Panama: Due Diligence In Real Estate Transactions In Panama

Last Updated: 28 October 2019
Article by Ricardo Cambra La Duke

We frequently serve clients in matters related to the acquisition or sale of real estate in the entire territory of the Republic of Panama or for procedures ranging from value updates to the registration of properties under the new regime of Family Tax Patrimony.

Unfortunately, also in the analysis of the cases that are presented to us, we find those where there are errors in the records, or they have the values or other outdated data. These errors or omissions can cause delays of many months that cause damages when it comes to a purchase or a sale, it can even cause a loss in the sale if its property that has been paying real estate tax based on the wrong value.

As advisors in a real estate transaction, we must follow several measures before advising the client to sign a promise to purchase or a final purchase agreement, that is, to enter a due diligence process to ensure that the values, measures and other important details are correct. Here are some important recommendations to follow when you buy or sell a real estate in the Republic of Panama.

I. Legitimacy to Sell.

It is important to verify at the Public Registry that the seller, whether it is an individual, group of individuals or legal entities, is/are the legitimate owners of the property.

Where an individual or individuals are the owners of a property it is important to verify that their details are correct and that they have legal capacity to enter obligations.

Where a company or other form of legal entity is the owner of the property, it is important not only to verify that the details are correct, but also that the company is in good standing, in existence and that the individual representing the company complies with the legal capacity refer to above.

II. What is being sold?

Once the ownership of the property is verified, the transaction can continue is course and further due diligence must be made on the property itself when the same is owned by an individual or group of individuals. We will discuss this part further ahead in this section.

However, when the property is owned by a legal entity it is important to discuss with the seller the object of the transaction, whether it is the shares of the company or the underlying property.

Shares.

Should the object of the sale be the shares of the company, it is important to review the corporate documents of the company as our experience indicates that in many cases errors and absence of important documents delay the closing of the transaction. The most common are the following:

  1. In many occasions the subscribers of the articles of incorporation are confused as shareholders and such is a mistake that must be corrected from the start. The subscribers normally transfer their right to acquire one or more shares of the company back to the company. The company later issues all the shares and allocates them to one or more shareholders.
  2. The shares are not issued following the correct procedures set forth in the Law. In this case, the board of directors must issue a resolution whereby it is agreed to issue the shares and proceed to their allocation.
  3. Meetings of the Shareholders are recorded on company public records without the existence of Shareholders.
  4. Absence of the corporate books (Minutes records and share registers).
  5. Absence of letters of resignation from directors and officers.

Property.

Whether the transaction involves the direct purchase of a property or like above, the purchase of the shares of the company that actually owns the property, it is of utmost importance to ascertain the following:

  1. Quite important is to ascertain that the property does not have any liens or encumbrances.
  2. That the property is actually on the location indicated on the maps and blueprints provided by both the seller and the records of the Cadastral Registry, especially if it's a rural property;
  3. That the details about the property that are publicly recorded, such as measurements, surface and others correspond to those on maps and blueprints provided by the seller. These details must also match those recorded at the Cadastral Registry.
  4. That the property itself is in good standing as it relates to taxes and utilities.

III. Taxes.

When a property is sold in Panama it immediately triggers a tax called the Property Transfer Tax, which is of 2% and payable over the updated Cadastral Value of the property, which is no more than the value that the government has recorded. Such tax must be paid prior to closing and signing the final purchase agreement that will be afterwards recorded at the registry for the purpose of transferring the ownership.

With the amendments to our tax system in 2005, a new tax was created. This would be the Capital Gains tax which is of 10% calculated over the capital gains. This tax must also be paid prior to closing and signing the final purchase agreement.

The above taxes are payable by the seller.

The property must also be in good standing regarding the property taxes. If any are owed the government will not issue a certificate of good standing and the transfer will not be able to be recorded.

In the case of the sale of the shares, the only tax that would be triggered would be the 10% income tax over the profits that result from the sale of stock of a company. In this case the buyer has the obligation to withhold 5% of the selling price and report it to the government within the next 10 days of the transaction. This 5% is discounted from the price to be paid to the seller who can in turn discount it by way of a credit to the 10% tax mentioned above. By taking the above measures, one ensures that the transaction reaches a happy ending and a satisfied customer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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