By DON WINNER for Panama-Guide.com - Recently a potentially explosive issue has come to my attention. Panama passed Law Number 5 of 11 January 2007, and according to that law it's very possible every foreigner who owns property in a Panamanian corporation has to pay a tax equal to 2% of the value of that property in an "equity tax" every year. For example, if you own a property worth $250,000 dollars, if that property is held within a Panamanian corporation, and if you have done nothing else to specifically protect yourself from this tax, then you already owe Panama about $10,000 in back taxes (2% of $250,000 or $5,000 for 2007, another $5,000 for 2008, plus penalties and interest.) Want to read more? I thought so... (more)

Thanks For The Heads Up: First of all let me give credit to Jeff Duda from Panama Casa for bringing this matter to my attention. Actually it was one of Jeff's customers who I know as well who contacted me initially. At first I was skeptical and I made a few phone calls to lawyers and accountants, and they basically said the initial information was wrong or incorrect. Based on that response I pushed this story back and provided that feedback to Jeff and his client. They have since done some additional investigation and digging, and it's starting to look more and more like there's a ticking time bomb being left behind by the Torrijos administration that will eventually blow up under the wallets of all of the people who own property in a Panamanian corporation.

Remember - You Heard It Here First: This article is almost certain to create a huge splash here in Panama for two reasons. First of all, we're talking potentially thousands of dollars which will multiply to millions when you apply this tax to everyone who is impacted. Secondly, no one is talking about his tax right now for lots of reasons. Either they are blissfully ignorant, meaning the real estate agents and lawyers who are selling corporation packages to foreigners either don't know about it or they are not telling you. Of course, the well informed readers of Panama-Guide (good morning, folks...) are now, as one, going to reach for their telephones, dial up their lawyers and real estate agents, and scream a collective "WHAT THE ***" over the line. Send your lawyers a copy of this article and see what they have to say. Then, send their responses to me. I expect this will turn into a fireball in about ten seconds after publication. So, here we go...

The Law At Issue: The problem comes from Law Number 5 of 11 January 2007, which modifies a previous law from 2005. This is what the law says, textually, in Spanish;

• Artículo 29. El artículo 1004 del Código Fiscal queda así:
  
  
• Artículo 1004. El impuesto anual que han de causar los Avisos de Operación de Empresas será el dos por ciento (2%) del capital de la empresa, con un mínimo de cien balboas (B/.100.00) y un máximo de cuarenta mil balboas (B/.40,000.00). Quedan exentas las personas naturales y jurídicas con capital invertido menor de diez mil balboas (B/.10,000.00).
  
  
• That Translates To:
  
  
• Article 29. Article 1004 of the Fiscal Code is thus:
  
  
• Article 1004. The annual tax caused by (or generated by, or created due to) the company's Notice of Operation will be two percent of the capital of the company, with a minimum of one hundred dollar ($100.00) and a maximum of forty thousand dollars ($40,000). Those natural people and legal entities with less than $10,000 as invested capital will remain exempt from this tax.

OK, So What Does That Mean? Let's say for example you bought an apartment worth $150,000 dollars in cash. Let's say you also created a brand new Panamanian corporation with (on the books) $10,000 in capital. That means the company has a total of $160,000 dollars in assets. Now, go back and read Article 1004 again where it says "two percent of the capital of the company..." According to this law, if you are in this situation you owe $3,200 in taxes based on 2% of the $160,000 of capital held by this corporation. That tax was due in 2007 and 2008, so therefore your total tax bill right now is $6,400 plus any additional penalties or interest.

A Loan Reduces the Capital: Let's say you went out and got a mortgage to buy your $150,000 apartment. According to this same law, if you got a loan that effectively reduces the amount of tax you owe as the amount of the loan is deducted from the equity tax. So, let's say your loan was for $130,000. You subtract the total due on the loan from the total held in the company, in this case leaving $30,000 held as capital in the company. This reduces your tax liability to only $600 dollars per year. Lucky you if you have a mortgage, but if you paid cash you're apparently screwed.

