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Before starting any business, apart from the study and analysis of the market, profitability and competition, you should investigate the legal requirements in order to execute your entrepreneurial idea. Certain economic activities require a special commercial license. Although in Panama there are not as many restrictions as in other countries when it comes to starting your own business, there are certain commercial activities that are exclusively reserved for nationals. This limitation is based on Article 20 of the Constitution of the Republic of Panama, which establishes that Panamanians and foreigners are equal before the law, but for reasons of labor, national economy, morality, health, public safety and other conditions, the exercise of certain activities may be denied to foreigners in general. Which activities are reserved for nationals? Retail in general is reserved for Panamanians. That is to say, the direct sale of products to the Consumer (B2C). But it is possible to sell wholesale products (B2B) to distributors, supermarkets or other stores that sell directly to the customer. It is also possible to import and export products or merchandise. And, there are certain exceptions when it comes to agricultural products that you produce yourself on your own your farm and then sell them (example farmer's market). The so-called "liberal professions" in Panama require a special permit and can only be performed by Panamanians by birth or foreigners with a letter of naturalization. These include the following professional branches: Nursing, Barbering and cosmetology (there are exceptions for foreigners married to Panamanian nationals), Dentistry, Engineering (Civil, Chemical and Forestry are not allowed, the rest are), Architecture (there are exceptions for foreigners married to nationals), Agricultural Sciences, Pharmacy, Chiropractors, Nutrition, Medicine, Psychology, Medical Assistants, Accountancy, Journalism, Laboratorians, Public Relations, Speech Therapists, Therapists and the like, Economics, Social Workers, Veterinary Medicine, Physiotherapy, Medical Radiology, Law, Dental Assistants, Sociology, Chemistry, Sociology, Chemistry, Education in the following fields: History, Geography and Civics. (The rest of the fields are allowed). If I studied a career in medicine or nursing, can I practice it directly in Panama as a foreigner? The answer is no. Unless you are naturalized and your degree is recognized in Panama, you cannot. But what you can do is to incorporate a company in Panama (for example, a private clinic or an agency offering nursing services) and be the owner of that company and hiring licensed Panamanian employees to perform the service under your supervision. For the activities of engineering, architecture, insurance, real estate companies, certain tourism companies (such as travel agencies or tour operators) among others, there is a special rule that says that the president and legal representative of the company must be the person who holds the license to exercise that economic activity. In that case, it is possible to hire a person with said license, but it is the company that provides the service. The same company of which you are the owner. You would be the one who manages and administrates the company and provides instructions based on your experience and knowledge in that field. But it will be your company together with your collaborators, that will execute the work and carry out the commercial activity. You may not be able to validate your architectural degree in Panama (or it may be a little difficult to do so), but it is possible for you to have your own construction company. Which activities are allowed for foreigners in Panama? Services and wholesale activities are accessible to foreigners. This means that you can open a hostel or B&B, you can open a restaurant, import and/or export products, work remotely offering (digital) services to customers anywhere in the world, invest in real estate and live on rent and much more. In fact we have clients all over Panama who operate touristic and/or gastronomic companies, who are owners of hostels, hotels and restaurants, who produce strawberries, tofu or grow gourmet coffee, who are involved in construction, real estate projects or real estate investment, who offer maritime services, who provide IT services to clients in Germany, logistics services, who sell digital products or software, real estate agents and property managers, who work remotely as freelancers for clients in Europe and/or the United States, who buy nails in Taiwan and sell them to European companies, and much more. As corporate lawyer I am passionate about entrepreneurship and new business set-ups, and there are endless opportunities and entrepreneurial ideas to discover. Tell me about your experience. What is your business idea?
