It costs about $700 just to set up a Panamanian corporation, and another $450 each year for taxes and agent fees.  Would it be better to pay the 2% sales tax when you sell your property?

Transfer tax comparison: Obviously, the price of the property will be a consideration.  Lets assume you buy a property in Panama worth $200K, and plan to hold it for at least 10 years.  Should you decide to sell the property, you will be liable to pay the 2% transfer tax, or $4.000. As you can easily calculate, after about 7.5 years, the cost of maintaining your corporation will start costing you more money than the savings of your 2% transfer tax.

Capital gains: Most people misunderstand the fact that you are liable for capital gain tax, regardless whether or not your property is owned individually or as a corporation.  There are ways to shelter, or minimize capital gain taxes, and this is definitely should not be a consideration for deciding to incorporate.

Anonymity:  If a person does not want anyone to know that he or she owns a property in Panama, then yes, a Panama corporation is the way to go. If however, you are the average Joe moving down to Panama with your wife to retire, and secrecy is not an issue for you, then keep reading.

Limitation of liability: By virtue of it being a corporation (and not a natural person) who owns property, a person avoids any possible legal action (i.e., foreclosure of that property) in case of legal actions against him/herself.

Foundation:  A foundation is a similar entity to a corporation, but is often set up as a way to make transfer of property and assets easier. For example, you could set up a foundation when you move to Panama, then put all of your assets under the foundation. Should the husband die, the wife takes over as the administrator of the foundation.  Should both husband and wife die, the kids can immediate assume control of the foundation. 

Useful Tips on Buying Property in Panama. 
So you just found that piece of paradise you’ve been looking so hard for and you’re ready to close the deal… Wait!  Before handing over any money, make sure you consult with a professional and do a proper due diligence investigation over the property to ensure you aren’t buying a big problem!  Buying property in Panama can be a great investment and is very safe, however, it’s important to understand the rules and process your property transaction correctly.     

Panama has three different types of property;   

Titled Property
Titled property is very similar to that of “fee-simple” titles in the USA.  Panama has a very sophisticated Public Registry with a cadastral department that oversees the registration of titled properties in all nine provinces of the country.  Titled property is the most preferred type since it is easily verifiable in the Public Registry system, as well as provides the most security from an investment standpoint, since private property is guaranteed by the constitution of the Republic of Panama.  Generally, banks will issue mortgage loans on titled properties, registering liens against the title as collateral on the loan.  Titled properties also generally incur annual property taxes when the registered value is over US$30,000.  Buying titled property is relatively simple, and normally requires the following procedures; 

1. Promise to Purchase Contract:  Generally a small down payment is made at the signing of the promise to purchase contract, and its’ purpose is to secure the property and provide enough time for the title search, as well as to coordinate payment arrangements for the closing and the setup of a corporate property holding structure (if applicable).  This contract should normally be registered at the Public Registry to guarantee that the property cannot be sold to any third parties in the interim prior to the final closing.
2. Title Search: you should hire a competent lawyer to do a title investigation consisting of; a) verification at the public registry that the title is in fact in the name of the seller, and it is free and clear of encumbrances, liens, or other issues that could affect the free disposition or transfer of the title; b) the cadastral survey map should be reviewed, and in some cases it is recommended to have a professional surveyor physically verify the maps points on the property, to avoid future boundary conflicts; c)  verification of utility debts (water and sewage, power, telephone, etc.).
3. Buy-Sell Contract: This contract is registered at the Public Registry and the final balance is paid to the seller, or in some cases, if an escrow agent is used, payment is made once the title is transferred to the buyers’ name.
4. Title Transfer: The property ownership is officially transferred to the buyer once the property title is transferred to buyers’ name, which is done immediately after the buy-sell contract is signed by each party and registered at the Public Registry.  In some cases, if the title is in a corporations’ name, and the seller agrees to sell the corporations’ shares, then there is no transfer of title, only a transfer of shares of the corporation.

