All the details
Panama is a key destination for foreign investment for all of its advantages:
• Strategic geographic position
• Economic, financial, and political stability
• The most important destination for tourists and investment according to recognized international media
• World-class communication platform
• Highest economic growth in Latin America and the Caribbean
• Economy based on a developed service sector
• Complete logistics platform
• Panama Canal as main shaft
• Colón Free Zone as the largest free zone in the western hemisphere and second largest in the world
• Legal and tax benefits per areas and special programs such as the SEM (Headquarters of Multinational Companies), Panama Pacific Special Economic Area, and free zones, among others.
Panama’s economy and commerce is based on a free market approach, where most goods and services are produced and rendered depending on demand, and prices fluctuate accordingly.
Nationals and foreigners (residents or not) can open, own, and operate businesses. The general rule is that commercial acts and ventures can be carried out by any person, either an individual or legal persona, national or foreign, with the exception of retail sales, which is restricted to nationals and foreigners acquiring Panamanian nationality.
The main entities involved with incorporation of a business entity are:
• Public Registry of Panama (Registro Público de Panamá): controls incorporation of companies and other legal entities. Real estate transactions, mortgages, and shipping registries are also regulated through this entity
• Superintendence of Securities (Superintendencia de Mercado de Valores): encourages, establishes, and controls the activities of the Stock Exchange and companies whose shares are traded on Panama’s securities exchange market
• Ministry of Economy and Finances (Ministerio de Economia y Finanzas) through the General Revenue Bureau (Dirección General de Ingresos or DGI): collects, monitors, and regulates all issues related to taxes
• National Customs Authority (Autoridad Nacional de Aduanas): collects and safeguards customs duties and controls the flow of goods
• Banks Superintendence (Superintendencia de Bancos): maintains international financial integration, security of financial intermediation, and control of the monetary system.
All companies operating in Panama are required to maintain their accounting records according to the following rules:
• In chronological order, indicating the date on which transactions are occurring or periods that are affected
• In Spanish. It is permitted that invoices and support documentation may be issued in a different language
• In the local or commercial currency, which is the US dollar
• Indicating the amount for each commercial transaction, professional services or service performed
• Nature and identification of each transaction
• Reversions, corrections, errors, and omissions must be properly registered and identified
• All accounting records must be the responsibility of a Panamanian certified public accountant (CPA)
• All technological systems and programs to maintain accounting records need to be certified by a CPA according to the requirements established by Panamanian regulations
• Specific Chart of Accounts. There is no requirement in Panamanian regulations for a specific chart of accounts
• Language: Panamanian regulations are very specific about the language of the accounting records, indicating that these are to be maintained in Spanish, but there is no indication of language requirement for financial statements. It is safe then to conclude that FS may be issued in English, but translations must be made to authorities upon requirement
• Overseas preparation of accounting records. The CPA definition for these matters is for a Panamanian certified public accountant. A CPA must be responsible for the accounting records and must countersign financial statements
• General ledger requirements. General ledger requirements include that all transactions must be listed in chronological order, in accounts classified as assets, liabilities, equity, income, expenses, and order accounts, making reference to specific journal entries.
Financial Statements must follow the below guidelines:
• Financial statements must be prepared in accordance with generally accepted accounting principles in Panama (IFRS), countersigned by a certified public accountant, and issued within 120 days after closing of the fiscal period
• Financial statements must include at least: general balance, income statement, statement of equity and retained earnings, and statement of cash flows
• Financial statements must be approved by the Board of Directors, shareholders, or partners and kept available for review by the authorities within the company’s premises.
Invoices and regulations
With respect to invoices, companies operating in Panama must comply with the following requirements:
• Designation as appropriate, depending on the type of document (invoice, receipt)
• Consecutive and unique numbering of the records
• Numbering of the fiscal equipment or fiscal cashier machine
• Name of the individual or company engaging in the business activity, its address, and taxpayer unique registration number (RUC) of the issuer of the invoice
• Date of issuance of invoice or equivalent document, constituted in a way that clearly refers to the day, month, and year of its issuance
• Description of the operation, with an indication of quantity and amount. Those operations in which the amount, because of its nature, cannot be expressed may be omitted
• Breakdown of VAT and any other tax withholding levied on the transfer
• Indication of the total value of the transfer, sale of goods or provision of the service, or the sum of both if applicable
• In cases where any other costs in addition to the price or remuneration agreed upon are levied or charged, or discounts, bonuses, cancellations, and any further adjustment to the price are made, description and value of said change shall be indicated.
