘cosec.’
However, if you are planning on seeking out additional assistance, such as with recruitment, visa processing, or ongoing operational support, you may find that seeking out the services of a provider of back-office services in Panama is your best bet.
SEE ALSO: Business formation Panama
Because such a firm will be able to cover all of your needs under one services agreement, meaning that you will enjoy the convenience of only having to deal with one provider.
If they are also active in other markets in the region, they will be able to provide cross-border support and assist with future expansion into other markets.
If you are planning on starting a business in Panama, read on to learn the fundamentals of financial regulatory compliance in one of Latin America’s most prosperous nations.
Or contact us now to find out more about how we can support you doing business in Panama, or any of the other 15 markets in Latin America and the Caribbean where we have offices staffed by local teams of professionals.
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Panamanian market a popular investment destination
Panama’s stable political environment, high levels of prosperity, relatively low levels of crime, and famed offshore banking system make it a highly popular destination for investors and corporations doing business in the region.Those factors combine with prime logistics, with Panama City just a few hours by plane from multiple major US cities, while the capital’s Tocumen International Airport has direct flights to various major cities in Europe and throughout the Americas.
The presence of the Panama Canal also means that the country is a critical hub for trade and commerce, with approximately 14,000 ships passing through the waterway each year.The Canal is also crucial to the economy, accounting for approximately 6% of gross domestic product (GDP), which hit $66.8 billion in 2019, after increasing five-fold over the previous two decades.
That exponential growth has been driven in part by a highly favorable environment for doing business, which saw the country achieve a very high score of 92 in the World Bank’s Doing Business 2020 report to be listed as one of the best countries in the world for doing business. Meanwhile, the UN’s 2020 World Investment Report highlighted how Panama receives more foreign direct investment (FDI) than any other country in Central America, as well as several much bigger nations in South America.
Another factor that makes the country attractive to investors is the fact that it is one of Latin America’s dollarized economies, providing a greater degree of currency stability than is seen in some markets.
Corporate compliance in Panama: key requirements
There are different types of legal entities that you can incorporate in Panama. In many cases, the most convenient options for foreign multinationals is a Corporation (Sociedad Anónima in Spanish) or Limited Liability Company or LLC (Sociedad de Responsabilidad Limitada). These types of corporations can be incorporated with just one shareholder. These entities allow 100% foreign ownership as either a natural person or a legal entity (an individual or another company).
Both an Corporation and a Limited Liability Company can be incorporated within a week. Furthermore, Panama offers an express registration process that allows incorporation to be completed within one business day.
What’s the difference between a Corporation and a Limited Liability Company?
The main difference between these two entities is that in a Limited Liability Company, the shareholder needs to be registered with the local public registry institution (Registro Público de Panamá).
For an Corporation, the shareholder’s information remains private with the owners, resident agent, the Superintendence of Non-Financial Subjects and with the bank (if you open a corporate bank account).
To establish a company, it is important for every foreign investor to know what the minimum requirements are in order to comply with the Panamanian laws and regulations.
Find a Legal Representative in Panama
According to Panamanian legislation, every legal entity or company must have a Legal Representative. This is the person appointed to act as the face of the company and represent it in all legal matters. The Legal Representative is therefore granted legal powers to make certain decisions on behalf of the company.
In Panama, a Legal Representative can be a foreigner, or Panamanian national, without any restrictions. Make sure that the person you appoint as your Legal Representative has an in-depth understanding regarding local laws and potential penalties if the company doesn’t comply with its annual or monthly corporate obligations.
What roles and responsibilities must a company’s Legal Representative fulfill?
- Sign formal documents on behalf of the company
- Open corporate bank accounts with the permission of the shareholder or beneficiary of the company
- Sign employment, sales, and lease contracts
- Represent the company in application processes for local permits, or registration, such as a commercial license (Aviso de Operación) with the Ministry of Commerce.
Register a Fiscal Address in Panama
As soon as the company is incorporated at the public registry, it must be registered at the National Tax Authority (Dirección General de Ingresos). The company is obligated to declare its monthly/annual taxes to the National Tax Authority (depending if the company has local operations).
