For most people visiting Panama for the first time, perhaps the most surprising characteristic of this modern metropolis is its city skyline, which straddles Ave. Balboa and overlooks the Bay of Panama. An assortment of banks, insurance companies, hotels, apartments buildings, condominiums, retail centers, and commercial offices account for the majority of the development in this portion of the city. Continually under construction, large cranes regularly dot the city skyline, adding to what is already Central America's most modern and architecturally diverse city center.

In this article, we hope to clarify some of the laws, regulations and processes that surround commercial and residential real estate investment and development in Panama. This information was gathered in March 2000.

REAL PROPERTY

Ownership of real property and/or private investment in it, is guaranteed and protected by Panama's Constitution under Article 44. It reads:

" ... Private Property is guaranteed as long as it is acquired in accordance with the law by natural person or legal entity."

Since it was enacted, the Civilian Code has stipulated that Panamanian law is applicable to both nationals and foreigners alike. This Code regulates general contracts under the principle of "autonomous of the will". The Constitution, as stated in article 18, confirms that particulars are free to act in all matters which are not prohibited by law. Furthermore, article 3 of Law No. 13 (1993), which pertains to condominium law, specifies that the owner of real property can transfer, mortgage, or use his/her property in all types of legal acts, between living persons or by cause of death.

With the US dollar serving as the country's legal tender, Panama has enjoyed a significant advantage when compared to the rest of Latin America. Real property has been, since our separation from Colombia in 1903, attractive to foreign investors, particularly those from the United States. Perhaps, the most solid evidence to support this claim has been the financing, construction and maintenance of The Panama Canal. Today, as a result of the Carter-Torrijos Treaty, signed in 1977, the Canal is regulated by a independent apolitical entity known as the Panama Canal Authority.

Investment on real property by foreigners continues to be aggressively promoted by the Panamanian government. There is only one exception limiting foreigners investment in real property, which stems from national security concerns. Article 286 of the Constitution prohibits that natural or legal entities, and/or nationals whose capital in whole or in part is derived from foreign sources, can not own real property located within 10 kilometers of the country's borders. This restriction can extend to certain, but not necessarily all, island property.

TAX INCENTIVE FOR NEW BUILDINGS

Since the enactment of Cabinet Decree No. 109 (1970), successive legislation have been passed offering tax benefits to developers. As the nation's largest single employer, the construction industry received these incentives to help bolster investment in this sector, which would in turn benefit the country's overall employment picture. It has been widely accepted that, as a result of these incentives purchasers of real property have also benefited.

Cabinet Decree No. 44 (1990), and its implementation through Resolutions No. 201-1622 in December 12, 1990, enunciates that the purchaser of residential units, apartments or single homes, built within the time table set forth in the Decree, is exempt from property tax (improvements value) for up to 20 years from when construction began. It is important to note that this exemption does not include property tax on land, but refers to the dollar value on all improvements on new construction. The developer also benefits from an exemption of income tax, if the earnings obtained from the construction are reinvested into new construction projects within two years; certain conditions apply. This tax incentive is similar in nature to those referred to in the United States as "the like kind exchange".

As mentioned above, article 3 of Cabinet Decree No. 44 (February 17, 1990), states the following:

Starting February 1, 1990, income obtained from selling real property, which is reinvested in new constructions, will be exempt from income tax, as long as the cost of the new construction is at least four times applicable in each case. If the cost of the new construction does not exceed the amount mentioned above, the tax payer will be authorized to deduct from the income originally obtained, at least twenty percent (20%)........

Additional Incentives to the Financial Institutions:

Mortgage Banks also receive tax incentives if they issue loans to buyers of residential units, providing they meet the following criteria:

·  a) It is the first purchase

·  b) It is a residential unit and the amount of the purchase price is between $25,000.00 and $62,500.00

·  c) The mortgage's duration can not exceed 15 years.

Law No. 50 (October 27, 1999), which partially amended Law No. 28 (June 20, 1995) and Cabinet Decree No. 44 (1990), stipulates that the benefits to the lending institutions are as follows:

• a) 4% discount (also a tax credit to the financial institution) off the maximum fixed interest rate, which is established by the Superintendent of Banks, will be awarded if the loan value is for more than $25,000.00 but less than $62,500.00
• b) 5% discount (also a tax credit to the financial institution) off the maximum fixed interest rate, will be applicable if the loan is for less than $25,000.00.

TRUST LAW

Panama oversaw the modernization of its Trust institutions with the enactment of Law No. 1 (1984). Although this law is devoted to general commercial activities, Article 35 refers to income arising from trust property or any other act, in respect thereof. This Article establishes an exemption from all taxes (including transfer tax on real estate), contribution, assessment or liens if any of the following items exist:

• 1) Property is located abroad or off shore.
• 2) Money or income deposited by legal entity or natural person in the trust, as long as the funds are originated from other sources other than Panamanian.
• 3) Shares or securities of any kind issued by corporations whose funds do not arise from Panamanian sources; even if such monies, shares or security are deposited in the Republic of Panama.

The foregoing exemption, to be applicable in Panama, must be invested in:

• a) housing development project
• b) urban programs for the development of industrial parks in Panama.

