Setting up a business in Panama

Benefits of opening a business in Panama

Panama's pro-business environment attracts international investment. Prominent global names, such as LG, Nestlé, McKinsey & Company Inc., Visa Inc., Nike, Dell, Procter & Gamble and Maersk, operate here. Key benefits of running a business here include:

• Tax incentives: The country has a territorial tax system—income earned abroad is not subject to local taxes. Hence, many multinational corporations choose Panama to optimize their tax obligations.
• Strategic location: Panama is a bridge between North and South America. The Panama Canal is the global commerce artery, receiving 14,000 ships annually. The country boasts unbeatable connectivity and a developed transport infrastructure for international commerce.
• Free trade zones: Panama has several special economic zones with tax exemptions and simplified customs procedures. The Colón Free Trade Zone (CFZ) is the largest in Latin America and one of the biggest globally. These zones offer advantages to logistics, manufacturing and international commerce companies.
• Currency: Panama's dollarized economy minimizes the impact of currency fluctuations.
• Sophisticated financial sector: The country is a financial hub with robust banking services.
• Stability: Panama is one of the safest countries in Latin America with a resilient economy.
• Favorable business environment: Streamlined registration procedures and a developed financial industry simplify business processes.
• Skilled workforce: Panama's bilingual workforce with proficiency in trade and logistics will meet most of your needs. Immigration policies allow companies to employ foreign staff if local expertise is unavailable. The law establishes specific foreign personnel quotas within a company for different scenarios.
• Investor visa: Opening a business in Panama can help obtain a legal immigration status in the country. The Macro-business investor program is designed for foreign entrepreneurs wishing to establish a company in Panama. Applicants must invest $160,000 and employ at least five Panamanian workers.

Read also Investing in Panama

Key sectors for foreign entrepreneurs in Panama

Business fields favored by foreign entrepreneurs in Panama include:

• Tourism and hospitality;
• Real estate and property management;
• Logistics and trade;
• Technology;
• Health and wellness;
• Retail;
• Financial services;
• Marketing;
• Educational and training.

Good to know:

Some activities, like construction, may require a Panamanian legal representative or director. To open a retail business, a foreigner must partner with a citizen of Panama.

Some professions are reserved exclusively for Panamanian nationals. These include medicine, psychology, law, dentistry, sociology, agronomy, accounting, architecture and engineering. A foreigner cannot obtain a license to practice these professions. However, being a shareholder in a company providing such services is not prohibited.

Read also Finding a job in Panama

Types of business-ownership in Panama

When starting a company, choosing the right type of legal entity is critical. In Panama, standard options include:

• Corporation (Sociedad Anónima or S.A.): Ideal for medium to large firms, this structure offers limited liability and flexible shareholding. Shareholders' identities can remain private, which is a significant benefit for those valuing confidentiality. That said, total anonymity does not exist in this country anymore. The owner's identity has to be disclosed to Panamanian banks and tax authorities. Incorporation requires a Board of Directors (three members) and at least three officers. Additionally, corporations must issue corporate stocks.
• Limited Liability Company (LLC): This is a popular choice for small to medium-sized businesses. Compared to corporations, LLCs have simpler management structures and fewer formalities. LLCs protect the personal assets of the owners from business-related liabilities. The entity must have at least two shareholders, who can be individuals or corporations, local or foreign. There is no minimum capital requirement.
• Partnerships: This is the simplest and least expensive way to open a business here. It requires a minimum of two partners and does not offer personal asset protection. Often chosen by professional groups, partnerships are not subject to corporate tax. They vary by the level of liability and involvement of the partners:

1. General Partnership (Asociación General): These structures are often aimed at commercial and general business operations. All members share liability. If one partner engages in fraudulent activities, all members may be held accountable in civil courts.
2. Limited Partnership (Sociedad de Responsabilidad Limitada): Partners' liability depends on their capital contribution.
3. Civil Partnership (Sociedad Civil): All partners have unlimited liability in civil courts. These partnerships are often tailored for specific professional needs. Doctors, lawyers and architects tend to prefer this structure.

• Sole Proprietorship: This type is best for those running small-scale or freelancing businesses. It does not provide limited liability protection.
• International Business Companies (IBCs): International Business Companies (IBCs) are popular for offshore operations, asset management and international trading. The identities of the shareholders remain confidential, and their assets are legally separated from the company's assets. However, due to increased regulations, banks require shareholders' information disclosure. IBCs allow simpler ownership structures, requiring at least one shareholder and three directors.
• Private Interest Foundations: This entity type was created in Liechtenstein. It blends the benefits of a trust (for asset management) with the practicality of a corporation (for legal structure). P.I.F.s cannot engage in commercial activities but provide robust protection for assets, such as real estate, company stocks or bank accounts. P.I.F.s must have a founder, a Foundation Council and beneficiaries. It is also possible to assign a protector, an individual or a legal entity chosen by the founder.
• Non-Profit Organizations: NPOs are private entities designed for charitable, educational or social purposes. They must adhere to strict guidelines and cannot distribute profits to members or founders. However, the proceeds of an NPO can be used to hire personnel or services to fulfill its mission. This structure must have a Board of Directors with a minimum of three members.
• Private Investment Funds: This entity is set up for collective investment purposes or pooling financial resources. These funds must have a legal representative in the Republic of Panama, such as a broker or brokerage firm, investment advisor, bank, accountant or lawyer. The legal representative must be authorized by the Superintendence of Securities Market (SSM). Two types of private investment funds exist here: PIF-20 and PIF-50. The former is limited to 20 investors, while the latter allows the participation of 50 members.

