Company formation in Panama

Panama is one of the most attractive jurisdictions for offshore company incorporation due to its legal and economic climate. The country offers many advantages for international business, such as political stability, a favorable tax system, and a strategic location. The Panama Canal provides access to markets in Latin and North America as well as Europe, making Panama ideal for trade and transportation operations.

One of Panama’s main advantages is its territorial tax system. This means that income earned outside the country is not taxed, making Panama ideal for companies with international operations. More than 300,000 registered companies use Panama for offshore operations such as banking, shipping, and trading.

Panama is also known for its high degree of privacy. Banking and corporate secrecy laws provide strong protection for the assets and identities of company owners. In addition, Panama has no currency controls, allowing for the smooth transfer of funds around the world.

There are no strict accounting and auditing requirements for offshore companies in Panama, and meetings of directors and shareholders are not mandatory. This makes Panama companies convenient to use as tools for asset protection, tax optimization, and privacy.

Panama continues to be one of the most popular jurisdictions for company incorporation due to the combination of these advantages, making it an attractive destination for those seeking an efficient solution for international business.

General Information

The company incorporation process in Panama is an easy and affordable way to set up a business with a wide range of benefits. Panama is a popular choice for entrepreneurs and investors due to its flexible legal system, attractive tax environment, and high standards of confidentiality.

Key benefits of registering a company in Panama include:

Taxes Benefits

One of the main advantages is the territorial tax system. Income earned outside of Panama is not taxed. This makes Panama ideal for international companies that can significantly reduce their tax liabilities by operating outside the country.

Fast Set-Up of a Company

Registering a company in Panama takes only 4-5 business days. This fast process allows entrepreneurs to quickly launch their businesses and begin operations as soon as possible.

Panama as a Financial Services Center

Panama has a well-developed financial infrastructure, which makes it an attractive center for offshore companies. A tightly regulated banking sector, a stable currency, and the availability of a variety of financial services create a reliable environment for international business.

Privacy and Confidentiality

Panama offers a high level of privacy for business owners. Bank secrecy and identity protection laws ensure strong privacy and asset protection. Information about the beneficiaries of companies is closely guarded, making Panama one of the most private places to do business.

Financial Reporting for Panama Companies

Financial reporting requirements are minimal. Companies are required to keep accounting records but can keep records anywhere in the world. The only mandatory payment is an annual franchise tax, which keeps the company in good legal standing.

Apostille/ Notarization/ Legalization

Panamanian company documents can be notarized or legalized for use in other countries. Panama is a party to the Hague Convention, which allows the use of a simplified apostille procedure for the official recognition of documents abroad.

When setting up a company in Panama, you will have access to a wide range of legal forms and business types to suit different business needs.

Popular legal structures for companies in Panama

The Panamanian jurisdiction offers several options for legal structures, of which the following are the most popular:

Corporation (Sociedad Anónima – SA)

A corporation in Panama is similar to a public limited company. Its creation requires from three to 50 founders, who can be of any nationality. The main advantage is that shares can be issued, and the liability of the shareholders is limited to their contribution. This structure is suitable for large companies planning to raise capital through the sale of shares.

Closed Joint Stock Company (Sociedad Anónima Cerrada, SAC)

This is a form of corporation with limited transfer of shares. The shares cannot be freely traded on the open market, and their transfer often requires the consent of the other shareholders. This type of company is suitable for family businesses or organizations where shareholders want to control share ownership and prevent outside influence.

Limited Liability Company (Sociedad de Responsabilidad Limitada – SRL)

SRL is popular among small and medium-sized businesses. It requires two to five founders, and their liability is limited to the amount of funds invested. SRL provides flexibility in management and profit distribution, making it suitable for entrepreneurs seeking protection of personal assets and flexibility in the business structure.

Sole proprietorship

This is the simplest type of business owned by one person. Sole proprietors are fully responsible for the business, including its debts and liabilities. This structure is suitable for small businesses and self-employed individuals who want to manage their businesses directly.

Private Interest Fund (Fundación de Interés Privado)

This structure is often used for personal asset management and inheritance planning. The fund protects assets from creditors and other risks while ensuring confidentiality. It is not intended for commercial activities but can be used for charitable or personal purposes.

Non-profit organizations (Fundaciones sin Fines de Lucro).

These organizations are created for charitable, educational, or religious purposes. They are exempt from income tax in Panama, which makes them favorable for those who want to carry out socially significant activities without a commercial purpose.

International Business Companies (IBC).

