Company formation in Panama

The first step in the company registration process is to choose the appropriate structure for your business. In Panama, entrepreneurs are given a choice between simple and more complex business forms:

• Individual Entrepreneur. This is the simplest form of doing business in Panama. It is available to any individual, regardless of citizenship. Only an ID card is required to register an individual entrepreneur. In this structure, the business is owned and operated by one person. This person is fully responsible for all obligations of the business, both financial and legal.
• Legal Entity. This is a business form in which the business is owned and operated by several people. These people are called shareholders or partners. To incorporate a legal entity, legal approval is required, as well as registration in a public registry. The register must show the names of the shareholders or partners of the company and their investments. Shareholders or partners are not personally liable for the company’s obligations; their liability is limited to the amount of their investment.

In Panama, there are several types of companies to register for businesses of all sizes and industries. The most common types of companies in Panama are:

Sole proprietorship
This is a business that is owned and operated by one person. A sole proprietorship is the simplest type of business, but it does not provide limited liability protection for its owners – the founder of the company is responsible for everything the business does, both financially and legally.

Limited Liability Company (Sociedad de Responsabilidad Limitada, S.R.L.)
This is a popular choice for small and medium-sized businesses in Panama. A limited liability company requires two to five founders. The liability of the members is limited to the amount of capital contributed, and there is flexibility in management and profit distribution. This means that the personal assets of the members are not at risk if the company incurs debts or liabilities. The share capital can be in any currency.

Corporation (Sociedad Anonima, S.A.)
This is the equivalent of a public limited company. A joint stock company requires between three and 50 founders of any nationality and allows for the issuance of shares. The person who has invested in the company is liable only to the extent of his investment.

Closed Joint Stock Company (Sociedad Anónima Cerrada, SAC)
This is a form of organization similar to a public limited company (Sociedad Anónima, SA), but with restrictions on the transfer of shares. In a closed joint stock company, shares cannot be freely formed on the open market, and their transfer is often dependent on the consent of other shareholders or the company’s limited articles of association.

Non-profit organizations (Fundaciones sin Fines de Lucro)
These are legal entities created for charitable, religious, or educational purposes. Non-profit organizations are exempt from income tax in Panama.

International Business Companies (IBC)
These are offshore companies that are not taxed in Panama. IBCs are often used to hold assets, conduct international business, and protect financial privacy. A minimum number of shareholders and directors are required to incorporate an IBC. Shareholders can be citizens of any country and directors can be individuals or corporations. IBCs are not required to disclose their financial information to the public.

The best type of company for your business will depend on several factors, such as the size and nature of your business, your tax objectives, and the level of privacy desired.

Panama’s jurisdiction is attractive to businesses because of its advantages:

Stable economy
Panama is one of the fastest-growing economies in the world. The country’s GDP is growing at 10.8% per year, well above the global average (according to current data, in 2023, Panama’s GDP is about US$76.52 billion and its GNI is US$17,358).

Easy company registration
Registering a company in Panama is an easy and quick process that takes only 4-5 days. You do not need to be physically present in the country or report to the government to incorporate a company. Board meetings can be held anywhere in the world, regardless of where the company is located.

Privacy
Panama is an offshore jurisdiction that offers corporations complete privacy. It also has bearer shares that allow owners to remain anonymous. Bank secrecy laws penalize the disclosure of account information to third parties. It is important to note that Panama does not have mutual legal assistance agreements (MLATs).

Favorable tax policy (0%)
Panama offers an attractive tax system for businesses. Income earned outside of Panama is not subject to income tax. This means that multinational companies can reduce their tax liability by moving their headquarters to Panama.

Trade advantages
Panama is a country located on a narrow isthmus between North and South America. It is home to the Panama Canal, the most important transportation route connecting the Atlantic and Pacific Oceans. Panama’s strategic location makes it an important trade and financial center. It also has free trade agreements with several countries such as the United States, Canada, and the European Union.

Lack of exchange controls
Panama provides freedom of capital movement for offshore companies. This means that such companies are free to import and export funds from the country without any restrictions.

No nationality restrictions
There are no nationality or residency restrictions for directors, shareholders, and officers.

No restrictions on the amount of share capital
Offshore companies in Panama can be registered with any authorized capital, regardless of its size. They are also not obliged to contribute the full amount of the authorized capital. In addition, Panama allows the issuance of shares with non-nominal value, voting, and non-voting shares.

