Incentives for domestic and foreign Investors

The Panamanian government offers foreign and domestic investors alike a range of incentives.

Under Cabinet Decree 413 of 1970 and Law 3 of 1986, companies in manufacturing and processing industries which export all their production receive exemption from most direct taxes and from import duties on machinery and equipment. To take advantage of the incentives, a company needs to register with the Official Registry of National Industry, a department of the Ministry of Commerce and Industry.

These laws were followed by Law 28 of 1995 which offered superior incentives, but only to companies which give up their registration under the previous laws and re-register under the new Law. The main benefits of registration under Law 28 were as follows:

• Total exemption until 31st December 2002 from income taxes generated by export activities;
• A uniform fixed rate of import duty on raw materials, semi-processed ingredients and capital assets employed in the manufacturing process; and
• For companies investing in technology in a range of industries, and not otherwise exempted from tax, a tax credit covering up to 25% of their tax bill in any one year.

Other investment incentive schemes apply to agriculture, forestry and housing development, and various aspects of the tourist industry. Tourist sector investments worth more than $300,000 (in the city) or $50,000 (in the countryside) attract exemption from import duties and real estate taxes for 20 years, exemption from capital taxes, and accelerated depreciation.

Under Law No. 25 of 1992 (as amended by Law No. 28 of 1996) export processing zones can be established by companies singly or in groups, in which all activities, including support services, are exempt from direct and indirect taxation, and from import duties; in addition, dividends and interest payments are exempt from withholding taxes. These incentives are particularly aimed at making use of the extensive facilities becoming available throughout the country as a result of the departure of US forces during the hand-over of the canal to Panama.

In 2003, in partnership with the World Bank's International Finance Corporation, the Panamanian government made plans to transform the American military's Howard air force base into a special economic zone with tax incentives and high-tech logistical and telecommunications facilities. It is hoped that the project will attract some $600 million in investment and create 20,000 jobs over the next two decades.

In May, 2005, Panama amended its Petroleum Free Trade Zone legislation, including an increase in the period covered by a permit from one to five years. Other changes included:

• Abolition of the need to present evidence of 50% financing by a financial institution has been eliminated;
• Distributors for sales in the domestic market are now exempted from some prevention and security requirements;
• Permit holders are obliged to operate at their maximum capacity;
• A 45 day deadline is given for the Crude Oil and By-Products Office to grant permits to operate or extensions to these permits;
• Companies operating on a Petroleum Free Trade Zone will now have to maintain strategic reserves equivalent to 7-day sales, as opposed to the previous 10-day sales period;
• The "precio de paridad" or benchmark price for Gas and related items is now considered a "suggested price" as opposed to the previous text considering it a "maximum price";
• The Crude Oil and By-Products Office can now determine the "precio de paridad"or benchmark price for Gas and Related Products on a weekly basis, as opposed to the previous biweekly basis;
• The executive branch can now, through the Crude Oil and By-Products Office, import all crude oil by-products to supply the local market in cases of national emergency, provided that the strategic reserve of the country is affected, or at risk.

No existing tax incentives were affected by the changes. Petroleum Free Zones were created under Decree No. 29 of July 14, 1992 for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a designated maximum amount. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for US$1,000,000. Local products must be used if available at competitive prices.

Qualified investors can engage in the following activities: Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments; Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and Import, store or handle petroleum for export or marketing and distribution within Panama.

Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.

In September, 2005, the government approved a plan by the Canadian-based mining firm Petaquilla Minerals Ltd and its partners, Teck Cominco and Inmet Mining, for a multi-phase mine development plan involving a number of tax incentives.

The acceptance of the plan by the Panamanian government means that the terms of the Ley Petaquilla, a contract law passed by the Panamanian Government in 1997 setting out the terms governing the development of Petaquilla's mining concessions, will be initiated.

The Ley Petaquilla sets out stable and guaranteed land tenure for an initial term of 20 years, with two options to renew for another 20 years each. It also incorporates a favourable tax regime for the mining partnership, which includes: an accelerated depreciation and depletion allowance; exemption from import duties all supplies and equipment; exemption from all income taxes (except the mineral production royalty) until the retirement of all construction financing; and exemption from withholding tax on interest payments to foreign lenders or dividends to foreign shareholders.

Furthermore, future changes in legislation that are inconsistent with Ley Petaquilla won't apply to the owners.

The first phase in the plan is the development of the Molejon Gold Deposit which commenced in 2006. The development of the Petaquilla copper deposit is included in subsequent phases of the plan, and will be the responsibility of Minera Petaquilla S.A., the joint venture company owned by PTQ, Teck and Inmet.

Panama Stock Exchange

Since its creation in 1990, the Panama Stock Exchange has been an important part of the development of Panama's role as a regional financial centre. Most transactions centre on government bonds. The exchange is the only dollar-based securities market in the region. The main corporate candidates for listing are the many companies of Central America and the northern countries of South America that have strong balance sheets but are too small to issue shares in New York. There are about 100 companies listed on the exchange. Trading turnover during 2004 was about US$3.5bn. Capitalisation of the 23 companies making up the Exchange's index was about US$4 bn at the end of that year.

Bolsa de Valores de Panamá, S. A., (the Panama Stock exchange) is a corporation organized under the Laws of the Republic of Panama. Its shareholder base is made up of the main local banks, including Banco Nacional de Panamá (National Bank of Panama) as well as commercial, insurance and industrial corporations and concerns, businessmen, professionals and stockbrokers.

There is a Board of Directors, made up of nine principals and nine substitutes. Additionally, four committees oversee the Panama Stock Exchange: the Technical Committee, the Computer Data Committee, the Products Committee, the Investment Committee and Promotional Committee. These committees are made up of members of the Board of Directors.

The Panama Stock Exchange's operations are performed through qualified intermediaries who, with the PST's prior authorization, are entitled access to the floor when in session. These people, also known as stockbrokers, act on behalf of corporations which have bought seats on the Exchange.

Transactions can be cleared exactly three days after the transaction (t+3), or at Term whenever the parties agree to deliver the money or securities, or both, at a future date, within the limits set by the Board of Directors, notwithstanding the fact that the parties may decide to settle the operation before the expiration of the agreed term.

Share trading takes place under an open outcry system, with an opportunity for auction once a trade has been posted onto the board. All transactions are recorded with their respective prices and posted to the public on a daily basis by the Panama Stock Exchange. The prices published at the close of the day for the securities quoted on the floor are those of the last operation made in cash on the respective date.

A limited electronic trading system was introduced in 2003.

Panama Colon Free Zone

The Colon Free Zone was established by Law No. 18 of 1948. The Free Zone is in the city of Colon at the Atlantic entrance to the canal, and has been extremely successful - more than 1,000 companies are established there, shipping more than $9bn of goods annually.

All kinds of processing and manufacturing are permitted within the Free Zone, while administration can be conducted from inside or outside the zone. 80% of a company's output must be exported; the remainder can be sold internally (separate books have to be kept).

Companies established in the Free Zone are largely free of taxes.