Possession Rights Property
Possession Rights Property is similar to “squatters rights” as was common in North America many years ago.  It is government owned property that is “occupied” or

“used” by a Panamanian individual (or Panamanian organization) over time.  Possession rights are generally granted to the “possessors” through very simple certification documents issued by either municipal mayors, sheriffs, or other government organizations such as the Agricultural Reform Department (Reforma Agraria).  Possession rights do not incur property taxes, although registered improvements over possession rights property may incur taxes at a municipal and/or national level.  Please note that most Possession Rights properties can become titled through a procedure of purchasing the land from the government, however, the law prohibits titling of possession rights properties in some areas such as certain coastal areas, national parks, or islands.  In these cases, as an alternative, the “possessor” of the property can apply for an administrative concession over the land to guarantee the pacific use of it. 

To acquire the possession rights over a property, it is important to follow these steps; 

1. Promise to Purchase Contract:  Generally a small down payment is made at the signing of the promise to purchase contract, and its’ purpose is to secure the property and provide enough time for the due diligence, as well as to coordinate payment arrangements for the closing.  Contracts relating with the purchase of rights of possession cannot be registered at the public registry, therefore, they should simply be authenticated by a public notary.  
    

2. Due Diligence: Unlike titled property that is easily verifiable through the public registry, the due diligence procedures on possession rights property is more complex since there is no central database of information on possession rights properties.  Therefore, buyers of possession rights should take extra precaution during the due diligence process.  Generally, the extent of the due diligence investigation that one can realize on possession right property is the following;
    
1. Verification of Certification of Rights of Possession: The certification of possession rights should be validly issued from a competent government authority, and should contain the possessors’ name, correct description of the property in terms of location, size (area), limits, boundaries and neighbors (to the north, south, east, and west).
2. Verification of Survey: The survey should be stamped and signed by a professional licensed surveyor engineer, identifying the possessors’ name, location and reflecting the same information in accordance with the certification of possession rights.
3. Inspection: The main elements to verify are physical occupation, no opposition by third persons, and good faith. A physical inspection should be realized by your surveyor to identify and mark the points of the property as well as confirm these points with the neighbors to ensure that there are no future boundary conflicts.  Also, the property should be maintained and fenced to clearly delineate the boundaries.
4. Permitting Verification:  In some cases, if the buyers’ intentions are to build a certain type of structure or project on the possession rights property (for example, a marina, port, hotel, airstrip, etc.), it is necessary to verify if there are any national or municipal regulations that may prohibit those activities in the area.
    

1. Buy-Sell Contract: The final balance is paid at the signing of the final buy-sell contract, or in some cases, if an escrow agent is used, once the possession right certification is actually transferred or changed to the buyers’ name. Contracts relating with the purchase of rights of possession cannot be registered at the Public Registry, therefore, they should simply be authenticated by a public notary.  
    

2. Possession Rights Certification Transfer: The possession right over the property is officially transferred to the buyer once the possession right certification is transferred to buyers’ name, which is done immediately after the buy-sell contract is signed by each party.  In some cases, if the possession rights are in a corporations’ name, and the seller agrees to sell the corporations’ shares, then there is no transfer of possession rights certification, only a transfer of shares of the corporation.

Concession Property
Concession property is similar to that of a land lease arrangement, as is common in Mexico or Hawaii, for example.  It is government owned property, where the government has granted a concession to an individual or organization for a specific purpose, such as a real estate development, hotel, marina, or other purposes.  Concessions in Panama are generally granted for a maximum of 20 year (renewable) periods, however, some concessions are granted for up to 40 years (renewable) in specially designated areas such as the Amador Causeway where there are commercial and condominium developments currently being sold (Naos Harbor, for example).  Concession Property is normally in special coastal or other governmentally protected areas where titles are not permitted by law.  In many cases, real estate developments over concession property offer investors time share or fractional ownership arrangements, which are very common in Mexico and other resort-type coastal areas around the world. Unlike Possession Rights property, Concession property is guaranteed by the government through a specific contractual agreement, so there is very little risk to the investor, and title insurance companies will generally offer title policies or guarantees to investors for peace of mind. 

Title Insurance
Even though Panamanian laws are setup to protect foreign investors, you should always take precautionary measures to insure your investment.  Title insurance is recommended for all property transactions, and is readily available in Panama through major international title insurers, such as LandAmerica Lawyers Title, First American Title Insurance, and Stewart Title.  Title policy costs are minimal and the peace of mind is definitely worth the cost. 

© Panama Offshore Legal Services - 2005. All rights reserved.
Written by: Manoj Chatlani, Attorney at Law
attorney@pos-inc.com
www.panama-offshore-services.com