The Republic of Panama is located in Central America and forms the narrow isthmus that links North and South America. Panama is famous for its canal, which joins the Atlantic and Pacific oceans.

The Republic of Panama is located in Central America and forms the narrow isthmus that links North and South America. Panama is famous for its canal, which joins the Atlantic and Pacific oceans. The country’s population is 3.1 million.

Panama enjoys a sophisticated banking and financial system that hosts 82 banks and 54 trust companies and is regulated and supervised by the Superintendency of Banks. The country’s legal system is based on its constitution.

The currency is the US dollar (USD).

Legal System
The country’s legal system is based on civil law. Despite the fact that the concept of trusts in Panama has adopted some common law and equity principles, the rules on trust ownership, trust settlements, recognition and enforcement follow civil law. Panama’s private foundation is also a Roman/civil law entity with similarities to a trust.

Trusts
In a trust, a person called settlor transfers assets to a person called trustee who administers or disposes of the assets in favour of a beneficiary, who may be the settlor.

Panama introduced the trust, with its Spanish name “fideicomiso”, by Law No. 9 of 1925, influenced by the Kemmerer mission which had visited several Latin American countries trying to expand the trusts concept as part of its economic and financial policy advice.

Law No. 9 of 1925 was replaced by Law No. 17 of 1941, which in turn was replaced by Law No. 1 of 1984 that together with its regulations and modifications is still in force.

For a trust company to engage in the trust business, it must obtain prior authorisation from the Superintendency of Banks, which then issues a trust license once all regulatory requirements have been met.

Most frequently used trusts include:
• for the offshore sector, estate planning, asset protection and tax mitigation trusts, and
• for the onshore sector, guarantee trusts.

The Panamanian legal system recognises various forms of corporate entities which exclude personal liability of shareholders or participants from credits or obligations of the body corporate. These include corporations, limited liability companies, general partnerships with provisions of limited liability of the partners, and limited partnerships by shares.

Private foundations were introduced through Law No. 25 of 12 June 1995 and Executive Decree No. 417 of 8 August 1995. This entity is used as an alternative to the trust for estate planning purposes. The main difference is that, unlike a trust, the private foundation has a corporate personality and may own its assets.

Taxation
The governmental budget is supported by income tax and the Panama Canal contributions. The tax system is territorial. Corporations, partnerships, branches of foreign corporations, limited liability companies, private foundations with non-habitual commercial activities and any other entity considered a juridical person by law must pay income tax on any profits or income generated in or derived from Panama. Income that is not derived from activities carried out in Panama is not subject to taxation in Panama. Trusts (especially commercial trusts) which generate income from Panamanian source, must also pay income tax.

The Trust Law (No. 1 of January 1984) and the Private Foundations Law (No. 25 of 12 June 1995) were amended by virtue of Law No. 6 of 2 February 2005 (‘Law No. 6 of 2005’).

Local tax incentives for commercial trusts investing in housing development projects or urban development of industrial parks were repealed. Local immovable property transfers tax exemptions where also repealed in connection with private foundations. The amendments maintained the fundamental parameters of territorial taxation applicable in Panama.

Income derived from offshore activities remains untaxed for trusts, private foundations and corporations. No tax returns for such income are required to be filed, and no tax returns are required from trusts, private foundations or corporations carrying out activities exclusively outside Panamanian territory.

Tax System
Because Panama taxes only income produced in Panama, regardless of where payment is received or the residence of the taxpayer, no credit or deduction is available for any foreign tax paid.

Panama does not impose foreign exchange controls.

Taxation of Trusts
Tax treatment for international (offshore) trusts differs from that of domestic trusts. If trust assets are located abroad, or money is deposited in trust by settlors whose income does not derive from a Panamanian source or is not taxable in Panama, or if the trust assets consist of shares or securities of any kind issued by companies whose income does not derive from a Panamanian source, capital gains and income of any kind are exempted from all taxes, assessments, fees or charges, even if such monies, shares or securities have been deposited in the Republic of Panama.

Capital gains tax is not levied on the settlor when assets are transferred to a trustee to be held in trust, as the funds/assets are considered to be a separate estate.

The same rule applies to private foundations. When property is transferred to a trustee within Panama, there is no transfer tax or any similar tax levied on the transaction, provided that the trust is created as a guarantee for a financial transaction. Previous tax exemptions for real estate transfers in Panama (where settlors and beneficiaries were parents, children or spouses) were repealed by Law No. 6 of 2005. The same rules apply for private foundations. Beneficiaries are not taxable in Panama if underlying companies to the trust/foundation have already been taxed. Beneficiaries, wherever located, are not taxable when not in receipt of income.

There is no estate tax in Panama.

Other Taxes
A comprehensive tax reform, approved in Law No. 6 of 2005, included value added tax applicable on the sale or transfer of any goods and rendering of services, withholding tax, dividends tax, import duty, immovable property tax, immovable property transfer tax, commercial and industrial licenses tax, stamp duty, social security contributions, education tax, selective excise tax, taxes related to the offshore financial centre (corporations and private foundations annual franchise tax and merchant marine taxes), and others.

Estate Planning Issues
Estate planning structures (trusts and private foundations), combined with Panama corporate entities and/or foreign instruments or offshore entities are commonly used within and outside Panama for wealth management, estate planning, asset protection and tax planning.

Anti-Money Laundering
Executive Decree No. 213 of 3 October 2000 gave powers to the Superintendency of Banks to carry out inspections of trust companies. Superintendency of Banks’ Circular Letter FID No. 3–2000 of 4 December 2000 (‘Law No. 42 of 2000’) requires trust companies to comply with the Know your Client Rules set forth by the Superintendency of Banks.

During the latter part of year 2000, the Superintendency of Banks created the Specialised Fiduciary Unit to undertake inspections of trust activities. The Fiduciary Unit performs onsite examinations of trust activities. Executive Decree No. 16 of 3 October 1984 as amended provides powers to the Superintendency to issue fines up to USD50,000 for violations, to order corrective actions, and to suspend or cancel a trust license depending on the severity of the violations. Law No. 42 of 2000 and the Superintendency of Banks’ Agreement No. 09-2000 (as amended) require trustees to obtain complete information on beneficial owners, including letters of reference and proof of domicile.

Information on clients must be kept confidential, unless a formal capital laundering, drug trafficking or terrorism investigation is in process.

Every trust transaction in cash for $10,000 or more and any suspicious transactions must be reported to the Superintendency of Banks, which in turn reports it to the Financial Intelligence Unit.

An existing trust must have all reporting requirements on file.

Licensed trustees taking over previously constituted trusts must be able to rely upon the information in such files. Periodical due diligence processes must be undertaken. Licensed trustees administering private foundations’ assets must also report such administrative activities to the Superintendency of Banks.

Despite the fact that private foundations are not regulated, these entities must be under the local ‘registered agency’ of a lawyer or a law firm, which is obligated to obtain enough information to identify its direct client, according to Executive Decree 468 of 1994.