A Large Degree of Denial: I've been making a lot of telephone calls on this issue, talking to every lawyer and accountant I can get my hands on. Most of them are saying "it can't be that way" and "I really doubt it" and "no one is paying that tax." But at the same time they all don't know what the hell I'm talking about when I call them, and they have not read the exact law and article I'm referring to, so there are no "experts" on this issue. At this point it seems like a whole lot of people are in a serious state of denial on this issue.

Working To Figure It Out: I know this is going to go over like a flying pig, and I expect I will get a whole lot of feedback almost immediately. Please tell your lawyers and accountants to sent their take on this issue to don@panama-guide.com. I would love to hear what they have to say about this issue. For my part, I'm going to keep asking questions of lawyers and accountants, but I'm also going to talk the the MEF and DGI to see what they have to say about this.

The Political Angle: Today is 16 February 2009 and today we are only 76 days away from Panama's next national general election to be held on 3 May 2009. This law not only applies to foreigners but all Panamanian corporations, so you can expect it will eventually go away when all of those guys find out that they have a big, fat tax bill waiting for them as a sleeping time bomb. Again, please remember that you heard it here on Panama-Guide.com first. This is how I get rich and famous. Now, let's see if the basic information and premise is correct. I expect part of the fireworks generated by this issue to blow over into the political arena. It almost can't be avoided in this operating environment.

The Basic Elements of the Law: I just took a look at Law Number 5 of 11 January 2007, and basically it establishes the parameters for opening or operating a business in Panama. The full title of the law is "Law Number 5 of 11 January 2007, That Makes More Agile The Process of Opening Businesses And Establishes Other Dispositions." Article One of this law, basically the introduction, says...

• "Article 1. Notice of Operation: All natural or legal persons will be able to realize commercial or industrial activities within the national territory, subject to what is established in this present law and its regulations and with the limitations established by the Constitution; therefore no public employee will be able to oppose the operation of a business that is in compliance with all legal requirements. The "Notice of Operation" is the only process required for the start of any commercial or industrial activity in the territory of the Republic..."

Has Your Lawyer Filed a "Notice of Operation"? Apparently, if not then your Panamanian corporation is not valid, or at least not properly registered as required under Panamanian law. And, this "Notice of Operation" is apparently the key element to his new law. And remember, they only screw you over on the details when they want to - a kind of selective enforcement of the law. It doesn't matter if they're not applying all of the laws evenly and equally to everyone, what matters is that they can decide to apply this stuff to you. Are we having fun yet?

Don't Shoot the Messenger: However, feel free to shoot your lawyers and accountants. No, not really. Just realize it's common for the Panamanian National Assembly to insert stink bombs like this in a new law, and then it takes months for the "regulations" to be published which actually put the law into effect at the street level, and then when that happens everyone screams bloody murder, and then they go back and make a modification or change something that's especially onerous. But, there is always the possibility that you as an individual might get caught by this requirement.

If You Need Help: Contact accountant Tom Rowley at http://www.panusatsvc.com, email tom@panusatsvc.com, cell phone in Panama 6675-8190. For example, did you know that you have to file a Panamanian tax return every year if you have a Panamanian corporation, and that there's a $500 "failure to file" penalty if you don't? It's tax season right now in Panama, and Tom can help you walk through the requirements to figure it all out. When I talked to him about referring people regarding this issue, he said there are ways to avoid paying some or all of this tax (technical accountant stuff that causes my eyes to glaze over...) but anyway, talk to him and maybe he can help. The "don't shoot the messenger" thing should apply to him as well. Tom wasn't even sure if he wanted to be in this article, so be gentle.

More To Come: I'm going to keep looking into this issue, specifically from the angle of people who have purchased a Panamanian corporation for asset protection. I want to learn more, and I also want to hear from you. As you guys figure this whole thing out as individuals, please give me the feedback on what happened, what you had to pay, how it worked out, what you learned, and who helped you get squared away. Also, let me know if you "dodged the bullet" because your lawyer or accountant did the right thing years ago so you don't have to pay anything, or if they neglected to do something so now you're screwed. Each and every one of you who are affected by this law will generate your own individual story, and if I can tell those stories then together we can help to educate the whole group. Hoo boy, what a mess...

Copyright 2008 by Don Winner for Panama-Guide.com. Go ahead and use whatever you like as long as you credit the source. Salud.