Company formation in brief
Panama is a well-known offshore jurisdiction with a recognized concept of a tax-exempt company (and/or offshore company, International Business Company (IBC), trust, foundation etc.) registration. Although the law of Panama provides for the establishing in this country of companies of various organizational and legal forms, a classic joint-stock corporation (Sociedad Anonima) which obtains the status of an offshore corporation (hereinafter referred to as the “offshore company”) provided that all its income is generated outside Panama is primarily of practical interest to a foreign investor.
Offshore companies may be established by one physical or legal person of any residence. Although, as a rule, all offshore companies are established here with a registered charter capital of USD 10’000, no minimum capital is required to be paid up upon incorporation.
Offshore companies with 100% foreign participation may carry out the same operations (except for retail trade) in Panama as companies established in the country by Panamanian citizens.
Each company must appoint at least 3 directors and officers – president, treasurer and secretary (both physical and legal persons, residents or non-residents of Panama). Directors and shareholders may also hold an office in the company or serve in several positions at the same time.
Offshore companies may issue shares of various classes, types and fractions – subject to the company owners’ decision.
Offshore companies should have a registered address in Panama, and may have its own office premises and manage its own affairs from Panama.
Directors’ and shareholders’ meetings may be held in any country of the world and their minutes and financial documents may be kept anywhere in the world.
Each Panamanian offshore company is required to maintain the directors and shareholders register, and although its corporate documents are not subject to public verification, they should be available for verification by shareholders. The directors data is kept together with copies of constituent documents in the office of the Registrar of Panamanian Companies.
Offshore companies are exempt from all taxes in Panama, as well as from a need to keep financial records and file financial statements. Repatriation of profits outside Panama is guaranteed to each company.
Offshore companies’ names may not include words reflecting activities licensed in Panama, such as Assurance, Bank, Building Society, Chamber of Commerce, Chartered, Cooperative, Imperial, Insurance, Municipal and Royal;
No offshore company may be engaged in banking or trust activities, insurance or reinsurance, or provide its registered office address for other companies’ needs.
A foreign company may move its address to Panama but there are no laws that allow a Panamanian company to move its registered address outside the country.
If a company fails to pay annual state duties for renewing its registration, it will be deleted from the Panamanian Companies Register one year after the date of the last payment. The Companies Act clearly explains that a company excluded from the Register may not continue its business and, in particular, manage its bank accounts, although its directors and shareholders continue being fully liable for the company’s debts and obligations.
A deleted company may be restored in the Panamanian Companies Register by paying all duties and penalties. However, after a certain period of time, an offshore company may be restored here only through a local court’s decision which may be both positive and negative.
Panama strictly follows the territorial principle of taxation, which requires that any Panamanian companies’ income from foreign sources is completely exempt from tax in Panama. An offshore company may do business with Panamanian residents and invest in Panamanian property of any kind but it will be subject to taxation of profits from local sources.
Every resident company is required to declare its profits earned in Panama. The so-called “IT alternative” is used for calculation of any resident profit earned in Panama. According to this rule, 95.33% of the taxable profit is deducted from the taxable base, and the remaining amount is taxed in Panama at a rate of 30%.
The fiscal year of Panamanian resident companies begins on January 1 and ends on December 31, and the tax return should be filed no later than March 31 after the fiscal year end, although a company may obtain the tax service’s approval to change the reporting period timelines.
All Panamanian taxpayers are required to make a preliminary assessment of income tax for the current year and pay income tax in advance in three advance instalments - on June 30, August 31 and December 31, respectively.
As for dividends distributed by Panamanian resident companies, they are taxed at a flat rate of 10% (the profits earned in Panama only).
Speaking about offshore business in Panama, it is worth mentioning the Colon Free Zone. The Colon Free Zone has become the largest international free trade centre in the Western Hemisphere and the second largest in the world after Hong Kong since 1948 when it was established. Goods imported into the Colon Free Zone may be imported, stored, modified, repackaged and re-exported free of customs duties and other charges to the Treasury of Panama. Companies based here are exempt from taxes.
Private interest foundations in the Republic of Panama are primarily governed by Law No. 25 of June 12, 1995, which was inspired on the law of Family and Mixed Foundations of the Principality of Liechtenstein, and has been regarded as a key effort to confirm Panama’s essential and preeminent role as a leading offshore center.
A private foundation as a type of legal entity, has an independent legal existence from that of its founder, thus the foundation’s assets constitute a separate estate and, as a general rule, may not be seized, attached or used to answer for obligations or liabilities of the founder or any other person, making the private foundation one of the most desired tools for asset management and protection.
Additionally, a private foundation is not liable to the Founder’s creditors, except in case of fraud in the transfer of assets to the foundation. Moreover, in view of the fact that foundations do not have the status of a corporation, no shares or participation quotas are issued.
