Panama, an Ideal Location for Foreign Investment.
November 30, 2012
In recent years, Panama has become the most popular and most desirable destination for FDI in the Central American region. Much of the attraction stems from the continued local development of favorable foreign investment conditions, such as an excellent telecommunication platform, top of the line maritime hub and port facilities, excellent living conditions, freedom from the major natural disasters constantly affecting neighboring countries, a fiscal structure based on the principle of local source income, an international air transportation hub servicing roughly 70 destinations throughout the Americas, the easy import and export of goods through the Colon Free Zone, one of the lowest inflation rates in the region, and a banking system overseen by a reliable supervisory authority,. Moreover, Panama has no legal restrictions affecting the international transfer of capital employed in for investment purposes. Additionally, Panama does not have its own monetary policy instruments due to the adoption of the US dollar as its legal tender, which, as a result of the Monetary Convention of 1904, is placed on an equal footing with the Balboa (the national currency). Accordingly, fiscal policy is the authorities’ main macroeconomic tool, with currency conversion issues never entering into the equation for potential investors in, or visitors to, Panama.
Panama has a territory of 78,200 km2 and a population of over 3 million people, with a per capita income approximately $4,000.00 higher than that of other Central American Countries. The local economy is primarily composed of a highly competitive services industry (over 75% of the GDP) developed around the financial sector, as well as transportation and commerce generated by the Panama Canal traffic and the Colon Free Zone. In contrast, the industrial sector is a comparatively less productive component of the economy, accounting for 12% of the GDP. The third largest sector is agriculture, which accounts for only 7% of the GDP, although it is responsible for around 20 per cent of total employment. These figures demonstrate a clear dichotomy between the services sector on the one hand, and the industrial and agricultural sectors on the other, a vastly different scenario from that which presently confronts the rest of the Central American countries, where industry and agriculture remain the centerpieces and driving forces behind the respective economies of Panama’s regional neighbors. Panama’s GDP has consistently grown since 2004, and continues to do so at an impressive rate, resulting in large part from an increase in investment and service exports. In terms of climate, Panama has tropical weather with temperatures in the range of 80 degrees Fahrenheit by day, with slightly cooler nights.
Panama maintains an relatively liberal trade and investment regime. Applied MFN tariff rates average around 8.5 per cent with tariff peaks for some agricultural goods. Key economic sectors such as construction, tourism, health, education, banking, real estate and energy have been focus areas for foreign investment efforts, and unlike other Latin American countries, Panama’s services-oriented economy remains strong in the face of the financial uncertainty generated by the US and EU financial markets meltdowns. Although no country is entirely immune from the backlash of this crisis, Panama continues to be one of the best, and most profitable, places to do business in the Western Hemisphere.
The Panama Canal plays a vital role in the country’s economy, and by 2014 Panama is expected to have completed a vast expansion of the Canal which will benefit Panamanians, creating a large number of both direct and indirect jobs. The expanded Canal will also greatly contribute to an overall increase in world trade. Further, expansion will improve the flow of international commerce and facilitate the movement of goods through several important markets; it will increase capacity at one of the world’s critical trade arteries; it will allow the vital “All-Water Route” to continue to grow, and create more efficient service at the Canal, all of which will serve to tighten the global supply chain and help get more goods to market faster.
Panama’s modern port system, a perfect complement to the Canal, handles over 3 million TEU’s per year. A prime example of the success of Panama’s port system is MIT, a port facility operated by Stevedoring Services of America, which is the busiest and most efficient port in Latin America.
Additional support for the strength of Panama’s economy and its desirable location for foreign investment came in the spring of 2010, when Panama became just the fifth country in Latin America to obtain an investment grade rating for its sovereign debt. There can be no doubt that this small country is under the watchful eye of international investors.
There is no specific legislation governing FDI’s, and the country maintains a liberal regime for foreign investment and investment in financial instruments. Investments (either foreign or local) are regulated, if at all, by sector-specific legislation. Tourism, telecommunications, energy and mining are among the sectors regulated through such specific laws.
