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Types of Business Entity Structure in Panama

Panama, despite its small size in Latin America, stands as a treasure trove of opportunities and advantages for companies. These advantages come in various forms, depending on the diverse legal structures available in the country. Panama's array of legal structures serves multifaceted purposes, ranging from facilitating international trade and establishing trusts and foundations to setting up offshore banking and investment accounts, holding real estate and intellectual property, and managing a wide spectrum of assets.


One standout feature of Panama's business landscape is its territorial tax system. Under this tax framework, income generated outside of Panama remains entirely untaxed, even if a business conducts some of its operations within the country. This tax-friendly setup means that businesses are exempt from taxation unless their income specifically arises from activities carried out within Panama's borders.


A critical element of effective tax planning in Panama revolves around understanding the default residency of Panama corporations in the Republic of Panama. This residency can be further solidified by enlisting the expertise of local professional directors and obtaining the necessary local and municipal business licenses.


An Overview of Business Entities Available in Panama


The types of legal entity options available are:

  • Corporation limited by shares (Sociedad Anonima – S.A.) - A corporate structure that provides limited liability to shareholders and is commonly employed for various business activities.

  • Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.) - A company structure that offers limited liability to its members and is well-suited for small to medium-sized enterprises.

  • Private Interest Foundation (Fundacion de Interes Privado) - A unique legal entity that operates similarly to a trust, providing a flexible framework for asset management, estate planning, and charitable purposes.

  • Sole Proprietorship (Empressa Individual de Responsibilidad Limitada) - Owned by a single individual who is fully liable for the business with his own assets.

  • Partnership (Sociedad en Comandita – S. en C.) - Two or more people who start a business together; there are two types of partnerships, detailed below.

  • Trusts (Fideicomisos) - A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries.

  • Private Fund (Fondos de Inversión Privados – FIP) - The Panamanian securities law regulates investment funds, including Private Funds, based on the number of investors, location of operation, investment types, and capitalization.

Corporation limited by shares (Sociedad Anonima – S.A.)


In Panama's dynamic business landscape, the corporation limited by shares, known as Sociedad Anónima (S.A.), stands out as the preferred choice for many, particularly those seeking offshore opportunities. Let's delve into the essential aspects of forming and operating an S.A. in Panama.


Formation Requirements:


  • Shareholders and Directors: An S.A. in Panama requires a minimum of one shareholder and at least three directors to commence business operations.

  • Capital Flexibility: Unlike some jurisdictions, Panama imposes no specific minimum capital requirements for S.A. entities. While there's no strict mandate, a recommended minimum capital of USD$10,000 is often advised, providing room for investment and growth.

  • Swift Incorporation: The process of incorporating an S.A. in Panama is known for its efficiency and can typically be completed within two to three weeks (excluding the time required for bank account setup).


Key Characteristics:


  • Limited Liability: Shareholders in an S.A. enjoy the advantage of limited liability. Their personal assets are protected, and their liability is generally limited to their contributions to the company.

  • Structure and Management: An S.A. must have a minimum of three directors, and specific named officers such as a president, secretary, and treasurer, all of whom can be part of the board. A legal representative for the company is also required, often one of the directors. Additionally, a resident agent, typically a Panamanian lawyer, is mandated by law.

  • Shareholder Obligations: Shareholders are obligated to subscribe to at least one share at the time of registration, contributing to the company's capital.

  • Tax Obligations: Panama has a territorial tax system which means that Panama Companies do not pay tax on any profits generated outside of Panama. It has complete exemption from taxation for all business activities or transactions conducted beyond the borders of Panama.


Panama's corporate landscape offers a host of possibilities, and the S.A. structure provides a versatile foundation for businesses. With limited liability, flexible capital requirements, and a streamlined incorporation process, it's an appealing choice for those venturing into the country's thriving business environment. As always, consulting with legal and financial experts knowledgeable in Panama's regulations is advisable to ensure a smooth and compliant business journey.

Limited Liability Company (Sociedad de Responsabilidad Limitada – S.R.L.)


In Panama's vibrant business landscape, Limited Liability Companies (LLCs) share the limelight with corporations as popular choices for offshore company formation. Let's dive into the key aspects of LLCs in Panama, highlighting why they are a favored option among investors.


Formation and Structure:


  • Scope of Activities: LLCs in Panama have the freedom to engage in lawful activities worldwide.

  • Founders: At least two individuals or corporations, whether Panamanian or foreign, can form an LLC, either in person or by proxy. The founders do not need to become partners.