In any case, the earnings resulting from such an investment, shall be exempt from Panamanian Income Taxes.

CONDOMINIUMS

Since the promulgation of Law No. 13 (1993), which amended Cabinet Decree No. 217 (1970), the City of Panama has witnessed new designs and construction on housing, commercial offices, clinics and shopping centers. Incorporating a condominium under the present regulatory structure is a fairly simple procedure, which takes approximately four months.

Owners of apartments, regulated under Law No. 13, normally obtain loan services from one of the five licensed mortgage banks (Banco General, Banvivienda, Primer Banco de Ahorros (Pribanco), Caja de Ahorros and/or Banco Hipotecario) in Panama. However, several of the more than eighty General License Commercial Banks in Panama also provide long term loan facilities.

PROPERTY AND TRANSFER TAX

The Fiscal Code refers to:

• Property Tax - This tax is regulated by Article 766. The maximum annual percentage of assessment is 2.10% over the value of the land (land value under US$20,000.00 is exempt of this particular tax, as per Law No. 36 of 1995). The property tax is also levied on the declare value of the improvement build on the land. The owners must pay according to the official assessment value (which is usually the declare (commercial) value on the last purchase Deed).
• Transfer Tax on Real Property - This tax is regulated under Article 701, and was amended in 1991 with the implementation of Law No. 31 and in 1995 by Law No. 28. The Law confirms that all sellers are obligated to pay, at the moment of a transfer of a real property, the transfer tax, but allows the seller, to apply one of two options. Option 1)the seller could select the 2% tax of the declared commercial sale price, which is understood as a advancement payment on the capital gain or the 5% tax of the assessment value, which is established by adding a 10% increase per annum, on the purchase value, stating the year that the owner (this alternative is understood as been the final payment for capital gain from the seller, due to the transfer).
• Capital Gain Tax - This tax is applicable, if the alternative of 2% for Transfer Tax is used for the transfer of real property and if there is a capital gain. This tax is also regulated by Article 699 and for corporations acting a sellers, a 30% flat tax payment on the profit will be applicable, notwithstanding, if shareholders are foreigners. Another percentage will be applicable if the seller, is a natural person. If there is no capital gain on the transfer of a property, the 2% transfer tax, paid in advance for the sale, use to be understood as a credit for the seller will be lost.
• Inheritance Tax - This tax was regulated under Article 819 until 1985, at which time it was abolished with the enactment of Law No. 22.

RENT REGULATION

With the implementation of Law No. 93 (1973), the owner of an apartment and/or office unit, with a monthly rent between $250.00 and $500.00, is not permitted to raise the rent unless first approved by the Housing Ministry. All other leasing contracts, with rents superior to the monthly amounts mentioned above, are free to be governed by agreements between the parties. This law remains in force today. Resulting from private sector criticism surrounding Law No. 93, and due to the lack of new investment by developers on rental buildings, Law No. 38 (1984) was enacted, and with it came deregulation in the leasing market. However, this modification only applies to new rental buildings which commenced construction after November 16th, 1984.

TOURISM LAW

On June 1994 Congress enacted Law No. 8 to further promote tourism investment in Panama. This law was later modified in April 1995, and is now similar to that which regulates tourism investment in Costa Rica, more specifically, allowing investors, both foreign and local, to obtain tax breaks for up to 20 years under certain circumstances.

The mentioned decree regulates public lodgings, receptive tourism agencies, tourist transport services of passengers, tourist restaurants, discos, nightclubs, specialized tourism centers, recreational parks, theme parks, zoos, convention centers, marine complexes, tourist development zones of national interest, etc.

Once an interested party or corporation has completed the necessary forms, they must be submitted to IPAT (Panama Tourism Department), where they will be reviewed by IPAT's Board of Directors. This board meets once a month, at which the Minister of Commerce serves as the Chair person. Upon approval, the benefits are granted to the developer.

Some of the tax incentive are:

• a) 20 years of full exoneration from import duties for the introduction of any material, vessels, automobile and/or equipment, which must be used to build and furnish public lodging establishments.
• b) 20 year exoneration from real property tax.
• c) Exoneration from any tax or assessment on its capital.
• d) Exoneration from warfare or any fee for landing on piers, airport (etc).
• e) Exemption from payment of income tax on any interest earned by creditors (etc).
• f) Annual rate of 10% will be allowed for real property depreciation, not including the cost of the land.

PUBLIC REGISTRAR OFFICE

The Public Registry is an institution which offers security for the investor and guarantees transparency in real estate transactions. Not all commercial activities are recordable, however, the transfer of real property, due to it's solemnity, requires proper registration in order for it to be considered a legal transaction. There exists in the Registry, numerous departments including those that handle the transfer of titled property located in each of the nine provinces. In addition, there are departments for vessel registration, mortgages, liens and/or attachments on real property by virtue of a circuit judge ruling, condominiums, corporations, trust on real property transactions, and others.

The Civil Code on articles 1753 enunciates the internal regulations of the institution. In addition Resolution No. 99-8 (July 7, 1999), enacted new fees for recording and obtaining certificates on properties. For example, a transfer of a real property costs approximately $2.50 for every one thousand dollars declared in the Deed of Transfer.