International Business Companies (IBCs) are a popular form of offshore structure in Panama for international operations. These companies are exempt from taxes on income earned outside of Panama, making them particularly attractive for international business. IBCs can have one founder and one director, who can be individuals or entities of any nationality.

The advantage of an IBC is complete confidentiality and flexibility in management. This structure is suitable for companies engaged in international trade asset ownership and for those seeking legal protection and a reduced tax burden.

When deciding whether to incorporate a company in Panama, several factors need to be considered, including the specifics of the business activity, the number of founders, the degree of liability of the participants, and the tax implications.

Types of business in Panama

Panama offers a wide range of opportunities for establishing and operating various types of business activities:

Holding

A holding company manages stakes in other companies, thus creating a business group. The main purpose of such a business is to own and control subsidiaries, investments, or other assets, thus optimizing management and reducing the tax burden. Holding companies are popular among international investors because Panama does not tax income earned outside the country.

Trust

Trust companies in Panama are created to protect and manage assets for the benefit of beneficiaries. A trust allows assets to be transferred to a third party (trustee) for management for protection from creditors, division of assets, and privacy.

The advantage of trusts is the high level of asset protection and the ability to preserve the anonymity of the owner. This structure is suitable for individuals who wish to protect their assets and ensure that they are passed on through inheritance.

Financial Services

Financial companies in Panama can provide services in the areas of banking, insurance, and investment. The jurisdiction offers a well-developed financial infrastructure and favorable legislation for such organizations. Panama’s banking system is one of the most stable in the region, and privacy laws help protect personal and corporate information.

The advantage of financial services in Panama is the opportunity to operate in a stable economy with minimal tax obligations. This form of business is suitable for international banks, insurance companies, and investment funds.

Asset Management

Asset management companies in this jurisdiction are engaged in investing and managing financial portfolios for clients, including stocks, bonds, and real estate. Panama is an attractive jurisdiction for such companies due to its tax regime and high standards of confidentiality.

The advantage of asset management in Panama is the ability to work with international clients and minimize taxes on income earned abroad. Suitable for private and corporate investors who wish to manage capital efficiently.

E-commerce

E-commerce is the sale of goods and services over the Internet. Panama provides a favorable environment for startups and online companies due to the lack of taxation on income earned outside the country and high privacy.

The advantages of e-commerce in Panama are low operating costs, no taxation on outside income, and the ability to reach a global audience. Suitable for owners of online stores, IT companies, and startups focused on international markets.

Company Types

The basic requirements for starting a company in this country include:

• a unique company name with an appropriate abbreviation;
• the presence of a minimum of three directors;
• the possibility of full foreign ownership;
• no need for the founder to be physically present at the time of incorporation;
• minimum number of shareholders per person;
• no mandatory requirements for authorized capital;
• payment of a one-time registration fee and an annual fee.

Necessary Documents

To register a company in Panama, an application signed by all founders must be submitted. The application must be accompanied by several documents that are submitted to the State Registry.

Company documents

• Memorandum of Association and Articles of Association – documents that define the legal structure of the company, its name, objectives, rights, and obligations of the founders, as well as the distribution of shares;
• minutes of the founders’ meeting – a document confirming the intention to establish the company and approving the main provisions of its activities, including the appointment of directors;
• resolution on the appointment of directors and shareholders – a formal decision of the founders on who will hold the positions of directors and shareholders of the company.

Documents confirming the identity of the founders

• copies of the passports of the founders – scanned copies of the passports of all founders and directors of the company;
• ID card (if applicable) – an alternative document for founders who do not provide a passport.

Documents confirming the place of residence of the founders

• utility bills – a bill for electricity, water, or internet, issued in the name of the founder and not older than three months;
• bank statement – a document indicating the address, issued by an official bank, not older than three months;
• residence certificate – a document issued by the local authorities confirming the founder’s residence address.

All these documents must be notarized.

KYC Documents Checklist

KYC documents are required to verify the identity of individuals and companies when registering companies in Panama. These documents help to verify the legitimacy of sources of income and comply with international anti-money laundering and anti-terrorist financing standards.

The list of required documents includes:

Company Documents

To comply with anti-money laundering laws, a corporation or organization needs to provide the following company documents in certified form (scan versions):

• Memorandum of Association and Articles of Association – the basic documents that define the structure and purpose of the company;
• register of directors – a list of all directors of the company, including their contact details;
• register of shareholders/ final beneficiaries – a document containing information on all shareholders and final beneficiaries of the company.