  • Minimum Partners: An LLC must have a minimum of two partners, with no maximum limit imposed.

  • Operational Date: An LLC becomes legally operational upon the registration of its articles at the Panama Public Registry.

  • Flexibility: An LLC can merge with other entities, change its legal structure, and even change its domicile.

  • Articles of Incorporation: These must include essential information such as the company's name, subscriber details, domicile, duration, authorized capital, manager(s), resident agent appointment, and any other relevant provisions.


Capital and Partner Shares:


  • No Minimum Capital: Panama imposes no minimum authorized capital requirements for LLCs.

  • Currency Flexibility: Capital can be in any currency, and it need not be fully paid at the time of incorporation.

  • Partner Shares: Capital is divided into partner shares, represented in share certificates. These shares can be paid for with assets or services, subject to partner approval.

Partners:


  • Disclosure: The identity of partners must be disclosed in the articles of incorporation.

  • Withdrawal: Partners have the right to voluntarily withdraw from the LLC with a three-month advance written notification.

  • Preemptive Right: Partners can oppose the purchase of new partner shares and have a preemptive right to acquire units for sale by another partner.

  • Limited Liability: Partner liability is limited to the value of their partner shares in the capital of the LLC.


Taxation:


Territorial Tax System: Panama's territorial tax system means foreign source income and dividends from foreign source income are not taxable in Panama.


In summary, Panama's LLCs offer a versatile and accommodating business structure, ideal for those seeking flexibility, personal liability protection, and favorable taxation in their international ventures.

Private Interest Foundation (Fundacion de Interes Privado)


A Panama Private Interest Foundation (PIF) is a type of entity that is a cross-breed between a trust and a corporation. It is a legal structure that allows individuals to transfer assets to a separate legal entity, which is managed by a council or foundation council. The PIF is a separate legal entity from its founder, and it has its own legal personality. The PIF is commonly used for asset protection, estate planning, and charitable giving.


A PIF is a 3 headed creature and is a separate legal entity that can be created by either a natural person or a corporation that later transfers part or all of his/her assets to the Private Foundation so they can be managed and protected in favor of the Beneficiaries. Unlike a Company it doesn’t have the typical top heavy Director focussed hierarchical management structure. The Private Foundation is Europe’s equivalent of a Trust and has been used principally as an estate and succession planning tool by wealthy European families for hundreds of years.


A Panama Foundation:

  • Is set up by a Founder/s

  • Is managed day to by a Councillor or a board of Councillors

  • Is either set up to fulfil a specific purpose or it has nominated beneficiaries i.e. persons or a class/es of persons who are designed to benefit eg financially from the set-up of the Foundation.


Formation Requirements:


To establish a Panama Private Interest Foundation (PIF), you need to fulfill the following requirements:


  • Founder: The PIF can be established by an individual or a corporation, which can later transfer assets to the PIF.

  • Council: A council or foundation council is essential, responsible for managing the foundation's assets and executing its objectives.

  • Beneficiary: At least one beneficiary, whether a natural person or a legal entity, must be designated for the PIF.

  • Registered Agent: It is mandatory to have a registered agent located in Panama for the PIF.

  • Registered Office: The PIF must maintain a registered office within Panama's jurisdiction.


Key features:


  • Versatility in Objectives: Panama PIFs can have diverse purposes, benefiting individuals, families, or specific social causes.

  • Tax and Reporting Exemption: Panama Foundations are exempt from reporting obligations and taxation, creating a favorable financial environment.

  • Corporate Veil Protection: Panama enforces strict confidentiality laws, safeguarding the privacy of Panama Foundation records.

  • Confidential Ownership and Governance: Protectors and Beneficiaries can remain undisclosed, with their appointments managed privately.

  • Corporate and Nominee Councilors: Options exist to appoint Corporate Professional "Nominee" Councilors while preserving privacy.

  • Flexible Meetings: Annual meetings are not mandatory, and when held, they can occur globally through various communication means, with legally valid resolutions.


Benefits of Private Interest Foundations (PIFs):


  • Structured Asset Transfer: PIFs establish an organized framework for transferring and distributing assets to beneficiaries, ensuring control during the Founder's lifetime.

  • Flexible Timing: PIFs can take effect immediately or after the Founder's passing, offering flexibility in implementation.

  • Inheritance Protection: Inheritance laws from the Founder's or Beneficiaries' domicile cannot affect the Foundation's assets or its objectives.

