By Jan Oliver Kuepfer Baer - Head Consultant, Stern & Co. S.A.

Introduction

The Republic of Panama is an Isthmus in Central America between Colombia and Costa Rica. The continued stability of corporate, maritime, trust and banking laws, as well as the existence of a sophisticated service community of professional consulting firms, law offices, and financing facilities with international expertise, has made the Republic of Panama a very attractive and secure place for corporate and private investment. The Republic of Panama is one of today's leading offshore financial centres.

Corporation Law

Offshore companies based in the Republic of Panama are enjoying a new boom time. Figures compiled by the "Offshore Finance Yearbook 1996" and several other media reports are showing record numbers of incorporations.

The Republic of Panama's Corporation Law was enacted on February 26, 1927 and was made to optimise flexibility, simplicity and convenience for its user. That created a corporation which is characterised by very low government fees (lowest worldwide), the possibility of complete anonymity for its beneficiary, a minimum on requirements and finally a zero taxation on the companies' assets and profits. It also has been one of the most important factors that helped other important business sectors of the Republic of Panama such as the Free Zone, the Maritime, and Banking to grow extraordinarily.

A Panamanian corporation may be organised by two or more persons, who need to be nationals or residents of the Republic of Panama and the Articles of Incorporation must be executed by them before a notary public. The resulting deed must then be presented for recording to the public registry office. The act of registration officially brings the corporation into existence.

In more detail the legislation is providing the following benefits and features:

For organisation
  • The corporation may engage in any lawful business, even if it is not similar to the objectives specified in the articles of incorporation.
  • The corporation may undertake any kind of lawful business in any jurisdiction outside the Republic of Panama.
  • The government of the Republic of Panama cannot request information on the activities of the corporation.
  • The government of the Republic of Panama does not require the filing of a tax return form.
  • The corporation may keep its books and records in any jurisdiction.
  • The name may be stated in the language of any jurisdiction.
  • The name has to include the letters S.A., Inc., or Corp. or any other acceptable expression that indicates it is a corporation (Ltd. is not possible).
  • The corporation is required to have a registered agent and office domiciled in the Republic of Panama.
  • The corporation may have a limited or unlimited life.

For shares and capital

  • The capital of the corporation need not be paid at the time of the incorporation, but the value of one share has to be paid up and this could have a minimum value of one dollar (each subscriber).
  • The assets of the corporation do not have to be equal or stand in any relation to the authorised capital.
  • The shares may be issued to individuals, corporation or to bearer. Preferred shares, class A shares, class B shares, voting, non voting and other share structures are permissible.
  • The authorised share capital may be expressed in terms of the legal currency of any jurisdiction.

For the directors, officers and shareholders

  • The directors and officers need not to be resident or national of the Republic of Panama (juridical persons cannot act as director or officer).
  • The corporation is required to have a minimum of three directors of legal age. No maximum number is specified.
  • The corporation is required to have a president, a treasurer and a secretary, but one person may serve in more than one of the said capacities (usually the directors are also the officers).
  • The number of shareholders is not limited.
  • The possibility to use nominee directors and nominee shareholders

For the meetings

  • The meeting of the board of directors may be held in any jurisdiction.
  • The directors may attend the meeting of the board of directors personally or by proxy.
  • The meeting of the shareholders may be held in any jurisdiction.
  • The shareholders may attend the meeting of shareholders personally or by proxy.

For its taxation

  • The corporation does not have to pay asset taxes of any kind.
  • The corporation does not have to pay income tax for income derived from sources outside the jurisdiction of the Republic of Panama.
  • The corporation does not have to pay income tax for income derived from international maritime trade or commerce of Panamanian merchant vessels duly registered in the Republic of Panama, even though the transportation contracts are executed in the Republic of Panama.
  • The corporation does not have to pay income tax for interest earned on savings accounts or time deposits kept in a bank established in the Republic of Panama.
  • Employees, officers and directors do not have to pay income tax or any other tax on income they receive for their services.
  • The Republic of Panama has no tax treaty with any other jurisdiction.
  • The registration tax is the lowest in the world and is payable annually within the three months following the anniversary date of registration. It is the only tax charged to corporations operating offshore according to Panamanian legislation.

The procedure for the dissolution of a corporation is to have a board of directors meeting where the decision to dissolve is recommended to the shareholders who in turn decide to dissolve the corporation (decided during a meeting or in case that voting shares are existing also only in written form). A corporation whose existence terminates by dissolution, or by expiration of the term agreed in the article of incorporation will continue for a period of three (3) years for the specific purpose of prosecuting or defending suits or for settling its business. The directors shall act as trustees and be jointly or separately liable for the indebtedness of the corporation up to the amount of the assets over which they have had possession and management.

The financial freedom offered by the Panamanian Corporation Law is extraordinary. It has made the Republic of Panama home to some 400'000 offshore companies which makes it one of the biggest offshore centres in the world. The law was from its initiation a perfect corporate structure and has never suffered any big changes, although several laws, decrees and amendments have been made and helped to keep the law perfect in shape. The latest amendment that is planned will allow a flexibility to redomicile...

