Panama is widely used by individuals and corporations as a base for their foreign operations. It is notable for the combination of tax and business advantages it offers despite the U.S. invasion a few years ago.
A major reason for the popularity of Panama is its location.It is the link between North and South America, and it includes the famous Panama Canal, connecting the Atlantic and the Pacific. Its total land area is 29,700 square miles. The majority of these people (60 percent) live off the land. The capital, Panama City, contains most of the urbanized population and most of the rest live in the other major city, Colon. Colon's significance, economically, derives from its freeport facilities, which we will discuss later.
A visitor to Panama is in no danger of freezing. The climate is tropical -- hot, with heavy rains (50 inches a year on the Pacific side, 150 on the Atlantic). There is a dry season from mid-December through the end of April.
One can reach Panama more easily than virtually any other tax haven. Many airlines serve Panama. If sea travel is preferred, Panama has four excellent ports: Cristobal at the Atlantic end of the Canal, Balboa at the Pacific end, and Puerto Armuelles and Bahias de las Rouge.
Telecommunication is extremely efficient because Panama is an international crossroads of trade. There is direct telephone service via satellite and very reliable telex, cable, and airmail.
Politically, Panama is a republic. It has a democratic election system that every six years is supposed to produce a turnover in the unicameral legislature, the National Assembly, while the "chief of state," the president, and the vice president are supposed to be elected by the assembly. The chief of state is the chairman of the national cabinet and roughly corresponds to the prime minister in a parliamentary government. The National Assembly has the job of examining and approving or disapproving legislation drafted by a national legislative commission. Prior to the American invasion, Panama was a typical Latin American dictatorship run by whoever happened to be in charge of the National Guard (army), with all the republican and democratic trappings as mere window dressing. However, the military leaders -- even the leftists -- never seemed to tinker with the tax and corporation laws. There is a kind of economic freedom absolutely unaffected by political turnover. The rulers seemed to have the good sense not to slay the goose that lays the golden eggs.
Another indication of the considerable independence and stability of economic policy is the structure of the Panamanian civil service and government. We are used to a public bureaucracy in which each department is headed by a political appointee to a ministerial/secretarial position. In Panama a variety of governmental functions are handled by purely bureaucratic agencies with no political honchos. Electricity and hydraulic resources, national telecommunications, tourism, social security, all these functions are handled by a semiautonomous official institute, which is not under any cabinet minister.
Spanish is the official language, but English is very widely used. Most professionals and businessmen speak English.
A very pleasing feature of Panama is the absolute monetary freedom. The local Balboa is on par with the U.S. dollar and exchanges freely with it. All paper money is American. The lack of exchange controls implies that the government cannot regulate the money supply, and there is no central bank. Add to this banking legislation comparable to that of the Switzerland of old: numbered accounts in the currency the account holder designates and tight secrecy laws.
The central position of Panama in inter-American as well as transoceanic trade means that its professional services -- banking, accountancy, legal, brokerage -- are of the highest quality and intensely competitive. There are many banks, both local and international. Name any major international banking organization and it has a branch in Panama.
There are many Panamanian management companies that can handle local corporate creation and management in all necessary aspects. They play a role analogous to that of Bahamian and other trust companies, and they even offer trust services. (However, in view of the fact that Panama is a civil law country, trusts, though legally possible, are best avoided.) They will handle anything and everything: incorporation, registration of assets, provision of all required nominee officers and directors to cover the various requirements of corporation law, etc. They will even conduct feasibility studies on the advisability of alternative possible investments.
Panama taxes locally generated income and exempts from tax all income generated abroad. This policy has existed since the country was founded in 1903, good reason to believe that the policy is too well entrenched to be changed with ease. The income tax on the local income of residents is progressive to 46 percent. If one is in the country less than six months in a year and generates local income, he is not exempted from tax altogether or even allowed to "spread" his income over the whole year. Rather, he pays taxes on a pro rata basis; the ratio of Panamanian residence duration to a full year is the basis for calculation. Thus, Panama is not ideal for an immigrant tax- refugee. (A curious feature of local tax laws is that tax evasion creates liability for fines but not for a prison term.)