  • Customized Purpose and Commercial Activities: Foundations are created to fulfill specific objectives but can also engage in occasional commercial activities and exercise rights related to their holdings.

  • Initial Patrimony Requirement: PIFs require an initial patrimony of at least US$10,000 for their objectives, with the option to increase it later.

  • Independent Asset Status: Foundation assets are legally separate from the Founder's private estate, offering protection against actions unrelated to Foundation objectives. Creditor rights expire after three years.


Possible Utilizations of a PIF (Private Interest Foundation)


When considering the potential applications of a Private Interest Foundation (PIF), the following options come to light:


  • Family Support

  • Tax Efficiency

  • Asset Protection and Administration

  • Educational Endeavors

  • Testamentary Intentions

  • Lifetime Annuities

  • Charitable Contributions

  • Capital and Title Management

  • Guarantees and Collateral

  • Insurance Management


Taxation : PIFs are exempt from various taxes, duties, contributions, and assessments related to their constitution, modification, or dissolution, as well as asset transfers or encumbrances. This exemption applies to:

  • Assets located abroad.

  • Deposits from individuals or entities with non-Panamanian income not subject to Panamanian taxation.

  • Shares or securities from corporations with income not sourced from Panama or not taxable for any reason, even if held in Panama.

Furthermore, transfers of property, certificates, assets, securities, or funds related to fulfilling Foundation objectives or its termination are tax-exempt when benefiting the Founder's first-degree relatives or spouse.

Sole Proprietorship "Empressa Individual de Responsibilidad Limitada"


In Panama, a Sole Proprietorship represents a fundamental business structure, managed by a single member who assumes unlimited liability for the company's debts. The owner holds full ownership of the business and its assets. The minimum requirement for incorporating a Sole Proprietorship in Panama is just one shareholder, and there is no obligatory initial share capital.


It's crucial to recognize that in the event of legal action or debt liability, the owner's personal assets are at risk. Regardless of the chosen company type, foreign investors must adhere to mandatory procedures during the registration phase. These essential steps encompass registration with the Public Registry of Panama, securing a registered agent located in Panama, and maintaining a registered office within Panama's jurisdiction.


Advantages of opting for a Sole Proprietorship in Panama:

  • Simplicity: Setting up and running a Sole Proprietorship is straightforward and hassle-free.

  • Complete Control: The owner enjoys full autonomy and control over all aspects of the business operations.

  • Profit Retention: All profits generated by the business go directly to the owner, enhancing financial rewards.

  • No Minimum Capital: There is no obligation to invest a minimum initial share capital when establishing a Sole Proprietorship in Panama.

  • Affordable Annual Fees: Sole Proprietorships in Panama typically incur low annual fees, making it cost-effective to maintain.


Disadvantages associated with a Sole Proprietorship in Panama:


  • Unlimited Liability: The owner bears unlimited liability for the company's debts, putting personal assets at risk in case of lawsuits or debt liabilities.

  • Lack of Protection: Unlike a Limited Liability Company (LLC), a Sole Proprietorship lacks the additional layer of asset protection.

  • Not Ideal for Larger Businesses: Sole Proprietorships may not be suitable for larger enterprises or those with multiple owners due to their structure.

  • Capital Challenges: Raising capital or obtaining financing can be more challenging for Sole Proprietorships.

  • Limited Expertise: Businesses requiring a high level of specialization or expertise may find the Sole Proprietorship structure limiting.

Partnership "Sociedad en Comandita – S. en C."


Partnerships in Panama represent a collaborative business structure where two or more individuals or entities join forces to operate a business. Panama's legal framework recognizes three distinct types of partnerships, each offering different advantages and considerations:


  1. General Partnership: In a General Partnership, all partners share both profits and losses equally. However, they also share unlimited liability for the partnership's debts. This means that in the event the partnership cannot meet its financial obligations, the personal assets of the partners are at risk. Decisions in a general partnership are typically made collectively, and if one partner decides to withdraw or leave, it can potentially lead to the dissolution of the partnership.

  2. Limited Partnership: Limited Partnerships in Panama are more flexible in terms of liability. They consist of two types of partners: general partners and limited partners. General partners have unlimited liability, similar to those in a general partnership. However, limited partners are only liable for the partnership's debts up to the amount of their initial investment. Limited Partnerships typically require at least two members and are governed by both the Commercial Code and Law no. 24 of 1966. Major decisions may involve a general meeting, and there are specific accounting and registration requirements.

