SETTING UP BUSINESS IN PANAMA 2023

General Aspects

Panama, a country in Central America on the Isthmus of Panama, the landbridge between the Caribbean Sea and the Pacific Ocean that connects North and South America. Panama is bordered by Colombia and Costa Rica. The country is best known for the Panama Canal, a man-made waterway, opened in 1914. The current population of Panama is 4,201,688, based on the latest United Nations estimates. Panama’s economy is based on the operations of the Panama Canal, tourism, banking and financial services, the Colon Free Zone (which is the second largest  free trade zone in the world after Hong Kong), and ship registration (obtained substantial income through the pipeline and licensing Panamanian flagged ships worldwide). There are significant but untapped

Legal Forms of Business Entities

copper deposits of bauxite, phosphates and  minimally carbon have been exploited, as well as other various construction materials such as stone and gravel. Oil reserves have  been found in the Pacific and the Atlantic.

The Panamanian government has promoted economic growth over the past decade in large part through open market policies and by supporting free trade. Moreover, the government actively encourages foreign direct investment through tax regulation and by guaranteeing ease of business.

Legal form Feature Remarks

Corporation (Sociedad Anónima)

Natural persons, Civil Society, and corporations can be shareholders for a Corporation. The highest authority of the corporation is the shareholders assembly.

An Administrator or a board of directors is in charge to manage the corporation. Possibility to increase or decrease his Capital Stock; abbreviation S.A.

The process of setting up a company takes 3 to 6 business days

Limited Liability Company (Sociedad de Responsabilidad Limitada)

Civil Law Association (Asociación Civil)

Natural persons, Civil Society, and corporations can be shareholders for a Limited Liability Company.

The highest authority of the Limited Liability Company is the shareholders assembly. An Administrator or a board of directors is in charge to manage the Limited Liability Company. Possibility to increase or decrease his Capital Stock; abbreviation SRL.

Predominantly economic character, but that does not constitute a commercial speculation, different kind of partners, they can be industrial partners and founders’ partners. The administrator partners are liable without limitation, as well as with his private assets. The liability of the other partners is limited to their respective share of the partnership capital.

The social capital must be between $ 2,000 and $ 5,000.

Foreign Corporations (Empresas Offshore o extranjeras)

Foreign Corporations can establish branches or agencies in Panama that claim start operations within our territory.

Under Panamanian law, offshore companies are exempt from the payment of income tax on capital interests in transactions involving the sale of securities (stocks, bonds, commodities, investment funds, currencies, etc.).

Is optional at least the capital of the A.C. has constituted by real estates, in that case is necessarily must be registered at the public registry.

Corporations incorporated abroad must be registered in the Commercial Registry of Panama. They must present a certificate of incorporation authenticated by the Consul of Panama or apostille, a notarized deed of the agreement or act of incorporation, together with a copy of the last financial statement and certification of the capital to be used in Panama.

Private Interest Foundation (Fundaciones de interés privado)

Limited Liability Entrepreneurship Companies (Sociedades de Emprendimiento de Responsabilidad Limitada)

Entity legally constituted in order to administer a heritage and that meets the objectives for which it was created for the benefit of a family or general group of individuals. Once the foundation is created and duly registered, it acquires independent legal personality, but unlike a Corporate Company, it has no partners, participants or shareholders.

Created by Law No. 186 of 2020.

Can only be constituted by one up to five individuals and said individuals cannot be part of another Limited Liability Entrepreneurship Company.

Are exempted from corporate income tax for two years and import duties can be reduced to up to 50%.

Commercial Register Corporations of all legal forms must be entered in the commercial public register. The registration procedure is established in accordance with the Commercial Code and the regulations specials that govern the subject. The Incorporation is a simple process that can take on average no more than four days.

Notice of Operations (Aviso de Operaciones) & RUC ((Tax ID) Registro Unico de Contribuyente)

The notice of operations is a commercial license issued by the Panamanian authorities and necessary to develop commercial activities within Panamanian territory. Taxpayers who initiate commercial, industrial, independent or similar activities, must make the registration of the tax ID “RUC” before starting their activities.

Notice of operations is automatic and mandatory. Municipal operation license and RUC is necessary.

