Panama
Legal Issues
Your local
attorney is likely to promote the idea that you will be better
off owning your property in Panama as a Panamanian corporation.
The argument is that with your property being owned by a corporation,
you will not need to pay the 2% transfer taxes should you ever
decide to sell your property. While this certainly makes sense,
there is a cost and the hassle of owning a Panamanian corporation,
not to mention that if you take that route, then you will need
to repeat the process each time you buy a new property. Yes, your
apartment will need to be incorporated, your mountain house, and
whatever other property you decide to invest in Panama, each will
have to be under its own corporation. As you can see, this can
get a bit involved after a while.
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;
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.
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.).
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.
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;
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.
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;
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).
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.
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.
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.
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.
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.