According to the 2007 WTO Trade Policy Review of Panama, the country “maintains an open investment regime although the State still has a significant presence in activities such as transportation, electricity, and telecommunications.” Notwithstanding the general openness to FDI in Panama, some limitations on foreign ownership are imposed in sectors such as retail and media. As of October 31, 2012, when the U.S.—Panama Trade Promotion Agreement entered into force, US retailers are now, under certain circumstances, allowed to invest in Panamanian retail companies.
To encourage long-term foreign investment, Panama requires no special authorizations, permits or prior registration for foreign investors. In 1998, Panama enacted the Investment Stability Law, which guarantees investors (either foreign or local) who invest at least two million dollars in Panama a special protection from regulatory changes, for a period of 10 years after completing registration in the Investment Stability Registry.
Panama also encourages multinational companies to open regional headquarters in the country by offering various labor, tax and migratory incentives. All of the required steps to open a regional headquarters in Panama are carried out through the Investment One-Stop-Shop at the Ministry of Commerce and Industries. As of January 1, 2012, 63 international companies have thus far been established under this law, including Samsung Electronics, Inc., DHL, DELL, Hutchison Port Holding Group, HSBC, BICSA, Scotia Bank, Assicurazioni Generali, PanAmerican Life Insurance Company; Tetrapack, General Electric, Johnson and Johnson, Unilever and Mc Donalds, among others.
Panama generally requires foreigners to obtain explicit permission to work, and in general requires that companies maintain a level of Panamanian employees equal to or greater than ninety percent of their ordinary employees. In addition, the practice of approximately 55 professions is reserved for Panamanian nationals only. Professionals such as medical practitioners, lawyers, accountants, architects, engineers and custom brokers, for example, are generally prohibited from practicing in Panama. Foreign lawyers, however, are allowed to practice and advise clients in Panama regarding the laws of their own jurisdiction. Foreign companies that need to rely on technical personnel may request waivers if there are no local professionals available.
Notwithstanding the above, according to recently approved special Decree orders, citizens of countries with a friendly relationship with Panama due to investment or any other economic reason (i.e.: United States, Canada, Brazil, Chile, France, Spain, Germany, Australia, South Korea, etc.) may be eligible to apply for Permanent Residency and an Indefinite work permit. The main requirement for the foreigners will be to demonstrate to the Panamanian government that they will conduct professional and/or economic activities in or from Panama and will maintain a bank account in a Panamanian bank.
Panama has enacted several Bilateral Investment Agreements with countries around the world such as Argentina, Canada, Czech Republic, the Dominican Republic, France, Korea, México, Netherlands, Spain, Switzerland, Ukraine, United Kingdom and Uruguay. These agreements include typical provision for the protection of FDI such as national treatment, most favored nation treatment and anti-expropriations provisions.
On the trade regulation side, Panama has entered into several free trade arrangements with countries and regions such as the U.S., the Central American countries (Costa Rica, El Salvador, Guatemala Honduras and Nicaragua), Taiwan, Chile and Peru, all of which area already in force; additional trade agreements that will soon enter into force include those with Canada and an association agreement with the European Union. Panama will also soon become a member of the Central American Economic Integration system, after negotiations for accession are finished with Costa Rica, Honduras, Guatemala, El Salvador and Nicaragua. Also, Panama has entered into negotiations for a free trade agreement with Colombia and the EFTA countries (Iceland, Switzerland, Lichtenstein and Norway). Israel and Korea have also been targeted for future trade negotiations.