Members of the company

All members of the corporation, including directors (or managers for LLCs), shareholders (or members for LLCs), ultimate beneficial owners (UBOs), and contact persons, must provide proof of identity and address. This requires:

• certified color copies of passports – valid passports of all members;
• tax identification number;
• proof of income (latest tax return or financial/bank statement for the last 12 months);
• a letter of recommendation from a bank, lawyer, attorney, or solicitor;
• proof of residential address, such as utility bills no older than three months.

Please note that the list provided, while exhaustive, may not cover all requirements. For additional individualized advice tailored to your specific case, please contact our support team at any time.

Applicable Legal Frameworks and Regulations

Panama’s legal system is based on the civil law system inherited from Spain, with influences from English common law. The regulation of offshore services in Panama is a combination of these legal systems, including the recognition of trusts and the creation of a sophisticated infrastructure for financial services.

The legal framework for business in Panama:

Corporations Law (No. 32 of 1927)

This law defines the rules for the establishment and operation of Panamanian corporations. It covers aspects of governance, shareholders’ rights, and directors’ liability, providing flexibility in structuring businesses.

Trusts Law (No. 1 of 1984)

This law regulates the creation and administration of trusts in Panama, providing a legal framework for asset protection and estate planning. It allows trusts to be used for a variety of financial and wealth structures.

Limited Liability Companies Law (No. 4 of 2009)

The law establishes the rules for the creation of limited liability companies (LLCs) in Panama, defining the rights and obligations of the members, as well as the minimum requirements for their registration and operation.

Private Foundations Law (No. 25 of 1995)

This law allowed for the creation of incorporated trusts that are used for asset protection and wealth management. Panama was the first jurisdiction to offer such facilities, which contributed to the growth of financial services.

Panama Commercial Code

The document establishes the general principles governing the formation, management, and liquidation of companies. It also covers issues relating to contracts, intellectual property, and bankruptcy.

Civil Code of Panama

The Code contains the basic rules of civil law, including property rights, contracts, and torts, as well as provisions on family law and inheritance.

Panama Tax Code

It outlines the different types of taxes applicable to individuals and businesses in the country, as well as the procedures for filing tax returns.

Panama Labor Code

The Code regulates labor relations, establishing the rights and obligations of employers and employees, the procedure for concluding labor contracts, terms of employment, and minimum wages.

Laws on attracting foreign investment

The Government of Panama passed Law No. 32 on Free Trade Zones (2011) to attract foreign investment and promote economic development.

Additional laws

There are also other laws, such as Law No. 45 on Consumer Protection (2007) and Law No.81 on Personal Data Protection (2019), that regulate certain aspects of business.

Overall, the legal framework for business in Panama is considered modern and favorable, with active efforts by the government to streamline the regulatory process and reduce red tape.

Panama has a business-friendly tax system that offers several favorable conditions for companies and investors. The list of main taxes includes:

Corporate Taxes

The corporate income tax rate is 25% and 30% for companies with more than 40% government share. Tax returns are filed within three months after the end of the fiscal year, with a possible one-month extension.

Capital gains tax

A 2% transfer tax is levied on the transfer of ownership, and a 10% capital gains tax on the sale of real estate on net income.

Branch profits tax

Profits of branches of foreign companies are subject to the same taxes as profits of local companies.

Value Added Tax (VAT)

The standard VAT rate is 7%, 10% for alcoholic beverages and 15% for tobacco products. Some goods, such as food and medical services, are exempt from VAT.

Advance tax on dividends

Companies are liable to pay an additional tax of 4% on behalf of shareholders if dividends have not been paid. For companies in a free zone, the rate is 2%.

Trading Privilege Tax

All incorporated companies are required to pay an annual tax of $300, with a late payment penalty.

Annual license tax

Companies in trade and industry pay a tax of 2% of net worth, up to a maximum of $60,000.

Social Security Tax

Employers and employees pay taxes according to set rates.

Tax on interest and dividends

Services and fees paid to residents are not taxed, except for dividends. Interest and dividend income is taxed at ordinary rates, but only on 50% of income.

Panamanian companies doing international business enjoy substantial tax benefits. They are fully exempt from all types of local taxes on profits earned abroad.

Taxation

Legal entities registered in Panama are required to comply with legal reporting requirements. For non-compliance with accounting and bookkeeping requirements, legal entities in Panama can be fined up to $1 million and may be disqualified from operating their business or liquidated altogether.

Accounting and Bookkeeping

Companies registered in Panama are required to keep accounting records even if they do not do business in the country or only hold assets. Accounting books and supporting documents must be kept for at least five years and may be requested by the competent authorities if necessary.

