Panama Forms of Offshore Operation

It is possible to use the following business forms to establish an offshore entity. A detailed description of each entity and more information about offshore corporations can be found in the section entitled Incorporation

• Corporation (Sociedad Anonima)

• Foreign Corporation

• General or Limited Partnership

• Civil Partnership

• Foundation

• Trust

Only financial institutions are required to obtain licenses.

Corporations are not compelled to disclose beneficial ownership nor do trusts and foundations have to disclose beneficial ownership or beneficiaries. However, limited partnerships must disclose the names of their members.

Tax Treatment of Offshore Operations

As Panama does not differentiate between onshore and offshore business entities, the information in the section entitled Domestic Corporate Taxes, which contain the general principles of Panama corporate taxation, also applies to offshore entities.

Only income derived from operations within Panama is taxed by the Panamanian government. It is possible for a Panama business entity to direct its offshore activities from Panama without becoming liable for tax. The Fiscal Code (Article 694) excludes the following types of income from the tax net:

• the profits of re-invoicing external goods or services;

• the profits of operations that are directed from Panama but carried out externally;

• the distribution of dividends derived from external income, including the above types of income.

Interest on deposits with Panamanian banks is always exempt from taxation no matter what the source of the cash was.

Even if an entity conducts both external and Panamanian business activities, only on the Panama-derived income is taxed and is subject to withholding taxes .

Panama business entities with only external operations are free from the Dividends (Withholding) Tax, the Undistributed Profits Tax, the Business Tax, and from Stamp Duty on contracts executed in Panama to be performed elsewhere.

Taxation of Foreign Employees of Offshore Operations

There is no legislative distinction between foreign and Panamanian employees regardless whether or not the business is an offshore entity. Just as the territorial basis of taxation applies to business entities, it applies to individuals. This means that individuals only pay income taxes on Panama on income that is earned in Panama, or Panamanian-sourced. \'Panamanian-source\' means that the services rendered are deemed to be provided within Panama rather than rendered abroad.

The fiscal reform package introduced in 2005 included a rule (Paragraph 1-B of article 694 of the Fiscal Code) that all payments remitted abroad to beneficiaries not resident in the Republic of Panama are subject to withholding on the condition that the payments are related to the generation of income within Panamanian territory or the conservation of a source of income located within Panamanian territory, and are considered to be deductible expenses by the payer operating from Panama. Among the type of payments subject to the new rule are fees and income relating to intellectual property rights, royalties, know-how, technological or scientific knowledge and the like.

The taxable base for application of the withholding tax (at income tax rates) is 50% of the payment involved.

Please note that individuals or legal entities engaged in “international business activities” and carrying out operations outside Panamanian territory are exempt from the tax; that is to say that payments caught by the law are not considered to be Panamanian source income. At this point in time there is no clear definition of the term “international business activities”.

Exchange Control

The Panamanian government does not exercise any exchange controls. Moreover, in effect Panama uses the US dollar as its currency with the exception of insignificant transactions in the Balboa, which is at parity with the dollar. Panama does not have a Central Bank.

Offshore Activities

With the exception of other banks with International or Representation Licenses, offshore entities are allowed to carrying on business activities in Panama, but will be taxed on income arising from domestic trading and will need to segregate such trading in their accounts.

Employment and Residence

The Panamanian employment market is very carefully regulated and the law sets maximum percentages for the employment of foreigners in a business according to its sector. Even so, foreign companies are allowed to fill senior and/or sensitive positions with expatriates.

Long-stay working residents are issued immigrant visas if their employment is permitted and short-stay visas are freely issued. Tourist-Pensioner visas are given to individuals that can demonstrate a monthly-designated level of income from interest on time deposits in a Panamanian bank. Finally, individuals who invest their own capital into local business activity may obtain an Investor’s visa.