You’ll also need to fulfill the annual renewal payment of the company. For this registration, every legal entity must supply a fiscal address. This address is used to receive correspondence and formal notices from government authorities and financial institutions.
Monthly and annual tax declarations
Your company will need to make monthly or annual tax declarations, depending on whether your company has commercial activities inside the country. This obligation can also change if your company is located in a free trade zone, develops an incentive activity like tourism or agriculture, or has Multinational Company Headquarters license (Licencia de Sede de Empresa Multinacional). Furthermore, Panama allows an entity to be registered without monthly or annual tax declarations as long as no commercial operations or incomes are received. This allows you to incorporate an entity today, not have to worry about tax declarations, and on a later date modify the tax declaration obligations when you are ready to start operating.
It’s therefore important to determine which obligations your company has with the national authorities depending on its commercial activities. Companies that are not aware of their annual obligation may end up paying more taxes than is necessary or making fraudulent tax declarations by mistake. Partnering with an experienced local accounting consultant in Panama will ensure you avoid any issues with your tax declarations.
Companies with local and commercial operations in Panama will need to report monthly tax declarations to the national tax authorities, unless the company is operating under a recognized special tax incentive. One example of this is the VAT (Value Added Tax) known better in Panama as ITBMS (Impuesto sobre la transferencia de bienes corporales muebles y la prestación de servicios). This tax is mandatory when annual income exceeds USD 36,000.00 or depending on the economic activity. According to the Panamanian fiscal code, in the article 1057-V, the VAT or ITBMS report must be filed and paid by the day 15th of each month.
Companies that have operations in Panama will also need to apply for commercial license (Aviso de Operación) and pay an annual tax of 2% over the accountable capital of the company, with a minimum payment of US$100 and a maximum payment of US$60,000. Additionally, each municipality taxes commercial operations differently (i.e. these additional taxes will depend on the district your company is located in).
Compliance for companies operating in or outside of Panama
Companies with operations in Panamanian territory (onshore) have more corporate compliance obligations than those operating outside of the country (offshore). Companies conducting activity inside of the country need to file an annual income tax declaration by March 31 of every year. You can request to extend this period to April 30. On the other hand, it is not necessary to file income tax returns for offshore companies with assets exclusively outside of Panama.
Note that if you operate a corporate bank account and receive any kind of income through the year, the company will need accounting registries. This is mandatory for offshore and onshore companies that are established in Panama.
Common Questions for Entity Legal Compliance in Panama
Based on our extensive experience these are the common questions and doubts of our clients when looking to operate within the country
The following are the most common statutory appointments for Panamanian legal entities:
– A Resident Agent must be appointed who will be personally liable for the company’s compliance with Ultimate Beneficial Owner (UBO) and Anti-Money Laundering (AML) regulation. The appointee must be a local attorney or a law firm.
– Three (3) Directors that can be nationals or foreigners.
– Three (3) Dignitaries (President, Secretary, and Treasurer) as a requirement. The dignitaries can be the same three persons appointed as Directors.
– Legal Representative the roles and responsibilities of this statutory appointment were already discussed above. It is very common for the President of the entity to be the Legal Representative.
Yes, a Registered Office Address or local Fiscal Address is required for all entities in Panama for the receipt of legal correspondence and Governmental visits.
Meet your obligations for corporate compliance in Panama with Biz Latin Hub
With an infinite amount of business opportunities available in Panama, it is not surprising that keen investors are looking towards Panama as great location to start developing their businesses.
It’s crucial to know how and when to file your monthly or annual taxes to avoid any kind of penalties with the national authorities. For this reason and more, working with a trusted local legal and accounting firm can ensure that your company remains compliant when operating in Panama.
At Biz Latin Hub, our team of local and expatriate professionals offer vital guidance and support to help companies meet their obligations for corporate compliance in Panama. Our accounting and legal experts are equipped to deliver high-quality, personalized market entry and back-office services to suit your needs.
Contact here at Biz Latin Hub to see how team Biz Latin Hub can support your business in Panama and Latin America.
Learn more about our team and expert authors, and how our specialist services can guide you through the company formation process in Panama.
The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.