Auditing requirements

Mandatory auditing is not required for most companies registered in Panama, allowing them to significantly reduce administrative costs. However, all legal entities are required to file annual tax returns with the Dirección General de Ingresos (DGI), disclosing income, expenses, and other financial information.

For offshore companies not doing business in Panama, reporting requirements are minimal. There are no additional tax or audit obligations. This audit exemption promotes a flexible and favorable regulatory environment for international business.

To date, Panama does not have specific regulations governing blockchain and cryptocurrencies.

In 2018, the Superintendency of Banks (SBP) reported that cryptocurrencies are not within its purview and that Panamanian financial institutions have not requested authorizations to work with these instruments. In the same year, the Securities Market Authority (SMV) issued an opinion stating that:

• cryptocurrencies are not considered securities;
• cryptocurrencies are not currencies, and therefore, the exchange of cryptocurrencies does not qualify as a FOREX activity;
• no license is required for cryptocurrency-related activities;
• brokerage houses cannot advise or trade cryptocurrencies.

Currently, no legislation in Panama recognizes cryptocurrencies as monetary instruments, securities, or digital assets.

Despite the lack of formal regulation, a bill regulating cryptocurrency exchanges and requiring a license is pending in Panama’s National Assembly, but implementation is still far off.

The Public Registry of Panama plays a key role in the registration and control of commercial activities in the country.

Registry of Directors

Panamanian law requires the appointment of a board of directors to successfully register a company. However, information about the directors is not publicly available. A company is required to maintain an internal register with details of its directors, including their names, addresses, and copies of their identity cards. These records can be made available to regulators or shareholders if required.

Registry of Shareholders

The company formation process in Panama also includes the appointment of shareholders. However, as with directors, a register of shareholders is not available to the public. Companies must keep data on their shareholders internally. The internal register should contain information including names, addresses, number of shares, and class of shares held by each shareholder.

Nominee Services

Panamanian law allows the appointment of nominee directors or shareholders to enhance confidentiality and protect the identity of owners. However, their use must also comply with applicable Panamanian laws and regulations.

Corporate Structure

Panama offers an attractive environment for registering and doing business by combining tax incentives with certain economic substance requirements. Compliance with these requirements allows companies to operate legally in the jurisdiction and enjoy all of its benefits.

Economic Substance

Panama, although considered an offshore jurisdiction, has introduced certain economic substance requirements for companies incorporated in its territory. This means that a company cannot exist solely on paper but must demonstrate real economic activity.

The main requirements for economic presence in Panama are:

• Local address and office: The company must have an official registered address in Panama and usually rent a physical office.
• Local employees: Full-time local employees must be hired. The number of employees depends on the type of business the company is engaged in and the size of its operations.
• Bank accounts in Panama: The company must open and maintain bank accounts with local banks.
• Meetings in Panama: Regular meetings of directors and shareholders must be held in Panama or using appropriate technology.

Note: The economic substance requirements may vary depending on the type of business of the company and other factors. Therefore, it is recommended to consult our experts before registering a company.

Residency Requirements of Shareholders and Directors

One of the key advantages of incorporating a company in Panama is that there are no strict residency requirements for shareholders and directors. This means that:

• shareholders and directors can be citizens of any country;
• physical residence in Panama is not mandatory.

This flexibility makes Panama attractive to foreign investors wishing to set up a company without having to relocate to the country.

Note: Although there are no formal residency requirements, it is advisable to appoint directors with experience in running companies and to carefully select nominee directors (if used). This will help to enhance the company’s reputation and facilitate communication with government authorities.

Panama’s banking system is one of the largest and most developed in Central America.

The advantages of the banking system in this jurisdiction are:

• stability and reliability – the Panamanian banking system is considered one of the most reliable in Central America;
• a wide choice of banks – there are many local and international banks in the country offering a variety of banking products and services;
• confidentiality – Panama respects banking secrecy, making it an attractive place to do business.

The process of opening a corporate account in Panama

Typically, a corporate account with a Panamanian bank is opened after a company is incorporated within 1 – 2 business days. However, the exact terms may vary depending on the bank chosen and the complexity of the client verification procedure.

The list of documents and requirements for opening a corporate bank account in this jurisdiction may vary from bank to bank. Usually, you will need:

• certificate of incorporation of the company;
• Articles of Association of the company;
• documents confirming the identity and powers of the director;
• documents confirming the source of funds (not always required).

The choice of a bank to open a corporate account should be made, taking into account several factors, such as tariffs and commissions, the list of services provided, and location. Among the leading banks in the country are Banco General, Bladex, and Bancolombia Panama.

Banking in Panama