Bank Account To open an individual bank account, corporations needs his incorporation deed and bylaws, registered at the tax authority. For individual person is necessary a valid passport, temporary resident visa with lucrative activities and a proof of address.

Notice of operations is automatic and mandatory. Municipal operation license and RUC is necessary.

Organizational Questions

Topic Feature

Visa Article 67 of Decree Law No. 3 of February 22, 2008 recently created the figure of Temporary Residency for employment reasons and seven categories are defined. This Visa may be renewed annually and up to a total of six (6) years. Citizens of 22 countries could opt to become permanent residents very quickly. This “fast track” permanent residence visa in Panama became known as the Friendly Countries visa.

Labour The contracted personnel must be registered in the Ministry of Labor (Mitradel). Employers can terminate the employment relationship with the employee easily in the first 2 years. After these two years, employees are backed by the law.

Panamanian laws establish that only 10% of the work force of a company can be foreign or 15% technical.

Therefore, to hire a foreign worker, you require a permit issued by the Ministry of Labor. The Law establishes that 90% of employees must be Panamanian citizens or foreign citizens married to a Panamanian or foreigners who have residence in the country for 10 years or more.

Remarks

Foreigners in Panama are not allowed to establish a retail business. Additionally, is not be allowed to practice in some areas such as: Medicine, Veterinary Medicine, Lawyers, Architects, Engineers, among others.

The minimum wage varies according to the time the employee has in the company. The worker has the right to enjoy 30 vacation days each year, plus 11 public holidays. In addition you also have the right to receive payment of a 30-day bonus that is known as the Thirteenth-third month. This bonus is paid in the two weeks of April, August and December of each year.

In Panama, the minimum wage hourly rates are divided into two regions (I and II) and each one covers different locations throughout the country.

Executive Decree No. 74, December 31st, 2021, Which sets the New Minimum Wage Rates Throughout the National Territory.

Labour

Colon Free Zone

Permits for Foreign Personnel Hired by Businesses in the Colon Free Zone Applicable only to foreigners that have been hired to lend functions in executive, confidence and management positions, or as specialized technicians, in businesses authorized to operate in the Colon Free Zone. To apply for this permit, the monthly salary must not be inferior to US$2,000.

Employment

Topic Feature

Social Security (Caja del Seguro Social)

Since the enactment of the Social Security Law (Law No. 51 of 2005), it is mandatory to the employer the affiliation of its workers to the scheme of the Social Security Fund. The current contribution of the employee is 9.75% and 12.25% for the employer. In addition to the social security contribution, the contribution for risks is mandatory professionals, which fluctuates from 0.56% to 5.67% of the salaries paid.

Remarks

The rates to pay for Social Security in Panama are based on the wages that workers receive, as shown below: Social Security of employees: 7.25%; Employer Social Security: 10.75%; Employee Educational Security: 1.25%; Educational Security of the employer: 1.50%; Safety for Occupational Risks of the employee: 2.10%. (This varies depending on the business activity). Tax on the income of employees: To be retained by the employer and paid to the Government according to the table of tax on wages.

Working days

Most companies work from Monday to Saturday.

The maximum daytime working time is eight hours, and the corresponding workweek is forty-eight hours.

Taxation

Topic Feature

Income Tax (Impuesto sobre la Renta)

The tax rate is 25% for all corporations (called to traditional method). However, for companies in which the State owns more than 40% of the shares, the tax is 30%.

The tax base (amount to which the tax rate will apply) for Corporations whose tax base or annual revenue exceeds B /.1.5 million will be the largest of one of the following:

• The net taxable income calculated by the traditional method established in the Tax Code or

• The net taxable income resulting from applying to the total of taxable income the four points sixty-seven percent (4.67%). (CAIR).

Work in seven hours at night and in seven and a half hours of the mixed working day will be remunerated as eight hours of daytime work, for the purposes of calculating the legal or conventional minimum wage.

Remarks

Corporations could request to the tax authorities “DGI” the possibility to choice the method to calculate its base revenue and the DGI has a period of six months after submitting to decide on the petition, otherwise, the request will be considered as granted.