Notwithstanding the fact that in a private foundation there are no shareholders or members, it has beneficiaries who are the persons for whose benefit the foundation is organized and its purposes carried out. In order to ensure confidentiality, an essential element in offshore transactions, these beneficiaries (who may include the founder) can be indicated in a private document known as the “Regulations”, which is not subject to registration in the Public Registry of Panama, as opposed to the Foundation Charter (incorporation document), which must comply with this formality for the foundation to acquire the status of a legal entity.
As an independent legal entity, a private interest foundation may acquire and own property, incur obligations, and participate in any judicial or administrative proceedings, but it has to limit itself to non-profit activities. Notwithstanding, private interest foundations may carry out commercial activities from time to time when necessary in the pursuit of its objectives and purposes, which may include holding an investment portfolio. This limitation does not extend to companies or businesses owned by a private interest foundation.
Another common use of private interest foundations is to act as a holding company to own shares and equity interests in private companies. In addition, private interest foundations are also used as an investment vehicle or to manage bank accounts.
Private interest foundations are often used for estate and inheritance planning, since they can be effectively used in lieu of a will. Through a Panamanian private interest foundation an inheritance may be divided confidentially and expeditiously without any of the drawbacks of inheritance proceedings.
As far as taxation is concerned, private interest foundation are exempt from taxes payable to the Panamanian Government on the income they earn and on any transfers made to or from them, provided that such assets or income are derived from operations consummated abroad. Once a private interest foundation is constituted, the only annual charge payable to the Panamanian Government would be a US$400.00 annual tax, to keep the foundation legally active.
As a final matter, foundations organized pursuant to the laws of a foreign country may continue their existence in the Republic of Panama, and, conversely, meaning that Panamanian private interest foundations may be re-domiciled in another jurisdiction.
A company formation in Panama could be arranged with a professional registered agent providing incorporation, virtual office and other corporate services in Panama. To set up a company in Panama is possible by correspondence, but to open a bank account in Panama will, most probably, require a personal visit.
The government of Panama enacted on November 11, 2021, Law 254 which introduces adjustments in relation to fiscal transparency and money laundering prevention.
Although it already existed the obligation of all Panamanian corporations and foundations with operations or assets outside of Panama to keep accounting records and supporting documentation, the recent law tightens these requirements and obligates the legal entity to sent at least one copy to the resident agent every year of said accounting records and supporting documentation, and confers to the resident agent the obligation to report to the Panamanian authorities which entities are complying or not with said requirements.
Accounting Records: Those that indicate in a clear and precise manner the operations of the legal entity, its assets and equity. These are records that are used to determine, at all times, the financial situation with reasonable accuracy and allow the elaboration of financial statements.
Supporting Documentation: The documentation that includes contracts, invoices, receipts and/or any other documentation necessary to support the transactions performed by a legal entity.
Legal Entity/Juridical Entity: Refers to the corporation or foundation.
Resident Agent: The lawyer or law firm that exercises the obligatory role of agent of the corporation or foundation, acting as a link between the client and the Panamanian authorities and is considered a subject obliged to keep the due diligence and other requirements of the law for the entities it manages.
Legal entities not carrying out operations that are executed, used or having effect within the Republic of Panama, as well as those exclusively engaging as holders of assets, within or without the Panamanian territory, are obliged to keep accounting records and maintain its supporting documentation
For how long should accounting records be kept?
The accounting records and the supporting documentation shall be kept for a minimum period of 5 years as of the last day of the calendar year when transactions were produced, the accounting records being applicable thereto.
Where should these accounting records be kept?
The accounting records and the supporting documentation shall be kept at the offices of the resident agent within the Republic of Panama or in any other place, within or without the Republic of Panama, as determined by the administrative body of the legal entity.
The legal entities are obliged to provide yearly to the resident agent, on April 30, the accounting records or a copy of the accounting records in relation to the fiscal year ending on December 31 of the immediately previous year.
Obligation of always keeping the information up-to-date.
The legal entities are obliged to notify the resident agent in case of any change in the person keeping the accounting records or supporting documentation under his custody.
The legal entities are obliged to inform yearly and in writing to the resident agent, the name and contact information of the person keeping the accounting records and supporting documentation under his custody and the physical address where they are being kept.
In case required by the competent authority, in addition to the accounting records or copies of the accounting records, the legal entities are obliged to provide the resident agent the supporting documentation of the accounting records within the period established by the competent authority, in order to comply with the requirement.
Accounting records must be provided in the following manner:
1. In case of legal entities not executing commercial activities or businesses and exclusively engaged as holder of assets, it must provide information evidencing the value of the assets being kept, the incomes from said assets and the liabilities in relation to those assets.
2. In case of legal entities executing commercial activities, it must provide a journal and general ledger.
If required by the competent authority, the legal entities are obliged to provide any supporting documentation and additional information during the period required by the competent authority.
Period to comply with this obligation in case of companies already existing.
Legal entities established before the effective date of this Law (before November 11, 2021) shall have a period of six (6) months to deliver to the resident agent the accounting records or copies of the accounting records, to be kept at the offices of the resident agent within the Republic of Panama.
Entities presently suspended and their accounting records.
