Introduction
There is a reason why numerous travel publications have rated Panama the most popular second home and retirement destination in the world. More than its famous and important canal, Panama is Latin America’s paradise. It’s excellent weather, diverse ecosystem, breathtaking beaches, high standards of living and truly affordable real estate make it an ideal place to invest in and establish a second home..
Situated at the southeastern end of the isthmus forming the land bridge between North and South America, the tropical climate of Panama covers an area of 78,200 square kilometers. The 2004 estimated population of Panamanians was 3.3 million, with an annual growth rate of 1.7%. Ethnic groups include, Mestizo (mixed African Amerindian and European ancestry), Amerindian, mixed (West Indian), White and Indian. Spanish (official) and English are the languages spoken in Panama.
Even though Panama boasts a standard of living that is comparable to North America and Europe, the cost is significantly lower. Panama’s advanced healthcare system prides itself in offering the highest quality of medical care in its region.
Business Environment
Doing business in panama is amply supported by its transportation and telecommunication infrastructure. The business environment presents a favorable image to foreign and local investors alike. Panama City the principal commercial centre followed by the Colon Free Trade Zone.
The Panamanian government encourages foreigners to live and invest in Panama by offering various incentive programs such as property tax exonerations on new construction from 10 to 20 years. Some other notable incentives for foreign investors include; foreign and local investors are guaranteed equal rights, foreign investors do not require special authorizations, permits or prior registration; one of the lowest tariffs in the region; special tax, import, and operational incentives in the construction, infrastructure, tourism, reforestation, mining, insurance and petroleum free zones sectors; no tax or government reporting requirements on any foreign earned income as well as many incentive programs that offer immediate residency, visas and passports.
Economic Environment
According to Reuters, Panama is one of Latin America’s fastest growing economies, spurred by increased canal traffic, a booming construction sector, buoyant banks and increased exports of tropical fruit. In October 2006, an approximated 77% of Panamanians voted to approve the expansion of the canal during a nationwide referendum. This USD$5.25 billion project is aimed at doubling the capacity of the canal and attracting an incredible 40, 000 jobs during the estimated timeline of 7 to 8 years. With the U.S. dollar circulating as legal tender since 1904, Panama’s economic stability provides very low inflation rates and virtually no currency inflations.
Taxation
Taxation
Taxation in Panama, governed by the Fiscal Code, is on a territorial basis; this is to say that taxes only apply to income or gains derived through business carried on in Panama itself. The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not in itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation.
Income Tax is payable on the income of a Panama or foreign corporation or other entity derived from business carried out within Panama; a corporation carrying on business both in and outside Panama will pay tax on the proportion of its income that arises within the country. The rate of income tax in Panama is 30% on chargeable income up to PAB 100,000 rising to 42% on income over PAB 500,000 for companies that are registered with the Official Registry of National Industry or that have government contracts.
Capital Gains Tax is levied on real estate at 30% after deductions. Transfer tax of real estate (not new homes) is 2% payable by the seller, which is credited against capital gains tax. Incentives introduced in 2004 to encourage development gave savings on a $200,000 home over 20 years of $69,250 – or about one-third of the purchase price of a high-quality home. But they were finally withdrawn on August 31, 2005, with existing projects needing to be completed within a year.
Residences with construction permits issued after September 1, 2005 benefit from the following exemptions:
• Value up to $100,000: 15 years
• Value from $100,000 to $250,000: 10 years
• Value over $250,000: 5 years
Land is not exempt and property tax would continue to be paid on it if its value is above $30,000.
These incentives were continued with some changes by 2008 legislation: improvements to real property authorized by construction permits issued after July 1, 2009, are exempt from real estate taxes for a period of 10 to 15 years.
Companies carrying on business in Panama (not Free Zone or offshore companies) need to pay an annual Commercial License Tax of 1% of the net worth of the business (min PAB 10, Max PAB 20,000). Certain rural and/or small businesses are exempt from tax. In addition to the national business license tax, municipalities levy similar taxes on businesses.
Banking
Doing business in Panama is convenient because Panama uses the U.S. dollar as its legal tender, the balboa (PAB – the Panamanian currency) being interchangeable with it. The banking environment draws the business and assets of many international corporations and provides security, confidentiality and privacy among others.
There is no Central Bank in Panama. The government offers three types of banking licenses, General licenses (permits trading in and outside the country), International/Restricted licenses (Offshore banking allowed to be carried out form an office in Panama) and Representation licenses ( issued to foreign banks allowing establishment of local offices).
There are as many as 100 banks functioning in Panama, including Banistno & Banistmo Mercantil, Panabank, Global Bank, Pan American and Capital Group that take much pride out of their share of banking investments.
Offshore Banking
Many international corporations choose Panama banking for various offshore options that are available. In choosing offshore, the corporation and employees of a respective international corporation receive some major economic and security-based benefits. It is one of the most tax free areas one can choose to bank, this, in addition to the privacy and security offered by Panama banking – offshore and not – draw many new customers and international corporations annually.