Annual single rate of companies (Tasa única annual de sociedades)

The annual single rate of companies must be paid by all companies on an annual basis. The deadline for payment depends on the date of incorporation of the company. If the company constituted at any date during the first six months of the year, the expiration date for payment will be July 15 of each year. If it is incorporated in the last six months, the date of expiration will be on January 15 of each year. Non-profit organizations, cooperatives and civil societies are not subject to the payment of annual single rate.

Dividend tax (Impuesto de Dividendos)

The profits and profits of the company are taxed, in addition to the income tax, with the dividend tax of 10%. The rate is reduced to 5% in the cases of companies that operate in Free Zones, if the income subject to dividends is considered exempt or from a foreign source.

Dividend tax provides for an annual presumed distribution of 40% of profits after the income tax, and in case of not being executed, it requires the payment of tax according to the equivalent of the minimum distribution, which will be considered as Tax Complementary, at a rate of 4% (10% over 40% of the distribution).

Movable goods transfer and provision of services tax (VAT)

(ITBMS)

The Panamanian Value Added Tax (VAT) rate is 7% effective from June 30th 2010, and Alcoholic beverages are taxed at 10%. Tobacco and its derivative products are taxed with 15%.

Exports are not taxed and the ITBMS paid to generate exports can be reimbursed.

The sale of goods such as medicines, food and certain products are not taxed.

No withholding applies to suppliers of goods, services, businesses or individuals affiliated to entities managing credit or debit cards, if they perform exempt activities of ITBMS.

Companies under special tax regimes that are considered as ITBMS exempt subjects are not allowed to be withholding agents.

Since 2016, Tax authorities create the figure of Withholding Agents. A) State agencies, decentralized entities, public enterprises, municipalities and other public sector entities not exempt, making payments or managing State funds (regardless of the amount of the compensation).

Withholding amount: fifty percent (50%) of VAT included in the invoice or equivalent document. In case of professional services, the withholding will be applied to the one hundred percent (100%) of VAT included in the invoice or equivalent document.

International Taxation

The Republic of Panama, through the reform carried out in 2012, established the rules for the application of double taxation for treaties signed by the Republic of Panama. This reform included the adoption of the terms tax resident, permanent establishment, certificate of Tax Residence and application of benefits of Double Taxation Treaties.

Up to date, Panama has a network of double taxation treaties covering 16 treaties with the following countries: Mexico, Barbados, Qatar, Spain, Luxembourg, Netherlands, Singapore, France, Italy, Korea, Portugal, Ireland, Czech Republic, United Arab Emirates, United Kingdom and Israel. In addition to these countries, Panama has negotiated Information Exchange Agreements with the United States, Iceland, Canada, Finland, Sweden, Greenland, Faroe Islands and Norway. The use of benefits contained in the Double Taxation Treaties need a previous notification of the use of the treaty benefits submitted at the Tax Authority, which include among other documents the tax residency certificate. The Tax Authority reserves the right to accept the request or perform additional researches in the process of acceptance of the use of the benefits.

International taxation (continue) US Foreign Account Tax Compliance Act (FATCA)

Panama signed the Model 1 Intergovernmental Agreement (IGA) for FATCA purposes with the US Treasury in order for Panamanian Banks to subscribe to the terms of FATCA. For this purpose, was created Law 51 of 2016 and Executive Decree 124 of 2017 that complement the IGA and establish the procedures and deadlines for the financial institutions obliged to perform the due diligence and send the reports to the Tax Authority.

Since 2016, Panama was committed to automatically exchange information starting 2018, according to the Common Reporting Standards (CRS). Same as the IGA-FATCA, the CRS also includes the automatic information exchange of financial information for tax purposes, based on the agreements signed by the Tax Authority (DGI) and the CMs.

Tax Incentives

To execute this compromise, Panama started an ambitious agenda of negotiations with the CMs, signing five agreements and concluding other three. Also, there are eight open negotiations and fifteen programmed. The objective is to sign at least thirty agreements for the automatic exchange of information starting 2018

In Panama there is a wide variety of tax incentives, for example, industrial companies that dedicate all of their production to exports enjoy tax exemptions for introduction taxes, contributions, levies and customs duties; Other sectors that enjoy significant tax incentives are export processing zones, the Colon Free Zone.

