A heads up, when you buy property in Panama.
Many lawyers will urge you to create a corporation first.
Often this course of action is presented as the only option.
But it isn’t.
In the case of Americans, forming a corporation can be a big disadvantage.
You do not need to form a corporation. There’s nothing to prevent you from buying a property in your own name.
Foreigners and locals alike can buy property in Panama – and it their own names.
Remember that the lawyers who insist you need to form a corporation, will earn a fee when they help you create your corporation. And annually after that, they will continue to earn a fee (although smaller) to keep it active.
However, there are some good reasons to hold your Panama property in a corporation. I will describe those reasons further on in this post.
The way you choose to hold your Panama property depends upon the property, your needs, as well as other considerations particular to you. There are 3 ways to hold your Panama real estate.
3 Ways To Hold Panama Property
- Under your personal name
- In the name of a Panamanian corporation
- In the name of a Private Interest Foundation
Putting your Panama property purchase in your own name is pretty straight forward. However, before you know whether to create a Panama corporation or foundation, you need to understand them better.
Corporations vs Foundations
When choosing between holding your real estate in a corporation or foundation, your decision will depend upon how you will use the property.
If the property will generate income, it may be best to set up a corporation for tax purposes (except if you are an American, see below).
If you are going to live on the property, and will not be renting it out, you might consider a private interest foundation which can serve to hold your property, and also act as your living will.
The main difference between a private foundation and a corporation is that a private foundation cannot conduct income producing business. However, a foundation can own investments such as real estate, other companies, stocks, bonds, etc.
Also a Panama foundation is not the legal personification of a person or group of persons. There are no particular owners within a Panamanian foundation. That is, the assets of a private interest foundation in Panama represent a separate legal identity from the personal assets of its Founder, Protector, Council Members or Beneficiaries. Typically, a foundation has a specific mission that benefits a group of individuals.
5 Reasons – Corporation/Foundation
There are 5 main reasons to have a corporation or foundation hold your property.
1. Estate Planning
First the good news: there is no estate tax in Panama. The bad news is that you cannot avoid probate if a property is held under a person(s) name(s). Probate in Panama is conducted in court. This process is usually long and costly, requiring that you hire an attorney to represent you.
In a nutshell, having a will won’t save you from probate, unless your property is held in a corporation or a foundation.
No Right of Survivor-ship in Panama
Be aware that you cannot assume that the laws in Panama are similar to the laws of your home country. For instance, there is no ‘rights of survivor-ship’ in Panama.
That is, if a Panama property is registered under more than one person’s name, it just means that each party owns a share of the total. When one owner dies, the property does not automatically pass to the surviving co-owner(s). In some instances, especially when the co-owners are not married, the deceased partner’s share of the property may end up being passed on to his/her heirs.
This is true even if your co-owner has named you as his heir in his will. This is true even if the will was created in Panama, by a Panamanian lawyer.
However, all of this complexity disappears if the property is held in a corporation or foundation. In this case, it is a simple process to change the ownership.
In conclusion, the specter of probate is a good reason to use a corporation or foundation to buy property in Panama. As long as the corporation or foundation’s shares are properly structured, you will avoid probate altogether.
2. Avoid title transfer & capital gains taxes – sorta
You will often be told that if you want to avoid Panama’s transfer and capital gains tax when buying and selling land, you should use a corporation.
Yes, this is true; corporations don’t pay a title transfer or capital taxes. However, they do pay an equivalent amount in share transfer taxes.
Both the title transfer and capital gains taxes are paid by the seller. Between the 2 taxes, the seller pays a tax equivalent of 5% of the sales price.
- Title Transfer Tax = 2% of sales price.
- Capital Gains Tax = 3% of sales price or 10% of gain, whichever is lower
However, while a corporation is exempt from those taxes, it must pay an equivalent share transfer tax of 5%.
- Share Transfer Tax = 5% of sales price.
Either way you effectively pay the same amount of tax. However, if you sell via a corporation you lose out on getting a refund if it turns out that your capital gain is less than 3% of the sales price.
3. Privacy Considerations
If privacy is your aim, you need to choose the right type of corporation and structure it appropriately.
To that end, there are 2 types of corporations in Panama, each with a different level of privacy.
International Business Corporation (IBC). An IBC requires at least 3 Directors and 1 or more shareholders who can enjoy participation privacy – for this reason, IBCs are also known as Anonymous Corporations. In an IBC the directors (president, secretary, and treasurer) are all listed in the Public Registry. These roles can be held by you, family members, partners or by a nominee director service. If you use a nominee director service, you can have a higher level of privacy regarding your participation in the corporation. In addition, the names of the shareholders are kept private and are not publicly listed.
Keep in mind that you cannot maintain anonymity if you plan on getting a mortgage. When you apply for a mortgage, your loan documents will be publicly accessible. Plus the bank will require you to show up at the bank in person before they will approve your loan.
Limited Liability Corporations (LLC). Alternatively, you could choose to form an LLC. LLCs do not offer the same level of privacy as an IBC. If someone searches for a specific LLC in Public Registry records, they will easily discover the names of the managers and partners of that LLC. An LLC requires a minimum of 2 Managers and 2 or more Partners. You are not required to have an equal partner, one partner could only have a 1% share. The names of all the managers and partners must be publicly disclosed in all registration documents. The object here is to provide more transparency. Such transparency is typically a requirement of a partner’s country of origin, rather than a requirement of Panama.