ESSENTIAL BUSINESS FORMS AND LEGAL ENTITIES
Joint-stock Company (Sociedad Anónima) or Panamanian Company
Companies in Panama are governed by Law 32 of February 26, 1927. It offers a flexible corporate structure, the possibility of issuance of bearer or nominative shares, and protection of the ownership of the shares (Corporate Veil), as the shares register only has to be kept by the Resident Agent, who is a lawyer, thus having its relationship protected under professional secrecy.
According to legislation, the companies may be formed with two or more individuals, whether or not citizens or residents of the Republic of Panama. Every company should have an Articles of Incorporation document, organized through a public deed and registered at the Commercial section of the Public Registry.
The establishment of a company takes about a week and has a low annual maintenance cost compared to other jurisdictions.
Limited-Liability company (Sociedad de Responsabilidad Limitada)
Limited-liability companies in Panama are governed by Law 4 of January 9, 2009.
According to the law, limited liability companies must use a name or company name that the organizers agree to assign, adding, however, the phrase ‘limited liability company’ or the initials “SRL.” Limited liability companies may engage in any kind of lawful, civil, or commercial activity.
Two or more individuals or companies may incorporate a limited liability company and establish its managers. The number of members for the venture must be no less than two.
The limited company will be established by private document or public deed protocolized before a Public Notary and registered in the Public Registry.
Joint Venture (Sociedades Accidentales o Cuentas en Participación)
Joint Ventures lack legal personality, are not subjected to any solemnity, and their existence may be attested by the common test.
Tax structure and scope
Taxes in Panama are levied only on income or gains derived from business and activities carried out on in Panama itself, as Panama’s taxation system is conceived on a territorial basis.
Persons, either natural or legal entities, undertaking business both inside and outside the territory of Panama are subjected to taxes only on income generated within the territory of Panama. There are several special taxation regimes for companies operating under incentive regimes, such as companies located in the Colón Free Zone and other special commercial areas, as well as for companies specifying certain investments, services, or productions.
What is taxed?
Taxable income: income from Panamanian source, territorial.
How is tax applied?
For taxpayers with annual gross taxable revenues over $1,500,000, Panamanian source income is subject to a 25% corporate income tax rate assessed on the higher of:
• The taxpayer’s actual net taxable income; or
• a presumed net taxable income of 4.67%
Expenses or costs of the enterprise used to generate taxable income or to preserve the business are deductible in tax returns and must be documented by the fiscal printers.
Rates of income tax
General rate: 25%
Annual tax returns
Three months after the fiscal year ends.
What is taxed?
This income applies to imported merchandise, or products and services, sold in Panama.
Who is the contributor?
The importer, seller, or service provider
• General: 7%
• Alcoholic beverages: 10%
• Hotels: 10%
• Tobacco: 15%
What is taxed?
Securities, bonds, and shares:
The transfer of taxable securities is subject to a 10% tax over the gain and to an advance over the sale price of 5%, which must be withheld by the purchaser. The seller may opt for this 5% to be the definitive tax.
Real estate property
For the ordinary course of business with construction permits issued before January 1, 2010, the general tax regime applies.
For the ordinary course of business with construction permits issued after January 1, 2010, a definitive tax is paid over the sale price as follows:
Value of the new real estate property:
Up to $35,000: 0.5%
From $35,000 to $80,000: 1.5%
Over $80,000: 2.5%
Commercial properties: 4.5%
A non-ordinary course of business is subject to a 10% tax over the gain and an advance over the sale price of 3% that the purchaser must withhold. The seller may opt for this 3% to be his definitive tax. With this tax the seller must pay a 2% Real Estate Transfer Tax.
In all regimens, Dividend and Complementary Tax is paid.
What is taxed?
Net after-tax profits for the shareholder.
Nominative shares: 10%
Exempt incomes: 5% f) and l) of the Article 708 of the Fiscal Code, free zone companies, foreign source income.
Bearer shares: 20%
Ten (10) days following the date of distribution.
NOTICE OF OPERATIONS TAX
What is taxed?
• 2% annual over the net assets of the company up to a maximum of $60,000.
• 0.5% annual over the net assets of the company (free zones) up to a maximum of $50,000.
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