Private Foundation Law

Law No. 25 of June 12, 1996 recently sanctioned by the Government of the Republic of Panama introduces the figure of the foundation of private interest. It is a reflection of the family foundation of the Principality of Liechtenstein, which has been very popular in Continental Europe for many years.

However, Panamanian foundations are having great advantages compared to the Liechtenstein model. In the Republic of Panama there is the possibility of being one's own beneficiary and of having the beneficiaries set in a private document that does not get filed in the registry.

The characteristics of a Panamanian private foundation are very similar of those of a Common Law Trust. It's a juridical person created to preserve the assets conveyed to it by its creator. As such, it has no owners but beneficiaries. The foundation requires specific formalities; the founder's assets are transferred to the foundation; a foundation may be revocable; it may be inter-vivos or mortis causa through testamentary provisions; the same is usually created for the purpose of handling, conserving, administering and investing assets to protect the beneficiary members or the transferor's immediate family; it is created to maintain confidentiality on the ownership of assets and to obtain fiscal advantages.

The acts of creation, modification and extinction of a Foundation, with the acts of transfer, transmittal or encumbrance of a Foundation's assets and the income arising therefrom or any other act thereon, are exempt in the Republic of Panama from all taxes, assessments, rates, liens or imposts of any kind or description, provided that said assets consist of assets located outside the Republic of Panama, shares or securities issued by a company whose income does not arise from a source in the Republic of Panama, or where their income is not taxable on any account even though such shares or securities are deposited in the Republic of Panama.

The private Foundation law also includes minimal constitutional procedures and, on the matter of succession, it introduces revolutionary rules in the Republic of Panama such as that of expressly if the law on inheritance regarding the founder's or the beneficiaries' domicile will not be opposable to the Foundation nor will it affect its validity or prevent the fulfilment of its objectives.

In essence, the private Foundation is a unique form of a legal entity which acts like a Trust, and operates like a Company. Therefore, it can be established by a corporate entity or a private person and be used for the following purposes:

  • Payment of individual sums to members of one or more specified families for subsistence, education, training, clothing, and others relief. In these cases the Foundation is usually known as "The Family Foundation".
  • Recurring payments to individually designated "Beneficiaries", and distribution of the "Foundation" funds to those "Beneficiaries" if there is a dissolution of the Foundation.
  • For inheritance purposes, similar to a Will.
  • For charitable or Church purposes.
  • Funds dedicated to a Family Foundation which also serves general purposes outside the family, i.e., for the Church. This is known as the "Mixed Family Foundation".
  • A "common" Foundation established for any clearly defined asset protection purpose.

The private Foundation will very soon become one of the best options for clients who wish to take advantage of the Republic of Panama's favourable features as an offshore centre and who wish to have their assets protected from potential creditors.

Money Regulation

There are no barriers for the movement of any currency in and out of the country, except the usual regulations and supervision that is prudent for any solvent and properly run banking system. The official currency is the Balboa which is par with the US Dollar; but, no bank notes are issued and the US Dollar is the officially used currency. Security and confidentiality are important factors of the Banking Act.

Maritime Law

The Republic of Panama is holding the worldwide lead in ship registration today. The National Merchant Marine was created by means of Law 8 of 1925. Fourteen ships, with 8,000 tons combined registered in its first year. Since than it has been one of the most prominent open jurisdictions for the registration of ships. In 1995, the Republic of Panama boasts a merchant fleet of 13,282 ships, with 94.5 million in gross tonnage. In 1995 its fleet included 5,536 cargo ships, 2,182 pleasure craft, 1,263 tankers, 1,557 fishing boats and 673 tugboats. Last year alone Panama registered 950 ships, with 9.3 million in gross tonnage.

According to official statistics, the Panamanian Registry took over Liberia's lead and has occupied first place in gross tonnage in the world merchant fleet since June of 1993. The Republic of Panama has maintained and built on its international status because it offers many advantages both to shipowners and to mortgagees such as:

  • Panamanian laws offer a tax exempt status for revenue arising from international maritime commerce of merchant ships legally registered in the Republic of Panama, whether the transportation contracts have been legally executed within Panamanian territory or not.
  • Panamanian laws do not consider as taxable income any capital gains resulting from the sale or transfer of a vessel duly registered in the international service of the Republic of Panama, even if the contract is executed within Panamanian territory.
  • Panamanian laws do not require the owner of a vessel to be, in case of a natural person, a citizen of the Republic of Panama, or in case of a juridical person, an entity organised under the laws of the Republic of Panama.
  • The absence of restrictions as to the age, type or size of the vessel, makes almost any vessel eligible for registration.
  • The existence of a very simple process for the registration of ships and ship mortgages can be rapidly processed in the Republic of Panama or through Panamanian consulates worldwide.
  • The creation of a specialised Maritime Tribunal, organised to handle complicated maritime disputes involving the various types of vessels, as well as labour matters involving seamen, at whatever port the vessel may be lying, facilitates all maritime-related transactions.
  • The fact that the Maritime Tribunal is accessible twenty four hours a day, every day of the year, including holidays, to those who seek its process.
  • The existence of a highly efficient ship mortgage law and an attractive corporation framework law, which can be coupled with the registration of a vessel.
  • The existence of an extensive network of overseas consulates, in main port cities throughout the world, permits convenient, expedited processing of most maritime-related transactions.