While Panama´s merchandise trade traditionally runs on a deficit basis, services trade is in surplus. Panama’s main trading partner is the United of America. Exports of goods to the US market accounts for almost one third of the Panamanian merchandise trade (excluding re-export operations). Panama’s main merchandise exports used to be food products, however mining products have become increasingly important for exportation. Main service exports are transport services (including Canal operations), tourism, and financial services. Storage and re-export operations, transacted through the Colon Free Zone, also form a key service sector in Panama’s economy. On the negative side, in the opinion of the US Embassy in Panama, weaknesses of the country of which investors should be aware are related to poor rule of law, the lack of judicial independence, a shortage of skilled workers, alleged corruption, nontransparent government procurements and poorly staffed government institutions that are susceptible to influence. Also, the current government has made several changes tax rules, in order to fund major infrastructure projects like a modern metro system, leaving the private sector uncertain as to the legal fiscal environment in which business is conducted.
As a consequence of the unprecedented public investment in major infrastructure projects, the total public debt has grown considerably over the last few years.
Having briefly set forth the current state of Panama’s economy and overall structure as pertains to foreign investment, as well as what the future might hold, below are some reasons why you should consider Panama as the target location for your business, in addition to some guidelines to keep in mind when structuring the same:
- It is easy to create and incorporate a company: The Sociedades Anónimas or Panamanian Corporations are regulated by Law No. 32 of 1927, which was inspired by New Jersey and Delaware corporate legislation. Corporations are the traditional business organization used when starting a business in Panama, although there are alternatives such as the limited liability company structure. In order to incorporate a Sociedad Anónima, you need to hire a registered agent, notarize the articles of incorporation and register them in the Public Registry of Panama.
- Taxes: Registration of the company with the Ministry of Economy and Finance to obtain a tax contribution number takes only one day. Under the Panamanian Corporate income tax regime, companies are taxed at the greater of (a) 25% flat rate on taxable net income, or (b) an alternative calculation of taxable income, whereby total taxable income is reduced by 95.33% and taxed at a 25% rate. Both Domestic and imported goods, as well as services, are subject to a valued-added tax (ITBMS) and a selective consumption tax (ISC).
Since 2010, Panama has been actively concluding and signing Conventions for the Avoidance of Double Taxation as a means to strengthen its position as the most ideal location in Latin America for international services. Up to the present date, Panama has already concluded 15 such Comprehensive Double Tax Conventions, and 8 Treaties for the exchange of information.
- Commercial Operation Permit (Aviso de Operación Comercial): In order to engage in business in the country, an operating permit is required (formerly known as commercial license), which can now be obtained through a government website specifically designed for this purpose (Panama Emprende). It is important to remember that foreigners are not allowed to engage in retail business in Panama nor to render certain professional services that are specifically reserved by law for Panamanians (law, medicine, architecture, engineering and others), and therefore an online application for the permit must consider these restrictions.
- Municipality (Local Government): it is mandatory to register with the municipality or local government for the purpose of paying local taxes when doing business in Panama.
- Registration in the Social Security Office: It is mandatory to register all employees in the Social Security program, which is the public institution in charge of the administration of insurance programs for pension, health, unemployment, and occupational accidents and injuries.
All of the steps described above should take between 1 and 2 weeks.
In addition to what has been established above, why is Panama still a good place to invest today?
- Stability. Panama has a sustainable, prospering economy and a deep commitment to democratic values.
- Accessibility. Panama is home to the Hub of the Americas, the largest in the region, with daily flights to and from major U.S. cities and direct flights to select European cities. Panama is also home to COPA Airlines, the fastest growing and most profitable airline in Central America and the Caribbean, and is now a home port for international cruise lines.
- Convenience. Panama City is the most cosmopolitan city in Central America and offers an active nightlife along with wonderful restaurants, luxurious hotels and a safe environment.
- Business Capital of the Americas. The Panamanian financial center is the largest in Latin America and is the most global economy in the region, with a legal framework that facilitates business, and professionals who understand international markets.
In conclusion, as Panama welcomes the challenges of the 21st century, if you take but a moment to consider the most desirable country in Latin America in which to do business, there can be no doubt that the Isthmus of Panama must immediately jump to the forefront of your mind.