Businesses looking to invest in Central America should set their sights on Panama.
Panama has a robust economy based on the US dollar, a stable government, and is involved in many free trade agreements. Panama has served as the crossroads of trade for the Americas due to the Panama Canal, making it one of the world's most important areas for trade. The country also has a low cost of living and is very safe.
Panama's economy is growing and is expecting 5% growth in 2019. There are investments in public infrastructure and in February 2019 a copper mine will be opening and is expected to generate about $2 billion of annual exports helping to boost the economy of the country. The Panama Canal is essential for global trade and represents 10% of the country's GDP. One of the sectors that has lost importance in the country is agriculture. The main sources of economic activity are logistics, financial services and tourism. Panama can offer tax incentives for companies especially in the industries of logistics, shared services and research and development. Due to new laws, two other sectors that are seeing investment growth are call centres and reforestation.
Benefits for investors
The Multinational Headquarters Act has allowed for companies to establish headquarters in Panama with the help of tax incentives and also gives the option for bringing in foreign workers under a special visa. Companies in Panama normally have a limit of 10% foreign workers but that does not apply to these companies under this Act. This law gives multinational companies an advantage for investing in Panama.
Incorporation of a company in Panama
Depending on the entity you pick for your company, the process to incorporate a business in the country takes about 7-10 days. An off-shore company only needs to be registered in the Mercantile Registry. They do not need an operating licence unlike a company that is physically operating the country. Any company that will be physically doing business in Panama will need to follow a 4-step process:
- register with the Mercantile Registry;
- obtain an operating license;
- register with the tax authority;
- get a municipal permit.
If your business will have employees, you must register with the social security office within the first six days that the employee begins employment to avoid fines. Employee contracts must also be submitted to the Labour Ministry and they must accept the terms. Panama also requires businesses to have a fiscal printer for invoicing which is a physical printer with special software.
Tax rates and Special Economic Zones
The corporate tax rate in Panama is 25%. There is an alternative method for calculating income tax for tax payers that have taxable revenue greater than $1.5 million.
The sales tax rate is 7%. Withholdings on dividends are 5% or 10% depending on the source and interest is subject to withholding of 12.5%.
There are Special Economic Zones that have been created in Panama with tax and hiring incentives to starting businesses in these areas. One is called the City of Knowledge and is for companies that are technical or scientific.
Panama has two free trade zones, Colon and Panama Pacific, one on the Caribbean ocean and the other on the Pacific Ocean. Panama Pacific is a business hub with companies that specialize in logistics and services. This zone is located 15 km from Panama City, giving businesses a proximity to the city while helping to remove some of the congestion in the actual city centre. Colon free zone is the second largest free zone in the world and the main commercial centre for Latin America and the Caribbean. Businesses operating in the Colon free zone are mostly for logistics, warehousing and distribution purposes.
Challenges to investing in Panama
While Panama provides incentives and many possibilities for investment in the country, there are challenges that you must be aware of before opening a business. Due to heightened requirements and requests for extensive paperwork, it can take up to two months to open a bank account.
Since Spanish is the national language of Panama, every document that is needed for official transactions must be translated into Spanish.
TMF Panama can help
Investing in Panama is the right choice for your business but it is important to have local help when starting a business in the country. TMF Panama has local experts that can assist both local and international clients, providing financial, legal, HR and payroll services across the country and help you succeed and stay compliant in all of your business ventures.
Get in touch with us to see how we can help your business grow in Panama.
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.