The registration of a vessel should be applied at the Panamanian Shipping Bureau either through a Panamanian Consulate or directly off a vessel. The following information are needed:

1. Name of vessel; 2. Previous name; 3. Previous nationality; 4. Where built; 5. Year built; 6. Name of builders; 7. Number of (a) decks, (b) masts, (c) bridges, and (d) funnels; 8. Type of vessel; 9. Hull material; 10. Type of service; 11. (a) Length, (b) breadth and (c) depth of vessels; 12. (a) Gross tonnage, (b) net tonnage; 13. Number & type of engine; 14. Number & type of cylinder; 15. Name of engine's manufacturer; 16. Horse power; 17 Speed; 18. Name of owners; 19. Complete address of owners; 20. Classification, society and 21. Radio accounts attention or, in case that the vessel is not engaged in international trade, area of operations, frequencies used, and name and address of the shore base station.

After complying with the aforementioned information a Provisional Registration will be authorised by the shipping bureau and, simultaneously, radio code call letters will be assigned by telex or cable to the Panamanian Consul who will issue a copy of the Provisional Patent. The Provisional Patent, may also be issued in the Republic of Panama and airmailed by the firm.

To obtain the Permanent Patent the following documents must be forwarded to the firm:

  • Application for official number, call signs and registration.
  • Bill of Sale or Builders Certificate for new vessel respectively, which evidences ownership of the vessel, duly notarised as to establish the seller's true ownership and legal power of the person's signature in said document.
  • Power of Attorney authorising a firm to apply for the registration.
  • Official certificate stating that the vessel has been released by the country of its previous registry and, therefore, is free to register in the Republic of Panama.
  • Certificates required by the 1960 Safety of Live Sea (SOLAS) Convention, and the 1966 Loadline Convention.
  • Proof of Oil Pollution Insurance for Oil Tankers
  • Generally, all vessels are required to carry some type of radio communication equipment, be it radiotelegraphic or radiotelephonic.
Upon provisional registration, a vessel is issued a radio permit valid for an initial period of three (3) months, which may be renewed for equal periods. Within such period, a special application for a Definite Radio License must be submitted to the Maritime and Consular Service (Secnaves). This radio license is valid for an initial period of four (4) years, renewable also for equal period.

Any change in the name, ownership of any information with regard to appearing in its Provisional Patent or Regulation Patent of Navigation require the cancellation of such patent of navigation and the issuance of a new one.

A naval mortgage on a Panamanian vessel may be written and executed in any form and language, whether in the Republic of Panama or abroad. The signatures of the parties must be authenticated by a Panamanian Notary Public, or executed abroad, by a Panamanian Consul. The mortgage must be registered at the Public Registry Office to be effective against third parties.

Only the owner of a vessel registered in the Republic of Panama may grant a mortgage thereon. Once the vessel has been provisionally registered and a title thereto has passed to the future mortgagor, a mortgage, valid as between the parties, may be entered even before the title document is filed for registration or registered at the Public Registry Office. However, in order for the mortgage to acquire its full legal effect against third parties, it is necessary for the pertinent title document to be registered first so that the mortgage can be recorded in the Public Registry Office.

The mortgage should be acknowledged by the Notary Public, who should certify, to the best of his knowledge or based on sufficient evidence presented to him, that the person executing the mortgage on behalf of the mortgagor was duly authorised by his principal for said act. Although not strictly necessary, it is customary for the mortgagee to render formal acceptance of the mortgage.

The Republic of Panama's latest growth in ship registration is seen as a direct result of several factors. One of them is Law 36 of July 6, 1995. This law gives Secnaves director the power to discount registration fees by up to 20 percent for three or more 50,000-100,000-ton vessels belonging to the same owner. The law also gives a 50 percent discount for ships of more than 100,000 tons. Further, Secnaves can also extend credits for ships of at least 100 gross tons that re-register, if they promise to stay registered as Panamanian for at least four years.

Panama City

Panama City is the capital of the Republic of Panama and financial as well as industrial centre of the country and is located alongside the Pacific coast. The city was founded by the Spanish in 1519 and became very soon an important base for Spain's conquest of the Pacific coastal areas of South America. The English privateer Henry Morgan completely destroyed it in 1671, but the city was very soon rebuilt.

The 18th and early 19th centuries were a decline for Panama City. But its importance was revitalised by the opening of the Panama Railroad in 1855. It was declared immediately the national capital when the Republic of Panama seceded from Colombia in 1903 and became an important transportation centre after the Panama Canal opened in 1914.

The population is estimated to be over one million today and the city is home to some 100 international banks and hundreds of trusts and approx. 400,000 international offshore companies. There are direct flights from the USA as well as from Europe and Asia.

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.