Topic Feature Remarks

Tax Incentives (Incentivos fiscales)

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Inward Investment

Investment in industries, agroindustry, marine resources transformation, industries dedicated to extracting and transforming raw agricultural and forestry materials may get industrial promotion certificates which allow crediting the investment against taxes such as income tax, but limitation of depreciation of referred assets.

Accelerated depreciation

According to tax law, a taxpayer can apply accelerated depreciation depending on the use of the assets without any authorization from the Tax Authorities but will be limited to minimum useful life period described by law.

In tourism sector, in order to attract investors to this activity, income tax is exempted for a period of 15 years; property tax for a period of 20 years; import tax for materials and furniture; tax on the use of the pier and airport built by the investing company for 20 years, and income tax as a result of the interests that creditors may generate in tourist investment operations, to mention a few tax incentives. In order to promote the export of nontraditional Panamanian products, there are Tax Credit Certificates (CAT).

Tax Incentives

(Incentivos fiscales)

Continuation of page 6

Tourism, industry and agriculture allowances

Tourism development: The Law for Tourism Development grants several incentives and tax benefits, such as exemption from import duties on certain tourism service-related goods for companies dedicated to tourism, but only for those corporations with a signed tourism agreement with the Tourism Authority.

Income related to forestry activities is totally exempt from income tax if the final disposition of the plantations derived from property are registered in the Forestry Registry of the Environmental National Authority from 2017 within the next 20 years.

Special Tax Regimens

The investment regimes have been established as models for the establishment of companies with the objective of promoting productive activities in different geographical areas, the generation of new jobs and the economic growth of the country.

Law No. 122 and Law N° 82 of 2019 including amendments, define Rules for Panamanian Tourism Promotion Incentives extended the incentive period until the end of 2025.

Through the Executive Decree No. 274 of 2020, a tourism promotion incentive will be granted to the cruise lines that establish their base port in one of the ports of the Republic of Panama, relative to assuming the payment of the toll corresponding to one (1) transit through the Panama Canal. Base port is defined as the port of embarkation and disembarkation of passengers, where the cruise begins or ends. This incentive will be payable as a refund to the cruise line, according to the amount billed by the Panama Canal Authority corresponding to one (1) transit through the Canal.

Special Tax Regimens

The investment regimes have been established as models for the establishment of companies with the objective of promoting productive activities in different geographical areas, the generation of new jobs and the economic growth of the country. Although these regimes seem to compete with each other, they complement each other because they are oriented to different sectors and activities

Topic Feature

Multinational corporate headquarters) Empresas SEM)

Corporations with SEM License will pay ISR at the rate of 5% on the net taxable income applicable to the services provided. They will submit an annual income sworn statement and may consider as deductible expenses: the remunerations of all employees including those exempt from taxes in their remuneration in accordance with Article 26 of the SEM Law.

Remarks

1. The taxpayer of Panama who benefits from the service of a SEM company must retain 5% of the amount to be remitted to the SEM company whenever that service affects the production or conservation of its source of income and has considered it a deductible expense. the beneficiary of the service.

2. As of fiscal year 2019, persons who carry out transactions with related parties that are SEM companies are subject to the transfer pricing regime.

3. The SEM companies are not subject to the Operation Notice Tax since they do not have the obligation to have a Notice of Operation.

4. The gain or loss in the transfer of shares issued by the SEM company are subject to the capital gains regime, but at a fixed rate of 2% where the buyer will have the obligation to retain the seller a sum equivalent to 1% of the total value of the alienation.

Special Regime for Manufacturing Service Companies (EMMA)

Panama has enacted  Law 159 of August 31, 2020, which created a new special regime for attracting investment by promoting the establishment and operation of multinational enterprises for the provision of manufacture-related services (“EMMA”, as per its acronym in Spanish).

Benefits for EMMA companies include:

a reduced income tax rate of 5% on net taxable income from the provision of manufacturing services;

a reduced capital gains tax rate of 2% on the sale of EMMA company shares; an exemption from VAT (ITBMS) for services provided to subsidiaries that do not generate taxable income in Panama; an exemption from VAT (ITBMS) on the purchase and import of goods and services; an exemption from all types of import duties, taxes, and fees on products, goods, and equipment required for the execution of services; and an exemption from dividends tax, and complementary tax, and business license tax.

