Panama, located between the Caribbean Sea and the Pacific Ocean and is most famous for the Panama Canal that was artificially created by the US in 1914 to connect the Caribbean Sea to the Pacific Ocean. The Panama Canal is second only to the Suez Canal in Egypt.
What makes Panama a tax haven, and why do people want to set up offshore companies in Panama? The Mossack Fonseca leak, also known as Panama Papers in 2016 where over 2.6 terabytes of documents were leaked from a single law firm, hinted at the extent of the offshore business in Panama.
Location of Panama. Infographic by the writer.
The following will walk you through the process and considerations for setting up an offshore company in Panama:
- Should I still set up an offshore company in Panama after the leak at Mossack Fonseca?
- What are some MNCs in Panama?
- What are the benefits of setting up an offshore company in Panama?
- Are there any drawbacks to setting up an offshore company in Panama?
- How do you set up an offshore company in Panama? Are there any requirements?
Offshore Companies and the leak at Mossack Fonseca
The Panama Papers revealed the hidden mechanics of 214,000 offshore companies, of which some were embroiled in money laundering activities. Prominent figures were also mentioned in the Panama Papers, and these included Russian President Vladimir Putin, Iceland’s now-former Prime Minister Sigmundur David Gunnlaugsson, and former British Prime Minister David Cameron.
Even though the Panama Papers exposed the inconspicuous world of offshore companies, the practice of setting up offshore companies is still legal and should not be unfairly stigmatised. An offshore company is broadly defined as a company that is registered in a foreign territory outside of one’s home country. Sometimes, offshore activities are synonymous with outsourcing, a phenomenon of an increasingly globalised world. Businesses set up offshore companies due to the benefits that lead to lower costs and thus higher profits. Some of these benefits will be covered later in this article.
Even though the Panama Papers were leaked, top banks in Panama still continue to hold a sizeable amount of assets, amounting to over US$120 billion as of Feb 2020. These statistics suggest that Panama’s robust banking system ensures that its offshore company formation industry continues to thrive despite the bad press it received in 2016.
MNCs in Panama?
Over 140 MNCs have registered and are operating offshore companies in Panama, and the following are some examples.
1. Procter & Gamble
Procter & Gamble, an American conglomerate that owns a range of brands including Febreze, Gillette, Oral-B, Pampers, and SK-II. Procter & Gamble has had its headquarters for Latin America based in Panama since 2008.
In 2016, Nestle announced its intention to invest in a regional purchase centre in Panama. Nestle cited lower costs due to Panama’s location between North and South America as well as a gateway to reach a broader market due to the expansion of the Panama Canal.
Benefits of setting up an offshore company in Panama
1. Low corporate tax rates
Panama only imposes corporate taxes on income generated within its borders. Foreign income deposited into offshore bank accounts in Panama along with dividends and shares distributed to stakeholders is exempted from paying any taxes. The lower corporate taxes make Panama a tax haven that protects the bottom lines of companies.
2. Strict banking secrecy laws
Although the increased in global pressures for greater transparency in tax havens, Panama is still regarded as a safe and secure country for offshore companies. Banking secrecy laws in Panama uphold high standards of privacy and confidentiality for foreign clients. They enable private individuals and firms to set up offshore companies to hold liquid assets without having to disclose their identity. Firms with corporate secrets or research that they do not want competitors or media outlets to find out about may choose to set up offshore companies in Panama. By doing so, companies can keep things under the radar during their projects’ gestation period.
Panamanian laws will protect all offshore companies unless they are involved in crimes such as “financing terrorism, drug trafficking, money laundering or other serious crimes.”
The commitment to strict privacy and confidentiality standards has helped Panama rank fifteenth in the Financial Security Index 2020, ahead of the Bahamas, Gibraltar, and the Isle of Man on the same list.
3. Uses a reliable currency
The official currency in Panama is the balboa. The value of the balboa is pegged to the US dollar in a 1:1 ratio. Since the balboa is only minted in coins, the US dollar is widely used as legal tender in commercial activities. Therefore, it is easy for international businesses to set up offshore companies and do business in Panama.
4. Foreign companies are welcomed
Some countries may require a firm’s registry of stockholders or directors to include locals. Fortunately, Panama does not need locals to be a stockholder or director in the company before these companies can be set up an offshore company in Panama, therefore eliminating the hassle of recruiting a citizen of Panama when setting up a foreign company in Panama.
5. Situated in a strategic location
Due to its strategic location in Central America and the Panama Canal, the Panamanian airport is easily connected to numerous big cities in the Americas, the Caribbean, and Europe. Panama’s connectivity increases the ease of travelling to and fro for offshore business activities.
Panama’s Colon Free Zone that generates exports and re-exports valued at more than US$11 billion annually also makes Panama a bustling international trading hub.
Are there any drawbacks to setting up an offshore company in Panama?
1. The need to appoint three directors
To register an offshore company in Panama, firms have to appoint three directors, although they do not have to be of Panamanian descent. This requirement may hinder the overseas expansion for small firms that only have one director.
How do you set up an offshore company in Panama? Are there any requirements?
The following documents are required for foreigners to set up an offshore company in Panama:
- Three possible names for the company (in case the first choice is already in use)
- An initial capital fee that varies (the standard amount is US$10,000)
- Names and addresses of the company’s directors (can be of different nationalities)
- Proof of residence
Registering an offshore company in Panama takes approximately two weeks, and representatives do not have to be physically present in Panama during the process.
Since it is strategically located in Central America, displays a strong commitment to the privacy of foreign clients, and with its reputation as a tax haven, Panama is an attractive option for firms seeking to expand overseas.
However, Panama may not be the most appropriate or logical option for all businesses and firms may also struggle with the relevant paperwork required as well as and contacting the relevant authorities.
Therefore, it is recommended that businesses engage our team of experienced professionals at Desfran. Led by one of the world’s leading management teams, our experts leverage a wealth of knowledge and experiences to offer practical and sound management advice.
We are aware of the latest developments and trends in the financial markets and are well-equipped to guide you in setting up your offshore company in Panama or elsewhere in the world.
Request for a consultation with Desfran today.