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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?
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!
On March 14th, 2018, in a matter of minutes, the public announcement regarding the closing down of the law firm, which played a leading role in the well-known "Panama Papers", is being published worldwide. The law firm Mossack Fonseca & Co., Bufete MF & Co. or Grupo Mossack & Fonseca has closed its activities on the 30th of April, 2018, in all of its branch offices around the world, including its head quarter in Panama City. In Panama, the "offshore" incorporation and financial business sector is an important pillar for the national economy, and sustains almost 50% of the service sector. What are the consequences for the affected clients? Change of Resident Agent According to Article No. 2 of Law No. 32 of February 26th, 1927 all corporate bodies in Panama must have, mandatorily, a registered agent or resident agent in Panama; which can be a law firm or a practicing lawyer that represents the corporate body in Panama. If the corporation is left without resident agent (due to the resignation thereof), it will only have a period of 90 days to appoint and register a new resident agent in the Mercantile Section of the Public Registry of Panama. Otherwise, the Panamanian government will proceed to fine the affected corporation and will inactivate its status through official order. Inactive Corporations In September 2017, by means of the Resolution No. 201-5612, the process for the inactivation of corporations due to arrearage in payment of the mandatory annual franchise tax for more than three (3) consecutive years has been approved. In the past, after ten (10) years of not paying the annual franchise tax, the affected corporations were dissolved by official order. With the change of this legal base, thousands of corporations in Panama are currently "inactivated" by the tax collector office (DGI for its acronym in Spanish), which also affects their status in the Mercantile Section of the Public Registry, often without knowledge of the owners (foreign shareholders) of said corporations. For the reactivation of an inactivated corporation, a fine of one thousand US Dollars (USD$1,000.00) must be paid to the competent authority (additionally to the payment of the pending franchise tax plus interests), and the reinstatement of the corporation must be requested formally at the Panamanian tax collector office. Later on, the tax collector office must inform the Public Registry of the re-activation of the corporation, which will then reset the original status. Illegal Use of "Offshore" Corporations The incorporation of an "offshore" corporation does not constitute an illegality in itself, since the crime depends on the purposes for which it was created. Such as defrauding the treasury, money laundry, drug trafficking or other criminal intentions being the leading objective of the "offshore" corporation, where the main characters involved prefer to hide in the shadows. Although an "offshore" corporation offers greater autonomy to manage a business, it does not grant the right to commit crimes. It is for that reason that the Panamanian government has established certain transparency laws, binding for financial and non-financial individuals, including lawyers and accountants, obligating these professionals to report any suspicious activity or any potential tax evasion to the competent authority. Transparency in Legal Proceedings It is for that reason, that each case must be considered individually, in order to assure that the objective of the "offshore" corporation complies with the established rules and regulations in order to guarantee its ethical and legal operation at all time. The creation of an "offshore" corporate body may help to reduce its tax burden in a meaningful manner. But this does not mean that the tax laws in the country of origin may be or can be fully avoided. Trying to hide money from the tax system in the country of origin is deemed as an unlawful use of an "offshore" corporation. Elimination of the "Offshore" Type Corporation Through Resolution No. 201-1254 issued by the tax collector office of Panama (DGI) and published in the Official Gazette on the 9th of March 2018, the categorization of corporations has been restructured. From now on Panamanian corporations will be categorized by the fact that their income derivates from a Panamanian source, or not, with the purpose of establishing their tax obligations in Panama and abroad. Corporations that derivate their income from a Panamanian source (as low as its percentage may be), will be determined as "type A", and are obligated to file an annual income tax return (ISR for its acronym in Spanish) or an Income Affidavit with the Panamanian tax office. Those corporations that are only incorporated for the purpose of ownership of a certain asset or real estate property ("holding"), that do not conduct any business, nor derivate any income from a Panamanian source, or if their income is derived 100% from a foreign source ("offshore"), are considered "type B", and therefore, are not obligated to file an annual income tax return with the Panamanian authorities nor declare their income, since these corporations are currently tax-exempted. The "E-tax" System and Income Tax Return in Panama It is important to mention that those corporations that did not declare the origin of their income at the time of their registration, must do it now, by updating their information in the "e-tax" system, in order to avoid that the tax collector office in Panama will fine them for not submitting the annual income tax return on time. Gomez Tomiczek International Group