UP BUSINESS IN

The Colon Free Zone consists of a port and transit system designed for export, re-export, import, manufacturing, storage and refining and processing of goods and other activities related to free zones.

Only 5% dividend tax.

Zero taxes on income from export activities.

Call Centers Law No. 52 of 2018 provides fiscal, migratory and laboral zone benefits to call centers established in Panama for commercial operations.

Exemption from direct and indirect taxes, fees, contributions, and charges, (with the exception of those established in this Law and the fees charged the ASEP) relating to the services covered by the concession.

Exemption from income tax for the provided services (subject to the compliance of certain conditions). A 5% dividend tax rate decreased to a 2% complementary tax in case there is no distribution of profits.

FFocuses mainly on international transport and logistics services activities, as well as specialized manufacturing and high technology.

Companies are required to have a minimum of 60% of imported products to be exported annually and to hire five Panamanians.

City

Promotes activities and management of a scientific and academic nature, as well as human and cultural development. The Free Zones Law allows for the development of special zones that enjoy tax, labour and migration benefits, and encourage production mainly for export and the generation of new jobs.

The application for a concession to provide call center services must be delivered to and approved by the Public Services National Authority (ASEP, by its Spanish acronym). In addition to the following incentives, special labor provisions are more flexible than those for other types of businesses that operate in the rest of the Panamanian territory.

Temporal Resident Permit - foreign personnel hired in trust, executive, expert and/or technical positions will have the right to request such permit. Valid for the duration of the work contract.

Special Tax Benefits: Corporations registered in the Area are exempt from indirect taxes. They are applicable to all companies, except those that are identified in Law 41 of 2004, modified by Laws 31 and 69 of 2009, as Specific Business Activities.

It is an international community formed by academic organizations, technology companies and non-governmental organizations. The complex is run by the City of Knowledge Foundation, a private non-profit organization created in 1995. City of Knowledge emerges as a knowledge platform focused on enhancing the innovative and competitive capabilities of the users who are in the conglomerate. Likewise, it facilitates access to a series of benefits and services focused on the needs of users.

The Free Trade Zone of Barú is established under the Special Tax and Customs Regime of the Tourist Free Zone and Multimodal Logistic Support in accordance with Law No.19 of 2001. It is a commercial, tourist, industrial logistics and services area, which seeks the growth of the Barú region, province of Chiriqui. Its privileged position, being on the border of Panama with Costa Rica, provides commercial benefits for the entire Central American region.

The companies established in the Zona Franca de Barú will enjoy the additional fiscal incentives to which they may be entitled, in accordance with the laws in force. All merchandise and other articles or effects of commerce that enter the free trade areas owned or operated by the Barú Free Trade Zone shall be exempt, at all times, from the payment of taxes, tax, national or any other kind of taxes, both for its introduction, in these areas, as for its permanence within them, and other contributions.

The Colón Free Zone (Zona Libre de Colón)

The Panama Pacifico Area (Area de Panamá Pacífico)

of Knowledge (Ciudad del Saber)

The Tourist and Multimodal Logistic Support Zone of Barú

(Zona Franca de Barú)

This guide has been prepared by SMA SERVICIOS, an independent member of Antea

SMA SERVICIOS

Calle Aquilino de la Guardia C/50, Torre Banco General, Ciudad de Panamá - Panamá Tel.: +507-260-9969 / 399-5508 info@smalatam.com www.smalatam.com/pan/

SETTING UP BUSINESS IN PANAMA

Mallorca, 260 àtic 08008 – Barcelona Tel.: + 34 93 215 59 89 Fax: + 34 93 487 28 76 Email: info@antea-int.com www.antea-int.com

This publication is intended as general guide only. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied on as a substitute for such an advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, not Antea Alliance of Independent Firms neither its members accepts no responsibility for any errors or omission it may contain whether caused by negligence or otherwise, or forany losses, however caused, sustained by any person that relies upon it.

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