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On December 3rd, 2020 the President of Panama announced the creation of a new type of legal entity called “Startup Company" in order to increase entrepreneurship in Panama, facilitating the formalization of companies and at the same time providing tax incentives for new startups.

How can I create a new startup company?

Two to five natural persons, of any nationality, may form a startup company in Panama. The subscribers of the articles of incorporation will be at the same time the partners and therefore the final beneficiaries of the company. Unlike other company types in Panama, this information will be publicly available. But in order to avoid the abuse of the benefits and incentives for this type of company, no natural person who was previously part of a startup company will be able to belong to another startup company.

The new startup companies are similar to the limited liability companies in Spain. The economic liability of each partner for the obligations contracted by the company will be limited to the amount of their participation made or promised. The minimum capital of the company is US$500 and can be contributed by the partners in money, goods, or services.

It is possible to transform an already existing company (as long as it has not been operating for more than three years) into a startup company, and thus take advantage of the benefits and incentives of this new figure.

Administration of the startup company

As with Spanish limited companies, startup companies will have at least one administrator. The administrator must always be one of the partners and can celebrate or carry out all the activities and contracts related to the operations of the company.

An interesting detail is that the new startup companies do not require a resident agent. All companies and private interest foundations in Panama must have a registered resident agent (a licensed attorney or law firm in the Republic of Panama that acts as a point of contact between the company and the national authorities). In the case of the new startup companies, the appointment of a resident agent is optional. If the startup company does not have a resident agent, the administrator must be assigned as the legal representative and contact person for the authorities. In addition, the domicile and physical address where the offices of the startup company will be located must be registered.

What are the advantages and incentives for the new startup companies?

Startup companies will be exempt from paying income tax during the first two (2) years of their operation. In addition, they do not have to pay the annual franchise tax and will be exempt from using a cash register (but they must issue electronic invoices and manage an electronic invoicing system). Additionally, the startup companies will be able to apply for a discount for up to 50% on the import taxes of the raw materials required by the company for the creation of its products, services, or innovative processes.

What kind of economic activity can be carried out with a startup company?

Startup companies may execute any legal economic activity, but may only operate within the Republic of Panama. In addition, startup companies must not be used to carry out one or more of the following activities:

  1. Companies operating in one of Panama's free trade zones
  2. Casinos, gaming, gambling, and similar activities
  3. Developer companies, real estate agents, or brokers
  4. Construction companies and contractors
  5. Security transport companies
  6. Pawnshops
  7. Commercialization of precious metals or gems
  8. Buying and selling new and used cars
  9. Legal and/or accounting services (lawyers, accountants)
  10. Startup companies must not be listed on the stock exchange.

There is a limit of one million US dollars gross income per fiscal year in order to qualify for the tax benefits of the startup companies. If the company's income exceeds this amount, it must transform into another type of corporate body in order to continue operating.

Curious? For more information, contact us for a free video consultation!

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