• Free Zones in Panama:  Comparative Advantage
  • July 26, 2012
  • Law Firm: Mossack Fonseca Co. - Panama Office
  • Through the enactment of special laws, Panama has established itself as an international center for logistics, banking, legal and maritime services. Today, in addition to the world famous Colon Free Zone, the country has promoted the establishment of well-known international companies and the development of new technologies through the creation of "special areas" that offer excellent tax, immigration, labor and operational incentives. By way of illustration, we cite the Panama Pacifico Special Economic Area, the Multinational Companies Headquarters and the City of Knowledge.

    Additionally, in an effort to update its legislation and adapt it to the guidelines of the World Trade Organization, Panama enacted Law No.32 of April 5, 2011, which repealed the old Act on Processing Export Zones (Act No.25 of 1992), and created the new Comprehensives and Simplified Regime of Free Zones, which may be established anywhere in the country, as long as their activities do not significantly impact the local ecosystem.

    To date, according to statistics provided by the Ministry of Commerce and Industry, there are fourteen Free Zones registered, nine of which are already operating. Within these zones, eighty-nine companies have been set up under the previous law and nine under Law 32 of 2011, generating two thousand seven hundred and twenty-nine new jobs.

    Within the free zones, the customs and tax regime is applied differently, allowing the establishment of companies whose production or services are directed to the foreign market. The enactment of this law has expanded the range of opportunities for the establishment of manufacturing, assembly and high-tech companies, as well as higher education institutions, logistics and environmental services, among others.

    The law provides for two kinds of licenses, namely: the Promoter/Developer License and/or the Operator's License and the Free Zone-Based Company License. This Act benefits both the developer as well as any individual or company that decides to be based within a Free Zone. The Developer conceives the idea and develops it while the operator is the one who assumes the management and administration of the Free Zone entity. The institutional and administrative formalities for obtaining licenses must not last more than three months.

    Among the most important requirements to become a Developer is making a minimum investment of U.S.$250,000.00 and have a minimum of two hectares of land to develop the project.

    As for the requirements to obtain a License for a company based in a previously established Free Zone, they are  different and no minimum investment is defined.  However, if the employer wishes to apply for the Permanent Resident Visa as a Free Zone Investor, he/she will need to make a minimum investment of $250,000.00.

    As for the tax benefits, the general principle is that any company established under this scheme will be exempt from direct and indirect taxes, thereby enjoying exemptions on imports of raw materials, the import of equipment, supplies and any goods or services required for their operations. Notwithstanding the foregoing, from January 1, 2016, companies will start paying some taxes, which remain minimal, for example, the tax for the payment of dividends to its shareholders. By law, this tax only represents 5% of the profits distributed to shareholders.

    Another tax that will take effect from 2016 is the annual tax of 1% on the company’s capital. This tax is paid in lieu of the 2% tax for the notice of operation. The amount payable in respect of this annual tax shall not be less than $100.00 nor more than $ 50,000.00.

    This law also creates an immigration regime that allows applicants to obtain permanent resident visas for investors and temporary visas for workers, students or researchers. In addition, traders and investors may apply for short-stay visas for a term of nine months, enabling them to evaluate business opportunities, investments or transactions within the Free Zones.

    With regard to labor issues, it is important to note that labor relations within a free zone are handled in a more flexible manner than that existing in businesses located in the rest of the country.

    In sum, the aforementioned law affords multiple incentives which together with other advantages offered by the country, when compared to its closest competitors, seek to turn Panama into the best scenario at the regional level for foreign investments, and thus contribute to employment creation, technology transfer and increased exports.

    The growth in exports recorded since the enactment of Law No. 32 of 2011 and the increase in the number of companies formally established are clear examples that multiple objectives are being achieved. The future looks prominent for Panama’s free zone system, whose success will depend on adequate international marketing by the competent authorities.