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Found 5 results

  1. Panama has always positioned itself as an attractive destination for expatriates, businessmen, retirees and foreign investors. Forty percent of real estate assets in Panama above $140,000 are purchased by foreigners. Despite the pandemic we can see that the Panamanian real estate market is going through a boom of international buyers. Real estate buyers often forget that they will most likely sell the property at some point. Personal circumstances may change, and eventually, you want to sell. The purchase of a property should be well structured from the beginning to avoid headaches and bad surprises in the future: What will be the taxes to be paid when the property is sold? What legal figure is the most convenient to acquire the property? Selling a Panamanian Corporation: Asset Deal vs. Share Deal In the past it was very fashionable to invest and sell real estate in Panama by buying and transferring the shares of a corporation, thus maintaining the cadastral value low, so as not to increase it each time it passed from hand to hand (buyer/seller). When the Panamanian government discovered that this was a normal practice, it decided to regulate this type of transactions: Which means in order to transfer a property, the seller must pay approximately five percent (5%) in taxes and the same applies if you sell the shares of a corporation. Five percent (5%) taxes of the value of that share deal must be paid to the tax office. The only advantage of paying that tax for selling the shares, is that the cadastral value will not increase every time the property is sold over and over again, and therefor maintain annual property taxes low. In fact, selling a corporation represents in simple words, selling the shares with all the corporation’s assets included, changing the board of directors, changing the resident agent and paying the taxes to the DGI (tax office) through form 108. The only thing that cannot be modified in this method of purchase and sale are the subscribers, but that does not affect the interests of the new owner... since with the formal resignation of the subscribers, they will not have any right to claim in the future. But, How Do You Sell a Private Interest Foundation in Panama? If foundations are not made as instruments to negotiate, neither to carry out business activities in Panama, since they are made for estate planning and as a living will, then how do you sell them? The answer can be found in an article that modifies the Foundation Law of Panama (already created several years ago by the way), in fact within a Law that is not related to the subject of foundations. Based on this legal footing you can sell all the rights of your foundation, including all its assets, by means of a private and notarized contract, and by making all necessary changes within the foundation (foundation council, resident agent, by-laws, and even the name if you like). Of course, the technical - practical legal details of the whole transaction are too complicated and complex to explain in a blog without boring the reader with technical and legal terms, but in conclusion,… you can sell your foundation. And if the foundation owns a property, well, you do not have to pay transfer taxes to the tax office because what you are selling is not the property itself, it is the foundation with its rights and obligations.
  2. The owners of apartments or real estate that are subject to the Horizontal Property Regime in Panama, have the obligation to pay taxes, related to their individual real estate unit, as well as regarding the land on which the building is built. Here we are going to explain why you must pay taxes for your condominium under the Horizontal Property Regime, even if you have a tax exemption for the apartment. In Panama many years ago, most of the owners of an apartment (which we will now call PH) took into account that if the value of their apartment was less than USD$30,000, they did not have to pay real estate taxes for the land on which the building is built. But as a result of a law created in 2010 that modified the tax code in relation to real estate taxes, it is established that "the first $30,000 of this fee will not apply to the land of the properties subject to the horizontal property regime". In other words, the land where the building was constructed is taxable since it becomes common land, that is to say, the co-owner's land. The law does not say how to pay the taxes, and generally people forget to pay them and accumulate a debt with the tax office over the years. The Panamanian tax office distributes this tax among all the co-owners of the building and assigns the payment to each one of them in their individual account (according to the respective property number). In my professional opinion, and I agree with other professionals on this, as the land is a common good, that is to say it belongs to all the owners where the building is built, the tax should be paid in full and each owner should deliver his share with the monthly administration fee. But in practice this is not the case. The tax is not included in the common maintenance fees, which is why it is often forgotten. Nevertheless, each individual owner is responsible for paying his taxes and keeping up with his fiscal obligations. Now why is this happening? When a property is incorporated into the PH regime, two properties (fincas) are automatically created. The first property is the PH (the common property) with a different number and which is registered in the PH section of the Public Registry. This property has an initial value that is set by the developer that built the project. The other properties that are created, are all the apartments, one of them or several can be yours. This is called private property. The exempted improvements only correspond to each of the properties of the PH, i.e. the apartments, but this does not include the common property, i.e. the building constructed on that land. By law you will not be able to exonerate the real estate tax of that land. Therefore, if the value of the land is 1 million dollars, the tax to be paid is calculate based on this value at the rate of 1%. And this 1% is distributed among all the real estate units, i.e. all the apartments in the building. The 1% is paid in three installments per year: at the end of April, August and December. However, it is possible to pay in advance. When the exemption period of your apartment expires, you will pay for the value of the apartment plus the amount of the participation coefficient, that is to say, the 1% we have already mentioned. What if I have a "normal" property? How much do I pay? As of 2019, properties declared as family patrimony - principal residence (through a special procedure at the tax office, because nothing is automatic in Panama) must pay a real estate tax according to the value declared in the Public Registry, i.e.: Between USD$0 and USD$120,000 = exonerated. Between USD$120,001 and USD$700,000 = 0.5% of the value. Over USD$700,000 = 0.7% of the value. My property has not been declared a family patrimony, how much should I pay? From USD$0 to USD$30,000 = exonerated. From USD $30,001 to USD $250,000 = 0.6% of the value. From USD $250,001 and USD $500,000 = 0.8% of the value. Over USD $500,000 = 1.0% of the value. Banks became property tax withholding agents. The amendments to the Tax Code now obligates banks in Panama to help the tax office by withholding the respective tax for each apartment or property in general that has been acquired through a mortgage financing. With the exception of new homes which have an exception for up to three years, with the condition that you have never purchased a property before and that it is your first home. Property Exemptions in Panama: Why? The developers, or construction companies according to the tax office are recognized a type of exoneration to the constructions of those projects which construction permit was in force prior to 2018. After this date the developers must pay the respective tax from the legal birth of the PH property. The exonerations in Panama are created with the purpose of promoting the economic development of the country encouraging people, nationals or foreigners who want to do business in Panama and develop the country, and in return the Panamanian government grants them tax incentives. Therefore, farms dedicated to agricultural activities which cadastral value does not USD$350,000.00 are exonerated from taxes every 5 years while maintaining their activity.