What should I do, sell the shares of the corporation I own or just transfer the title of my property to the buyer? In this week’s blog I explain you two very common situations which only apply to Panamanian corporations (SA - sociedad anónima) since private interest foundations have no legal framework to "sell" a foundation because they are originally used as a living will, for estate planning purposes and therefor the transfer of a foundation is not regulated (from a tax point of view), but this would be a topic for another blog. If I wish to sell my property, that is to say, transfer the title of ownership to the buyer, the taxes that the owner must pay to the tax office must be calculated, that is to say, the Real Estate Transfer Tax ("ITBI") which is 2% that must be paid based on the higher value of either the sale price or the updated cadastral value (VCA). But this value will be different from the one calculated by you, because for the Panamanian tax office, the property has as increase in value over the years (regardless of the global economic situation or crisis). Therefore, the period of time the property has been kept by you without selling it, will influence the calculation of the VCA. That means that the VCA calculated by the tax office might differ from the original value of the property. A property that costs $25,000 dollars, and being kept in your hands during 15 years increases its value. When you sell this very same property, the tax office will take into account this increase in value (the system calculates it automatically and you cannot modify it) using a coefficient of 0.75 for the full 15 years. That is to say that for the tax office that property had an increase of the VCA of $18,750.00 dollars. If you add this increase in value to the $25,000.00 dollars that you have in your deed, then your property is now worth: $43,750.00 dollars (for the tax office, regardless of the market value). Now, this tax for this specific example will be about $875.00 dollars, not much compared to the price, and it is still in your best interest to sell the property and not the shares and I will explain why. We continue with the same example of only 2% but with another sale value: If the sale value of the property is $352,500.00 dollars and under the same example, the property was kept for 15 years in your hands gaining value as a long term investment, the tax office is going to perform the same calculation with a coefficient for the land (0.75) and another for the improvements, the house, (0.5) because the value between land and improvements (house), results in the value of the property; In this example it turns out that the VCA is now $529,375.00 dollars. Even if you sell your property for a lower price, the government will base its calculations on the higher value in order to apply the 2% tax. This means you will have to pay $10,587.50 dollars and on top of that, the cadastral value of the property will increase (if applicable). In this particular case, it is recommended to sell the shares of the corporation that owns the property, because there is a capital gains tax on the sale of securities (shares of the corporation) which is 5%. For territoriality purposes, it is considered as Panamanian source income , an income produced by capital or securities economically invested in the national territory, whether its sale has taken place inside or outside the Republic of Panama. Therefore, if you sell the shares instead of the property, you will not increase the official registered value of the property (remember that annual property taxes are calculated based on this value). You pay your transfer taxes for the share deal and sell the property without further charges. The taxes for a share deal must be withheld and remitted by the buyer to the Panamanian tax office within 10 days after the closing. Taxpayers who commit tax fraud, and do not pay this tax to the national treasury, will be sanctioned with a fine of not less than 5 times nor more than 10 times the amount defrauded. The other tax to be paid is the Capital Gains Tax, which is 3% on the official registered price and the gain (if any) on the sale price. It is said "updated" because if you built "improvements" i.e. a house on the property, the improvements incorporated to the real estate must have been declared and registered in the Public Registry of Panama, otherwise legally they do not exist. These taxes were created to tax transfers of real estate, personal property and securities, made by individuals and legal entities. Each case is unique and special and we cannot guarantee that this example is accurate for your needs, but it does provide you necessary information to understand a little more about how buying and selling in Panama works so you can make an informed decision when selling your property or investing in real estate in Panama.
Foundations are a fantastic tool for estate planning and to structure and administrate your assets, but is a foundation really necessary? The answer to that question is not that simple, as there is no golden rule that is applicable to everyone and everybody. It depends on the type of assets you own and their value. If you purchase titled real estate in Panama you practically have three options: 1. Register the property in your personal name, 2. Register the property in the name of a corporation, 3. Register the property in the name of a foundation. Due to Panamanian inheritance law and its legal procedures I will always recommend my clients to avoid option number 1. Why should I avoid buying real estate in Panama in my personal name? When you own real estate in Panama in your personal name and you have a will, or otherwise you do not have a will, after your demise the procedure for your heirs to claim their inheritance will always be the same in Panama: 1. Your heirs must hire a Panamanian lawyer 2. The lawyer must file a lawsuit of succession (with will/ without will) with the court in Panama. 3. The process of the lawsuit will take from one (1) to two (2) years to be completed (given there are no complications in the process). 4. Meanwhile, you heirs cannot take possession of the assets until the Judge passes judgment in their favor. In other words, it is the Judge who has the order and the last word. 5. According to the minimum fee scheduled established by the Bar Association in Panama the lawyer handling the lawsuit has the legal right to charge 10% to 25% of the total commercial value of the estate as legal fees. Is it better to buy real estate in the name of a corporation of foundation? If you invest in real estate in Panama you should always register the title either in the name of a corporation or foundation in Panama. But using a foundation might not always be the best choice. Why? It depends on the type of real estate and the usage you want to give the property. The character and objective of a foundation in Panama is to hold and protect assets, while a corporation is per se created to execute commercial activities. Foundations in Panama are prohibited to execute regular business activities. So, if you plan to purchase real estate in Panama as a private retirement home and keep the asset as a long-term investment, a foundation sounds like a solid option. But if you want to invest in real estate as a short-term investment in order to rent, sell, and make it a profitable business , a corporation might suit you better. In fact if the property already has a very low cadastral value or a high cadastral value, it might be smart to use a corporation. Are there examples where a foundation is not necessary at all? Yes, I recommend my clients to never ever register a car title in the name of a foundation. Also, if you have a personal (savings) bank account, depending on your bank you can nominate a beneficiary at the bank. After your demise, your designated beneficiary(ies) can access the funds in the bank account (the procedure varies from bank to bank, so comparing different options is recommended). And if you are a permanent renter in Panama and only own a average bank account and a car, using a foundation or even a corporation to hold those assets is not worth it. Stay safe and healthy!
Need legal services? I offer efficiency, quality, honesty and have experience in: Creation of Panamanian companies/Private Interest Foundation and foundations or nonprofit associations. Creation and post incorporation work of companies incorporated in Samoa, Bahamas, BVI, B. Anguilla, Nevis, USA among others. Purchase/sale of property and property titling or right of possession issues in our country. Immigration law (cases of obtainment of friendly nations visas, retirement visas, work permits, etc). Post-mortem arrangements through local funeral home for foreigners which relatives passed away in waters within Panamanian territory. Opening of multi-currency bank account with international bank. Please contact me at email address: email@example.com or by whatsapp at telephone (+507) 6738-6253.