  3. Limited Liability Partnership: In a Limited Liability Partnership, all partners enjoy limited liability for the partnership's debts. This means that their personal assets are not at risk if the partnership incurs debts beyond its assets. Profit-sharing among partners is typically equal in this type of partnership.


One of the key advantages of partnerships in Panama is that they are not subject to income tax at the entity level. Instead, any income tax obligations are distributed among the partners in proportion to their capital contributions.

To establish a partnership in Panama, it is mandatory to register it with the Public Registry of Panama. Given the legal complexities and the importance of understanding the liability implications, seeking legal advice is highly recommended when considering setting up a partnership in Panama.


Trusts "Fideicomisos"


Trusts in Panama are required to be established through a written agreement. The key parties involved in a trust, namely the trustee, beneficiary, and settlor, are typically expected to be citizens or residents of Panama. There is no mandatory minimum capital amount needed for the establishment of trusts.


It's important to note that trusts in Panama may be subject to taxation if they receive income within the country. However, one of the notable advantages of a Panama Trust is that it provides a tax-efficient solution for foreigners who possess assets located outside of Panama. These trusts offer the benefit of tax exemption for non-Panama assets, properties, and all income derived from assets situated outside of Panama.

Panama has a long history of trust legislation, with the first trust law enacted in the 1940s. Subsequently, a more flexible trust law was introduced in 1984, known as Trust Law No. 1 of 1984. This updated legislation, represented by Law 1 of 1984, explicitly stipulates that assets and income generated by trusts from sources outside of Panama are entirely exempt from taxation.


This favorable legal framework makes Panama Trusts an attractive option for individuals and businesses seeking tax-efficient structures for their offshore assets and income.


Registration and Formation


Panama Trusts are not obliged to undergo registration with the Panamanian government, except when acquiring real estate within Panama. The trust becomes valid immediately upon the drafting and signing of the Trust deed by the Settlor. The key features of a Trust are -


  1. Naming of Panama Trust - Each Panama Trust is required to include the term "Trust" in its name to clearly denote its legal nature. Furthermore, trust documentation and names can be entirely in English.

  2. The Trust Deed - The Settlor of a Panama Trust holds significant authority in shaping various aspects of the trust's structure. This includes defining its objectives, the composition of the asset portfolio, the authority of the Trustee, the rights of Beneficiaries, the appointment and authority of a Protector, and the trust's duration.


Under Law 1, Panama Trusts can be established for any lawful purpose, including the creation of purpose trusts that may not have traditional beneficiaries but instead focus on specific events or objectives.


Key provisions in a standard Panama Trust Deed include:


  • Appointment of the Settlor, Trustee, and Beneficiaries (except for Purpose Trusts), with the option to appoint deputy trustees and beneficiaries.

  • Specification of the intended trust assets.

  • Declaration by the Settlor indicating the establishment of the Trust and whether it will be irrevocable or revocable.

  • Determination of the trust's duration, which can be perpetual or for a specified period, potentially allowing for early revocation or termination.

  • Definition of the powers, duties, rights, restrictions, and limitations of the Trustee.

  • Guidelines on how the Trustee should manage, oversee, and distribute the Trust's assets and income.

  • Selection of a Registered Agent, who must be a Panama Attorney at Law or a law firm.

  • Designation of the registered address for the Trust.

  • Confirmation of compliance with Panama's legal requirements.

  • The Trust deed functions as a legally binding contract and is typically signed by both the Settlor and the Trustee, often in the presence of a notary public.


3. Settlors - Settlors, whether individuals or legal entities, are not restricted by nationality or residence and can be from any country. They initiate the establishment of the Trust.

4. Beneficiaries - Beneficiaries, individuals intended to receive financial benefits through the Trust, can be located anywhere globally, without the necessity of residing in or being citizens of Panama. Beneficiaries can be natural persons or legal entities.

5. Trustees - Trustees, whether individuals or legal entities, do not need to be Panamanian citizens or residents. However, their activities are subject to government oversight, particularly by Panama's National Banking Commission, which oversees entities offering Trustee services.

6. Protectors - While not mandatory in Panama, Protectors, whether individuals or companies, have the authority to grant consent for specific Trustee actions. This includes changes to Beneficiaries, asset acquisitions or sales, debt incurrence, or payments.

7. Perpetuity - Unlike jurisdictions with restrictions on trust lifespans, Panama has no such limitations. Panama Trusts can endure indefinitely.

8. Confidentiality - Panama's Law 1 safeguards Trust information confidentiality. Breaching this confidentiality carries legal consequences, with potential penalties including imprisonment and fines for violators.

