Panama has created a series of laws that allow the establishment of companies within specially designated areas. Such areas are known as Special Economic Zones and were created as a mean to contribute to the country´s development and to stimulate employment. The Special Economic Zones also seek to provide optimal conditions of operational efficiency and comparative advantages to ensure companies established therein are competitive in international markets.
The legal framework of the Special Economic Zones entail, amongst others, tax, migratory and labor incentives mainly addressed to foreign trade activities, which make the establishment of companies within such areas more attractive.
Although there are many Special Economic Zones throughout the country, the main ones that offers a transit systems designed for imports, exports, re-exports, warehouse facilities and the processing goods are the Colon Free Trade Zone and Panama Pacifico. Both of these Special Economic Zones are defined as free and delimited commercial areas, comprised of the necessary infrastructure, facilities, buildings, systems and support services that are necessary for companies from all over the world to establish themselves in order to carry out activities related to provision of logistic services related with goods.
Law No. 8 of April 4, 2016, reorganized the legal framework and compiled all amendments made to the law that regulated the Colon Free Trade Zone. The Colon Free Trade Zone main objective is to serve as a platform for the redistribution of wholesale and tax-free goods from Asia, Europe and North America to Latin America and the Caribbean. Located on the Atlantic side of the country, this area is supported by a wide variety of logistic and financial services that take advantage of its connectivity to expand the flow of goods to regional markets.
On the other hand, Panama Pacifico is a public-private alliance between the Republic of Panama and London & Regional, created by Law 41 of 2004. Panama Pacifico is located on the pacific side of Panama and its main objective is to be a hub for the production of high technology, logistics services and commercial activities. The public-private alliance developed a master plan that includes areas dedicated to the storage and creation of distribution centers, manufacturing, commercial offices, airport and an ecologically friendly residential area. Such development is set to be carried out over a period of 50 years.
Although initially Panama Pacifico was more fiscally attractive, recent laws have sought to level the playing field between Special Economic Zones in order to ensure fair competition amongst them. Due to this, both areas now share similar tax benefits. For example, in the case of income tax, companies established within Colon Free Trade Zone are exempt of paying such tax with respect to sales or services carried out in favor of customers located outside the Panamanian territory and sales or transfers between companies established within the Colon Free Trade Zone. However, sales made to customers located outside Colon Free Trade Zone but within the Republic of Panama are taxed.
Similarly, Panama Pacifico offers income tax exemptions as long as the sales or services carried out involves import, export and re-export of merchandise that does not enter the Panamanian territory. Import tax on both Special Economic Zones have the same treatment: they are exempted at the time of the import into the Special Economic Zones and taxed at the time of their nationalization to the Panamanian territory.
Unlike the Colon Free Trade Zone, entities established within the Panama Pacifico zone may generally carry out all type of activities. However, the extent to which benefits will apply will depend mainly on the specific type of activity to be carried out therein. Also, in order for a company to establish itself and operate within any of Colon Free Trade Zone or Panama Pacifico, they will first have to comply with a thorough registration process that include different requirements for each one.
The decision whether to establish within a Special Economic Zones or another will depend on the specific needs of each company, as some activities enjoy better incentives in one that in another. However, the geographical location usually plays a key role.
It is no secret that Panama is a service-based economy, which over the years has explored different competitive ways to stand out in the region. It is not a secret that it has found a successful economic strategy in the creation of Special Economic Zones, as local investments, as well as new international investors, continuously seek to boost their corporate revenue by establishing themselves in such zones.
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.