Read also Panama's labor market

Steps to register a company in Panama

Working with Panamanian lawyers is crucial for establishing a business in Panama. Knowing the nuances of the laws, they can recommend the best option for your needs. It is also advisable to collaborate with accountants. They can explain the fiscal benefits of each structure and future tax obligations. Sometimes, there is no need to seek two separate advisors. Many law firms work with licensed accountants so that they can guide you through the whole process.

The steps to register a business in Panama are as follows:

1. Choose a business name: Come up with a unique idea and check the Public Registry to confirm its availability.
2. Draft and notarize the articles of incorporation: Your lawyer will prepare and notarize these documents. They should include the following information:
3. The company's purpose;
4. Structure;
5. Address;
6. Legal representation.
7. Register with the Public Registry: This step makes the company a legal entity. If all the documentation is in order, it should only take a few days.
8. Get a RUC: Registro Único de Contribuyente (RUC) is a tax ID issued by the General Directorate of Revenue.
9. Open a corporate bank account: This country has a robust financial sector. Local banks can tailor the best options for your business needs. However, strict banking regulations require thorough documentation. The requisites include, but are not limited to, articles of incorporation, a certificate of good standing, a shareholders and directors registry, a business license, IDs of the shareholders and directors and professional and financial references. Account approval may take longer than registering a company. Be patient and plan accordingly to avoid impacting your business plans. Often, attorneys collaborate with banks and can assist you with the process. Law firms can provide you with a package that includes opening a bank account along with setting up a business.
10. Obtain necessary licenses: Entities wishing to engage in commercial activities need a business license. The Panama Emprende online system provides a hassle-free licensing process. Some industries, like banking, insurance and telecommunications, require specific licenses. For example, if you aspire to open a financial brokerage firm, you must arrange a mandatory license from Panama's Superintendency of Securities Market.
11. Comply with the Social Security requirements: If the business requires employees, registration with the Panamanian Social Security Fund is necessary. The fund is responsible for employee benefits like health insurance and pensions.

Read also Opening a bank account in Panama

Things to consider when starting a business in Panama

Establishing a company involves a complex process beyond the legal framework. When embarking on your business journey in Panama, consider the following:

• Language: English is common in the business environment in this country. Even so, documentation and procedures at governmental institutions are conducted in Spanish. Bilingual lawyers are valuable at the start of your project. Later, you may also need staff proficient in foreign languages and translators.
• Legal representation: Working with Panamanian attorneys simplifies the registration process, ensures compliance with regulations and helps navigate disputes. The law firm handling your business paperwork may also serve as a resident agent. The latter is a mandatory figure that serves as an intermediary between the legal entity and the government.
• Real estate and office space: Factoring in the availability and cost of office space is vital. There is no shortage of commercial real estate options in this country. Panama City even has an excess supply. The latter has caused a slight price decrease for this type of property. Businesses have a lot to choose from. Additionally, acquiring an office space may be a better solution than renting one, depending on your needs.
• Tax obligations: Prosperous and peaceful operations of a business depend on its compliance with tax obligations. An in-house accountant is not necessary. However, working with a licensed accountant is essential. Annual reports and accounting records are mandatory aspects of a company's paperwork. Corporate taxation in Panama is set at a flat rate of 25%, with earnings made outside the country tax-exempt. Small businesses with a yearly income below $11,000 are not taxed. Companies in special economic zones benefit from tax reductions and exemptions.
• Corporate governance: Clear governance structures and accurate records are crucial for long-term success.
• Labor laws: Assess your workforce needs in advance. If you need to hire specialists from abroad, be aware of the quotas for foreign staff in Panamanian companies.

Possible challenges for foreign entrepreneurs in Panama

Panama offers countless business opportunities. The registration process is easy, and the tax incentives are significant. However, some challenges that international investors face in the country include:

• Bureaucracy: This country is known for its slow pace of life. Its administrative processes can be a drag. Do not despair. Getting mad or raising your voice will only slow things down more. Get used to the tropical modus operandi.
• Cultural differences: Panama's business culture may differ from your country of origin. Understanding local processes is a key to success. Do not expect things to be the same as in your home country.
• Banking requirements: Opening a corporate account in Panama used to be hassle-free compared to other jurisdictions. However, after the Panama Papers scandal, banking regulations have been tightened. Long approval times and extensive documentation requirements are common. Some banks are stricter than others. Local lawyers can recommend the best options for your needs.
• Local workforce: A typical complaint of foreign entrepreneurs is the work ethic of local staff. Panamanian labor laws tend to protect employees rather than employers if disputes arise. However, businesses can employ foreign specialists within specific personnel quotas. Professional advice may be necessary to organize your company's workforce.
• Changes in regulations and economic policies: Regulations can change without notice. Stay updated through official sources or consult with legal professionals.

Takeaway

Panama attracts international investors due to its varied legal structures, territorial tax system and free trade zones. If you seek asset protection and tax optimization, look no further. Setting up a business is straightforward, yet working with local lawyers is essential.

Useful links:

General Directorate of Revenue

Ministry of Commerce and Industry

Panama Emprende