In case of legal entities suspended in the Public Registry before the effective date of Law 254, in order to be reactivated it shall provide to its resident agent the accounting records or copies of the accounting records to be kept at the offices of the resident agent within Panama. In case the legal entities are suspended in the Public Registry before the effective date of the law, in addition to the copy of the accounting records, the legal entities shall be obliged to provide to the resident agent the supporting documentation of the accounting records within the period established by the competent authority in order to comply with the requirement.
In case of change of resident agent.
The legal entity shall provide to the new resident agent, before the registration of its appointment in the Public Registry, the accounting records and the supporting documentation or copies of the accounting records and supporting documentation, as is the case, which shall be kept at the offices of the new resident agent within the Republic of Panama. In case of legal entities having records and supporting documentation kept in any other place different than the offices of the resident agent, within or without the Republic of Panama, it must inform the name and contact information of the person keeping the accounting records and supporting documentation under his custody and the physical address where they are being kept.
In case of dissolution.
The accounting records and supporting documentation or the copies of the accounting records and supporting documentation, as is the case, in relation to five years previous to the registration of the dissolution, must be kept and be available by the resident agent of the legal entity, for a minimum period of five years as of the registration of the dissolution in the Public Registry of Panama. In this case, the Public Registry of Panama shall only register the respective public instrument containing the dissolution and which includes the express statement of the resident agent indicating that it has the accounting records and supporting documentation or copies of the accounting records and supporting documentation, as is the case, and as provided by the Law.
The Public Registry shall only register instruments containing the express statement of compliance with the previously provided, by the new resident agent.
Sworn Affidavit to the General Directorate of Revenues (DGI, in Spanish) on the Accounting Records
The resident agent shall deliver yearly to the DGI (General Directorate of Revenues) a sworn affidavit on July 15 which contains a list of the legal entities of which it is resident agent, including the name, RUC (tax identification number of Panama) and which contains the following:
1. The legal entities having original accounting records and supporting documentation being kept in the offices of the resident agent in Panama.
2. The legal entities having accounting records and supporting documentation being kept in any other place different than the offices of the resident agent and certifying that it has copies of the accounting records and the name and contact information of the person keeping the original accounting records and supporting documentation under his custody and the physical address where they are being kept.
3. The legal entities not having the information mentioned in the aforementioned paragraphs 1 and 2. The competent authority may apply sanctions to the legal entities the resident agent has included in the affidavit mentioned in this paragraph.
The executive body shall regulate the format in which this affidavit must be delivered.
In relation to legal entities established before the effective date of this law, the resident agent shall forward the first affidavit within thirty calendar days as of the due date of the six-month period established by the law in order for existing corporations to comply with said requirement, i.e. June 12, 2022.
Further Information on Accounting Records
Authorities may require the documentation at any time.
In all cases when the competent authority requires the supporting documentation of the accounting records, the legal entity shall provide the documentation to the resident agent within the period established by the competent authority and according to the regulation of this law.
The competent authority shall require the resident agent the accounting records and supporting documentation at any time and according to the provisions contained in the law, for faithful compliance of its duties.
Confidentiality of the information and documentation
The competent authority, for purposes of national and international cooperation, shall require any information as provided in this law and its regulations, without this constituting a violation to confidentiality.
Every information delivered to the competent authority in compliance to this law and its regulations by the resident agents, directors, officers, employees, representatives shall not constitute a violation to professional secrecy nor to the restrictions on disclosure of information resulting from the confidentiality imposed by way of contracts or by any legal or regulatory provision and shall not imply any responsibility for the resident agents nor for its officers, directors, employees or representatives.
The information received by the competent authority from the resident agent shall be kept in strict confidence and shall only be used by the competent authority for the faithful compliance of its duties, according to the respective laws. Non-compliance of this obligation of confidentiality by an official shall be sanctioned as a serious administrative infringement, without prejudice to the civil and criminal responsibility resulting therefrom.
The Executive Body shall regulate the manner and time in which the resident agent, previous requirement of the competent authority, shall forward a copy of the accounting records and supporting documentation.
The legal entities not complying with the obligations of the accounting records shall be sanctioned with a fine of US$5,000 up to 1,000,000 considering the seriousness of the fault, the recurrence and the level of damage.
In addition, the Public Registry shall be ordered the suspension of the corporate rights of the legal entity in default, this without prejudice that it complies with the obligations established in the law, its rules and regulations. The DGI is empowered to order the Public Registry the forced administrative liquidation of the legal entity.
Sanctions to the Resident Agent for non-compliance of the Accounting Records
The DGI shall sanction the resident agent not complying with the obligations in this law with a fine of US$5,000 up to 100,000 considering the seriousness of the fault, the recurrence and the level of damage. Further, it shall be applicable when in the supervision procedures, non-compliance of the obligations established in this law are observed.
Against these sanctions, remedies of reconsideration and appeal can be applied, as provided in the ordinary tax procedure. The Executive Body shall regulate the procedure for the application of sanctions.
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