On the bright side, all income generated by movement of commodities that never pass through Panama (even though they may be invoiced in Panama and managed from a Panamanian office) is completely exempt from taxation. Thus, there are good business reasons -- "business motivation" -- for setting up a Panama-based corporation. Moreover, if dividends are paid to stockholders residing outside Panama, no withholding tax applies, provided the profit underlying the dividends is all derived from sources external to Panama. Similarly, if one inherits property owned by a Panamanian corporation (by inheriting the stock) and the assets themselves are outside Panama, no inheritance taxes apply.
Even if the assets are in Panama, inheritance taxation is quite liberal when compared to the United States. Inheritance taxes are calculated after the estate is divided between the various heirs. The first $30,000 is exempt from tax (this means that if an estate of $150,000 were divided equally among five heirs, each would inherit $30,000 tax-free); close relatives are taxed much less than more distant relatives; and tax rates are only 80 percent of their officially stated ratio because of an automatic 20 percent deduction of tax liability.
The fact that overseas operations based in Panama are not taxed, together with easily demonstrated business motivation for Panamanian operations, the free exchange of currencies, and the economically strategic position of the country account for the 35,000 corporations, mostly foreign, that are registered in Panama -- more than in any other tax haven. This large corporate presence is, in itself, the strongest guarantee of future preservation of the tax-free-foreign-income policy. Any change of this policy would scare off most of the 35,000 companies, terminate the flow of money they feed into the Panamanian economy and the government treasury, and thus would be a vast net loss. The free market situation in the international tax haven industry, following from the existence of many alternative havens all competing for patronage, should keep Panama very much "in line."
Panama's principal claim to fame as a haven for foreign companies is based on the shipping industry. Like Liberia, Panama offers special advantages for ship owners who elect to fly its flag as a "flag of convenience." The cost of ship registration in Panama is low. Even if a shipping company regularly imports and exports from and to Panama, none of its income or profits (or the salaries of its crews, for that matter) are subject to any Panamanian tax. Moreover, Panama's maritime labor regulations are liberal.
Let us now review Panamanian corporate law. Fortunately, it is based on the Delaware laws of 1927 (without amendments). As the reader may know, Delaware is the best U.S. state in which to incorporate because of its very advantageous corporation laws. In Panama incorporation requires two incorporators, who must execute the articles of incorporation before the Panamanian counterpart of a notary public. These two are usually nominees, employees of a local management company. The articles of incorporation are recorded at the public registry office, and the later costs of maintenance can be reduced to a $100 annual fee to a local legal representative. Nominee "incorporators," though nominally shareholders at the time of incorporation, will sign a deed of transfer returning their stock to their principal(s) after incorporation has been effected.
The articles of incorporation must include the usual details: (1) company name, with the standard designation for a corporate entity, (2) a statement, however general, of the objects of the corporation, (3) capitalization, specifying both the total amount of authorized capital (which determines the limit of the company's liabilities) and its division into shares with their respective par values (shares with no par value can be issued, but then the government assumes that each share has the nominal par value of $20 for the purpose of computing the registration tax) (4) specification of the nature of the shares- -registered or bearer, common or preferred, voting or nonvoting, (5) names and addresses of at least three directors (usually nominees hired for an annual fee), (6) names and addresses of officers (again, nominees -- who can be the same individuals serving as directors), (7) the duration of the corporation, which can be a specified limited period or "forever," (8) name and address of the local legal representative of the corporation, and (9) the domicile of the corporation (e.g., Panama City, Panama).
How costly is incorporation? Usually $800 to $1,000.
Annual corporate maintenance costs very little, about $100- $200. The low fees stem from the fact that the local legal representative has only to exist; he has no reports to file nor any other work to do.