9. Asset Protection - Assets within a Panama Trust are legally separate from those owned by the Trustee, safeguarding them from confiscation, liens, or attachment resulting from Trustee debts or obligations. Only the Trust's own liabilities can impact its assets.

10. Unrestricted Asset Inclusion - Panama Trusts allow for the inclusion of various types of assets worldwide without restrictions.

11. Insolvency and Bankruptcy - In the event of the Settlor's bankruptcy or insolvency, a Panama Trust remains unaffected unless fraudulent intent to deceive creditors during trust formation can be proven in a Panama court.

12. Money Laundering - Panama has implemented laws to combat money laundering, applying to all financial institutions within the country, including Trusts, under the oversight of the Banking Superintendency.


Advantages:


A Panama Trust presents a host of highly beneficial features, including:


  • Global Reach: Foreign individuals have the ability to establish trusts that encompass beneficiaries and assets situated in various countries.

  • Confidentiality: Stringent legal safeguards are in place to prevent unauthorized disclosure of confidential trust information. Violators may face imprisonment for up to six months without the need for a court order or proper authority.

  • Privacy Protection: Panama Trusts are not mandated to register with governmental bodies, ensuring that sensitive details like the originator's identity, beneficiary information, and asset specifics remain absent from public records.

  • Tax Exemption: Profits generated from assets held by a Panama Trust located outside of Panama's jurisdiction are not subject to taxation within the country.

  • Estate Planning: Panama Trusts can be meticulously structured to endure across successive generations, serving as a lasting mechanism for heirs to derive benefits from.

  • Asset Preservation: All assets held within a Panama Trust are shielded from potential claims made by the settlor's or beneficiaries' creditors.

  • Efficient Establishment: The process of creating a Panama Trust can be efficiently completed within a relatively short timeframe, typically spanning one to two weeks.

  • English Documentation: Despite Spanish being Panama's primary language, all trust-related documentation can be meticulously prepared in English, ensuring accessibility and comprehension for international parties.


Private Fund "Fondos de Inversión Privados – FIP"


Private funds in Panama can be categorized into two types: private investment funds with up to 50 qualified investors or private investment funds with up to 20 investors, often referred to as "FPs."


20-FP (Up to 20 Investors):


  • A 20-FP is typically structured as a Panamanian company.

  • Shares of a 20-FP must only be offered privately, not to the public.

  • It is not required to register with or notify the Superintendency of the Securities Market (SSM).

  • Compliance with SSM regulations, such as appointing an auditor or custodian, is not mandatory.

  • Offers a streamlined and cost-effective establishment process.


50-FP (Up to 50 Investors):


  • Similar to 20-FPs, 50-FPs do not require registration with the SSM.

  • However, the SSM must be notified upon establishment.

  • Certain provisions in the fund's documents must limit the number of investors, require private offers, target qualified investors, and specify a minimum initial investment of at least USD $100,000.


Qualified Investors - To invest in a 50-FP, investors must qualify by confirming assets worth at least US$1,000,000 and consent to being treated as qualified investors.


Registered Agent and Legal Representative:


  • A Panamanian company must have a registered agent, typically a Panamanian law firm.

  • A 50-FP must also have a legal representative in Panama, often provided by the same law firm serving as the registered agent.

  • The legal representative acts as the intermediary between the SSM and the 50-FP.


Requirements to Set Up a 50-FP:


  • Legal representative must notify the SSM when the 50-FP meets regulatory requirements.

  • Documents, including constitutional papers, offering materials, audited financial statements, and more, must be available for SSM inspection.

  • Changes to documents must be reported within 120 days.

  • Latest audited financial statements must be provided within 120 days of the financial year-end.


Advantages of an FP in Panama:


  • Panama boasts a rapidly growing economy.

  • It serves as an excellent hub for banking and international financial services.

  • FPs, especially 20-FPs, face light regulatory burdens and do not require SSM registration.

  • There are no restrictions on investment types for FPs.

  • Directors of FPs need not be located in Panama.

  • FPs enjoy tax exemptions on income received from overseas, enabling structures with minimal or zero tax liability in Panama.

Disclaimer: To explore the ideal entity type for your business and receive expert guidance, feel free to reach out to us at team.offshorelawyer@gmail.com. We're here to support you in making well-informed decisions that can pave the way for your business's success. Thank you for reading our blog, and we look forward to assisting you on your entrepreneurial journey.







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