IBCs and LLCs share similarities in that both are legal entities and they both limit a member’s responsibility to his participation as a shareholder or partner.
Highest Level of Privacy
If maximum privacy or anonymity is your goal, you should first create a foundation and then an IBC corporation. The key is to have the private foundation named onto the board of your IBC corporation, so you are not named specifically as a board member. That structure will give you maximum anonymity.
4. Friendly Nations Visa Application
Another benefit of forming a corporation is that you can use your Panama corporation to establish residency under the Friendly Nations program. Creating a corporation is a fast and easy way to help qualify for the popular Friendly Nation visa.
After you receive your permanent residency status, you can terminate the Panama corporation. Maintaining your corporation means that you have to pay annual fees. If you are a US citizen you will also be required to report on the existence of your corporation as part of your tax return, even if your corporation holds zero assets.
Another important advantage to holding your assets under a corporate structure has to do with lawsuits. In the case of someone who attempts to sue you, they would not be able to go after your property since it is not owned by you. Instead it is in the name of a Panamanian corporation or a private interest foundation.
Costs of Creating a Corporation
Of course, there are negative considerations when deciding to create a corporation. I list 4 of them below, including why Americans, in particular, should think carefully before creating a corporation.
You must pay a lawyer to create a corporation or a foundation. After that, you need to pay an annual fee to keep the corporation or foundation active.
The typical cost for creating a corporation is from $1000 to $1500. The government then charges an annual fee of $300 for its right of existence. Additionally, the resident agent might charge his own fee to represent the corporation.
Note: if you feel your attorney is charging too much for this service, you could find an attorney with a more reasonable fee. It is a simple process to change your registered agent. You do not need to feel stuck with a lawyer as your registered agent just because you originally hired him or her to create the corporation.
Paperwork in Panama
Over time Panama corporations have grown more expensive and the paperwork associated with owning one has become more demanding.
In recent years, all Panamanian corporations and foundations, even those with no activity, are required to file annual financial statements with their registered agents. The goal of this new requirement is to increase transparency, something that has increased in importance in the aftermath of the Panama Papers.
Potential Paperwork – Esp for US Citizens
As you have probably heard, the IRS is very aggressive about collecting taxes from US citizens with overseas investments and income. Americans (US citizens and legal residents) that file taxes in the US are almost invariably required to file a form 5471 with the IRS. This is required if they are officers, directors, or shareholders in Panama corporations (or in certain corporations in other foreign countries as well). This is required even if the corporation has a net value of zero dollars.
Regardless of your citizenship, you should ask a tax specialist in your home country what reporting and tax requirements apply to owning a corporation in Panama.
Income Generating Property & Corporations – esp. for US Citizens
If you own real estate that generates passive income (e.g., a rental property) and is registered under a Panama corporation, you could be in for a big tax headache as a US citizen or legal resident. This is true even if it is not passive income, for instance if you run a business that is held by your corporation.
However if it happens, if you earn money with a Corporation in Panama, you will be required to file even more forms with the IRS. Keep in mind, all US citizens have to declare as income on all money earned in a foreign country.
Very few Panama attorneys fully understand the tax issues this may cause Americans. And frankly, some don’t much care. They are more interested in the money they make selling you a Panamanian corporation than whether it is the best vehicle for you to hold income-generating property.
So keep all this in mind when your lawyer insists that you need to have a corporation. Remember, you do not need to hold your Panama property in a Panama corporation. And, I repeat, if you are an American, you may not want to hold income-generating Panama property in a Panama corporation.
Talk with your lawyer or tax accountant about other options. Perhaps an off-shore corporation in another country, or some other solution that would give you the protection of a corporation, without the tax and reporting requirements.
Closing Your Corporation
Perhaps reading this information has prompted you to want to close your Panama corporation. The simplest way to close a corporation is to stop paying its annual registration fees. Eventually the government will drop the corporation from its records. You can check the status of your corporation by searching via this link.
If you follow the guidelines established for closure by Law 32 of Public Limited Companies, it will still take more than 3 years to close the corporation. What follows is a summary of those guidelines. First, the board of directors of the corporation need to vote on a dissolution agreement. If they vote in favor, then the shareholders need to vote on it. If they vote yea, then a certified copy of the agreement and the addresses of the directors and officers must be published in a local paper. After all that, the corporation is considered dissolved, but not closed. (Note: No corporation cannot be dissolved until all outstanding debts are made to the Ministry of Economy and Finance of Panama.) The government does not consider the corporation closed until 3 years after that notice is published in the newspaper. Not a fast method.
Given all that, the easiest way to close a corporation is to stop paying your annual corporation fees. Regardless of how you close it, you are not required to pay a lawyer to close your corporation.
The final decision to hold your property in your own name, the name of a Panama corporation, some other off-shore corporation, or a private interest foundation, will depend upon your individual circumstances. A style that is right for one expat in Panama, may not be beneficial to another.
Hopefully this post has provided you with enough information so you can make the best use of the advice of your lawyer and/or tax accountants.