Communication systems
Panamanian companies can be assured of reliable telecommunications services, as the country has a low risk of natural disasters. This allows them to utilize modern technology and solutions to improve business efficiency.

Investors can register a company in Panama in various forms, but the most common forms for offshore companies are corporations and limited liability companies.

The main requirements for registering a company in Panama are:

• name – the company must have a unique name, which includes an abbreviation indicating the legal form of organization (Corp., Inc., SA, etc.);
• companies must have a minimum of three directors, who can be both legal entities and individuals;
• foreigners can own 100% of the shares of a Panamanian corporation – there are no restrictions on the nationality of the founder and no residency requirements;
• presence at registration – the founder of the company does not have to be present at the registration of the Panamanian company;
• minimum number of shareholders of the company – one person (individual or legal entity);
• requirements to the authorized capital of the company – there are no requirements (the standard is about 10,000 US dollars, and there is no requirement for the actual contribution of this capital to the company’s account);
• fees – companies are required to pay a one-time fee upon incorporation, and pay an annual fee to the government.

The state fees for company registration in Panama are payable to the Panamanian Ministry of Commerce and Industry (MICIP) and are:

• US$500 for corporations;
• US$250 for limited liability companies.

In all subsequent years of the company’s existence, it must renew its registration annually. The amount of the state fee for renewal of the company’s status is the same as for registration.

The legal framework for business in Panama is primarily governed by the following laws:

Panama Commercial Code
This code establishes the general framework for the creation, operation, and liquidation of companies in Panama. It also covers topics such as contracts, intellectual property, and bankruptcy.

Panama Civil Code
This code deals with general concepts of civil law such as property rights, contracts, and torts. It also contains provisions on family law and inheritance.

Panama Tax Code
This code describes the various taxes that apply to businesses and individuals in Panama. It also guides tax filing and compliance procedures.

Labor Code of Panama
It is the legal framework governing labor relations in the country. This code establishes the rights and obligations of both employers and employees. The code regulates the conclusion of labor contracts, the rights and obligations of the parties involved, and the terms and conditions of employment. It also establishes working hours, breaks, and overtime and determines the minimum wages that employers must pay their employees.

In addition to these basic laws, several other laws and regulations govern certain aspects of business in Panama. These include Law No. 45 on Consumer Protection (2007) and Law No. 81 on Personal Data Protection (2019).

The government of Panama has also enacted several laws and legislation to attract foreign investment and promote economic development. These include Law No. 32 on Free Trade Zones (2011).

The legal framework for business in Panama is generally considered modern and business-friendly. The government has made a concerted effort to reduce red tape and streamline the regulatory process.

Panama’s tax system is one of the most competitive in the world. This is because Panama has a territorial tax system, which means that income earned outside the country is not taxed. This applies to both individuals and companies.

Panamanian companies that do business in Panama or employ workers in Panama are required to pay income tax. The corporate income tax rate in Panama is 25%. This is a flat rate, but several exemptions and incentives can reduce the rate to 0%.

In addition to corporate income tax, Panama has several other taxes that apply to businesses and individuals. These include:

• value Added Tax – this is a tax on goods and services that applies at a rate of 7%;
• social tax – applied to wages and salaries at a rate of 9.75% for employers and 12.25% for employees;
• property tax – applies to the value of real estate at a rate of 0.25%.

If a Panamanian company does business outside Panama, it is exempt from all local taxes, including income tax, capital gains tax, dividend tax, and stamp duty on transfers of corporate taxes and other property.

Corporations incorporated in Panama must comply with several reporting obligations, including:

• Accounting records. Entities that do not do business in Panama or are only asset holders must keep their books of account and supporting documents for at least five years. They must make this information available upon request by the competent authority.
• Annual Tax Returns. Corporations must file annual tax returns with the Dirección General de Ingresos (DGI). These returns must disclose the company’s income, expenses, and other financial information.

Individuals earning income in Panama must also comply with reporting requirements. These requirements include:

• Annual tax returns. Individuals earning income in Panama are required to file tax returns with the DGI each year.
• Foreign income information. Individuals who receive income from outside Panama are required to notify the DGI of such income, including income from investments, pensions, and other sources.

Legal entities and resident agents who fail to comply with accounting and reporting obligations are subject to fines ranging from $5,000 to $1,000,000. The amount of the fine depends on the degree of culpability, the presence of recidivism, and the extent of the violation. In addition, the management rights of the legal entity may be temporarily suspended, or the legal entity itself may be compulsorily liquidated by the DGI.