PANAMA: An Introduction

Chambers Global 2022  

Panama Country Overview  

Law firm: Alemán, Cordero, Galindo & Lee  

Authors: Partners Patricia Cordero, Rita de la Guardia, and Rafael Marquínez.

The Republic of Panama is strategically located at the juncture between North and South America. It is the narrowest stretch of land dividing the Atlantic and Pacific Oceans and, simultaneously, hosts the only waterway which connects both oceans within the American continent. This privileged geographical position has helped define the country's expansive role in the world economy as a multidisciplinary hub. As one of the main gateways to global commerce, the Panama Canal is the country's foremost landmark, which is supplemented by an ever-increasing logistics sector (ports, railways, etc.). This feature of Panama's economy plays an increasingly important role in the country's overall success. The Canal recently underwent a massive expansion, which was considered to be one of the biggest and most complex engineering endeavours since the construction of the original Panama Canal. The third set of locks, which was inaugurated in June 2016, has doubled the waterway’s capacity. With a cost of nearly USD6 billion, this expansion project has more than doubled the Canal’s annual revenue from USD1 billion to approximately USD3.9 billion for year-end 2021.

Complementing the Canal in matters of world trade and transportation, the country also boasts Latin America's largest container port terminal and is home to the second largest free-trade zone in the world, the Colón Free Zone. Moreover, throughout the last decade, Copa Airlines and Tocumen International Airport have worked together to transform Panama City's main airport into the 'Hub of the Americas,' which now offers direct flights to over 68 international destinations. The connectivity that resulted from this commercial crossroads, along with the political stability and pro-business legislation characteristic to the country, have made Panama an attractive space for financial institutions and multinational corporations from all over the world to establish their regional headquarters.

Panama continues to invest in infrastructure that will maximize its connectivity, such as Tocumen International Airport’s recent major overhaul that included the construction of Terminal 2, which doubled the airport’s capacity. Furthermore, the Government has approved expansion contracts for Lines 1 and 2 of Panama City’s Metro, which is a one-of-a-kind project in the region. This expansion will increase the Metro’s reach all the way to Tocumen Airport. The order to proceed in connection with Line 3 of Panama City’s Metro has also been issued, which will bring much needed transportation services to the Arraiján area (suburban area to the west of Panama City). The construction of Line 3 is expected to be the biggest infrastructure project in the upcoming years.

In addition, a large copper deposit was recently discovered in Panama, and Minera Panamá, a subsidiary of First Quantum Minerals Ltd., Canada, developed a $6.5 billion project to develop and operate a copper mine in Panama, which was the largest private infrastructure project ever conducted in Panama. The mining business has become an increasingly important industry in terms of Panama’s GDP.

Beyond its connectivity and major infrastructure projects, there are other prospects that differentiate the country from the rest of the region, such as a fully institutionalised dollarisation, no exchange controls or restrictions on the movement of capital, readily accessible credit, and increasingly sophisticated and liquid capital markets. When choosing Panama, international investors also look at the country's outstanding international banking system (with over USD132 billion in assets as of November 2021), which is home to more than 57 domestic and/or international banks. Panama’s financial sector boasts solid balance sheets, with little to no exposure to complex financial instruments originated abroad (although critics correctly point to significant exposure to domestic real estate). As for multinationals, Panama is now host to almost 100 major international corporations, including Liberty Latin America, AES, McKinsey & Company, Inc., Celsia, Brinks Regional Services, APR Energy, HP, Procter & Gamble, Caterpillar, VF Group, Sanofi-Aventis and Maersk, to name a few.

As a result of Panama’s increased investment, along with its geographic location and trade openness, Panama’s economy had been, until recently, one of the fastest growing in Latin America and among the highest in the world. In fact, the country was awarded an 'investment grade' rating by all three major credit rating agencies*. During the last couple of years Panama’s economy has slowed down, which was particularly highlighted by the COVID-19 pandemic. However, given Panama’s decades long capital investment, the International Monetary Fund (IMF) projected a short-term growth for 2021 of 12%, followed by a sustained 5% yearly growth rate once the COVID-19 pandemic recedes.

Panama has also enjoyed solid political stability for the last 30-plus years and strives to strengthen its economic, political, and commercial positions. Among the most recent legislations aimed at doing so, we can highlight the following:

• Law No. 41 of 2007 (as amended): creates a special regime for the establishment and operation of Multinational Corporation Headquarters. After being granted a special licence, these corporations, among other incentives, are exempted from income tax for services offered to entities domiciled abroad that do not generate income in Panama, and their employees are eligible to obtain work visas for up to five years.

• Law No. 159 of 2020: created a special regime for the establishment and operation of Multinational Corporation Headquarters for the Rendering of Services Related to Manufacturing. After being granted a special licence, these corporations, among other incentives, would be exempt from all taxes, encumbrances, duties or import fees on all types or classes of merchandise, products, equipment, and other goods which are used or required for the rendering of the manufacturing services. In addition, their employees would be eligible to obtain work visas for up to five years.

• To improve Panama’s compliance with international norms and regulations with respect to tax exchange regimes, and seeking to be excluded from “grey” or “black” lists, Panama has approved various laws as described below:

o Law 23 of 2015 which establishes measures to prevent money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction and identifies customer due diligence requirements and reporting obligations for all regulated (financial and non-financial) subjects.
o Law 52 of 2016, which requires all Panamanian companies (including offshore companies) to maintain accounting records.
o Law 70 of 2019 which modifies the Panamanian Criminal Code to include “tax evasion” as a crime.
o Law 129 of 2020, which creates the ultimate beneficial owner registry. In essence, this will be a registry managed and operated by the Government in which all ultimate beneficial owners of Panamanian corporate vehicles will have to be identified and recorded.
o Law 254 of 2021, which introduces amendments to the rules on (a) exchange of tax information, (b) prevention of money laundering, (c) accounting for legal entities, and (d) registration of beneficial owners of legal entities.

In sum, several factors have contributed to Panama's continued success. On one hand, the country has wisely seized the opportunities that geography and history have placed in its path. On the other, it has further enhanced those opportunities by enacting investment-oriented legislation, rolling out massive infrastructure investment plans and, more recently, committing to increased fiscal cooperation and transparency with the international community. As a result, there is good reason to expect that the Panamanian economy will continue to grow in the near future and that foreign companies and individuals will continue to choose Panama as their home within Latin America.

*Moody's rates Panama at Baa2 with a stable outlook; Standard & Poor's rates Panama at BBB with a negative outlook; and Fitch rates Panama at BBB- with a stable outlook.