Thus, neither incorporation nor company maintenance is very expensive in Panama. It is certainly much less expensive than the comparative action in Bermuda, the Bahamas, and even the Caymans. And one gets the same tax advantages for income generated outside the country. Moreover, there is further advantage to be enjoyed by Panamanian companies that deal exclusively outside Panama. They need keep no financial records locally, nor do they have to submit any annual financial reports with the local tax authorities. What has to be kept locally is a stock-register book for registered stock and a minute book for meetings of stockholders. The latter must be rubricated (for a special fee) by a local judge. It is also bound in such a way that the minutes must be entered manually; typed minutes cannot be filed in. This, though, is just an unimportant nuisance, not a serious consideration.
Another nuisance concerns stockholders' meetings. If not physically held in Panama, these have to be officially sanctioned by the Panamanian consul in the country where they are held and then registered in the minute book in Panama. Alternatively, they can be made official by the signature of the corporate secretary, the person whose name is recorded in the mercantile registry as the corporation's secretary. Again, this is merely a curiosity of some slight inconvenience, not a major problem.
If, however, a company does local business in Panama, it becomes subject to taxes on its locally generated income. In this case, a general ledger, a general journal, an inventory, and a balance sheet must be maintained. A commercial business license may also be needed. This could be bypassed by handling Panamanian business through a corporation domiciled in, say, the Cayman Islands. The Panamanian withholding tax is lower than the corporate income tax on locally operating companies.
In any event, if a Panamanian corporation is not in any way directly involved in domestic business activities in Panama, no annual report of any kind has to be made. Even interest generated locally on local bank deposits is free from any local tax or withholding. Thus, for a sum of about $1,000 for incorporation and $100-$200 a year in maintenance costs, a company can enjoy virtually complete business privacy -- no reports, no books, no anything.
Another advantage of Panama, apart from its very private corporations, the low costs of annual maintenance, and the free exchange of currencies, is the Colon Free Zone. Located at the Atlantic entrance to Panama and accessible by air and sea from every corner of the Western Hemisphere, it is very active economically, with an annual trade volume of about $950 million. It has attracted international companies from the United States, Japan, and Europe. Its freedom of trade involves complete exemption from duties on merchandise imported into it, packed, labeled and/or assembled in it, and reshipped from it. Moreover, no commercial licenses are needed.
How to use the freeport facilities depends on the size of the commercial operations one intends to conduct from them. Land can be leased there, and warehouse or other facilities can be built on it. The usual lease is for twenty years and is renewable. Warehouse space can be leased too. Finally, local warehouses are also available for fees based on the value of the total merchandise stored. Clearly, the leasing of space and construction of warehouses for hire is a lucrative business possibility in the Free Zone.
Unfortunately, the freeport, although duty-free, is not totally tax-free. Merchandise that physically passes through the Colon area and is subject to some form of local processing -- repacking, labeling, etc. -- is taxed by the Panamanian government. The tax rates, however, are extremely low. They are based on a 1954 income tax law, under which corporate income tax was but 30 percent on net profit. Add to this a 90 percent "tax discount" applicable in the Colon Free Zone, and the result is a negligible 3 percent tax on net profit from all merchandise that physically passes through Colon not later sold in Panama. (Standard taxes apply to all Free Zone goods resold in Panama.)
In 1995, Panama passed legislation enabling the creation of private foundations, similar to those which may be formed in Liechtenstein, but at far less cost. This new form of entity is likely to become extremely popular with people who need a situation in which they are not the legal owner of the assets controlled by their private foundation.
Summing up, Panama has an impressive array of advantages over its competition: (1) No exchange controls, no federal reserve or central bank, complete monetary freedom. (2) No taxes and no required financial or other annual reports by corporations doing business exclusively outside Panama. (3) Relatively low incorporation and annual maintenance costs, with a rich array of professional services to take care of everything. (4) The possibility of safeguarding privacy with both bearer shares and numbered bank accounts in the currency of the depositor's choice, with tax-free interest. (5) The possibility of dabbling in the shipping industry with minimal governmental costs, costs that are a low function of tonnage and are unrelated to profits. (6) The prospects of doing business through the Colon Free Zone, duty- free and almost tax-free. (7) A tradition of being a tax haven, bolstered by the local presence of many tax haven corporations, creating a virtual knockout argument for any future government tempted to impose taxes on foreign income. (8) The ease of supplying a business justification for a Panamanian corporation should the need arise.