  3. 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.
  4. When investing in a real estate in Panama, it is necessary to consider several factors and numbers in order to analyze if the purchase you want to make is profitable. This is why it is important to foreign investors to understand how the tax system works in Panama and what types of taxes must be paid when investing in real estate. There are three types of property taxes in Panama, which I will explain in detail below. First of all, Panama does not have what is known in Germany as “Grunderwerbsteuer" (real estate purchase tax). That is to say, the fiscal code in Panama does not contain a tax that must be paid for the acquisition of a plot or lot of land. When buying a property it is the seller who must pay the transfer taxes. Nevertheless it is customary that the buyer pays the registration fees of the Public Registry and the notary fees. What transfer taxes must be paid when selling a property? At the time of selling a property, the Panamanian government charges the seller the following taxes: 2% transfer tax calculated based on the cadastral (registered) value "or" the capital gains value (calculated by the system) "or" the selling price. The highest of these values is the one the government chooses as the calculation basis for charging the tax. And then 3% on the cadastral (registered) value "or" the selling price (whichever is higher) as capital gains tax. There are properties that pay annual taxes, others do not, some have exonerations, what does all this mean? In the past all properties whose value exceeded $30,000 were obligated to pay a progressive percentage of taxes on the cadastral value of the property (annually). However, there were different options to request an exoneration on these annual taxes for a maximum period of 20 years. This no longer exists today. But still the tax office respects the exemptions already granted, and for this reason you will see different offers in the real estate market with valid exemptions. Currently there is a new law where properties whose value is less than $120,000 do not pay taxes in Panama, as long as it is your primary residence. For properties with a cadastral value of $120,001 up to $250,000 the annual property tax rate is only 0.5%. Properties from $250,001 and above pay a rate of 0.7% (seven tenths of 1 percent). Now, if we are talking about horizontal property, that is to say, I have an apartment, what taxes do I pay? First of all, there are fixed expenses for the apartment that are calculated based on the registered square meters of construction, and from this measure the monthly maintenance fees that must be paid to the building’s administration is calculated. The maintenance fees must be paid on a monthly basis (you can also pay in advance if you wish) and never stop. The last reform of the law in 2020, made it very clear that for no reason it will be possible to stop paying the common maintenance fees since with these expenses the building exists and is maintained, that is to say as if it were a child's alimony. There is also a real estate tax that is divided in two, i.e. the tax on the apartment and then on the coefficient of participation of the land on which the building was constructed. It is important to mention that the payment of the (annual) property taxes is not included in the payment of the monthly maintenance fees. It is the responsibility of each co-owner to comply and pay their tax obligations for their apartment with the Panama tax office. What is a NIT? In order to have this information of how much you owe and if you are up to date in your tax obligations, it is advisable to process a user and password (called NIT) to have direct access to the electronic platform of the Panamanian tax office called "e-tax". This way you can check your current account statement, pay the corresponding taxes by credit card and even request a certificate of good standing, all of this can be done online. The NIT is also mandatory when selling your property in order to process the payment of transfer taxes and to obtain the documents requested by the notary for the closing of the sale. What if I sell the shares of my company ("share deal") instead of the title of my property ("asset deal")? Years ago the Panamanian government has regulated the sale of corporate shares in order to avoid the evasion of the transfer tax when selling a property. Now there is also a tax that must be paid if you have a corporation and this corporation owns a property and you sell the shares of your corporation (as a package). As the owner of the shares the seller pays a tax of 5% of the sales value, but the payment must be made on his behalf, by the buyer and both will have the legal responsibility before the Panamanian tax office. In the past the sale of corporate shares was a very popular strategy used to optimize the transfer taxes when selling a property, however each case is unique and individual and requires prior analysis by the lawyer. We will talk about this topic in the next blog, stay tuned!
  5. I definitely qualify under the "no property rule,, but does anyone know the process to get on that system? Thanks.
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