Startup Financing

A company’s need for substantial amounts of capital is intensified when looking to grow quickly, or develop an innovative product that will disrupt the market in a meaningful way. This is true to any company, and is especially true to innovative and disruptive startups, which aim at creating new markets, revolutionizing existing ones and prevailing over traditional market participants. To be disruptors, a startups’ product may need to go through testing, the startup may need hire experts in a particular field to assist in the development of a product, or invest heavily to gain scale in the short run and be competitive in a specific market. Thus, raising capital is, without a doubt, a key element in the life of a startup.

Initially, when founders are jumpstarting the company, they will have no other option but to use their own funds. However, as the business grows, and expenses pile up, the founders will need to turn to other methods of financing.

Two mechanisms by which startups may raise capital are (i) equity financing, whereby shares of the company are sold; or (ii) debt financing, in which the company may be required to put its assets as collateral to secure the debt. The latter may not be a viable option for a seed stage startup given that it may not have any assets, or the assets that it has are not an adequate guarantee for the loan. Consequently, convertible debt (which we shall discuss in a subsequent article) or equity financing are typically the most viable routes that startup founders take when looking to finance the operations of the startup. In this new Startup Series’ article, we will summarize the particularities of startup fundraising, the participants, and the terms that a founder should be paying attention to when negotiating with investors in a financing round or series.

The Players:

After founders have exhausted the seed capital, and require additional funding to keep financing the operations of their company, they will likely look for investments from close friends and relatives. At that moment, funding rounds involving friends and family, which will usually be informal compared to later rounds, will come into play. Because there is a certain level of trust between the investors and founders, the terms of the investment in a friends and family funding round will potentially be much more favorable to the founders, and investors will most likely not ask for special rights and protections such as voting rights over major decisions (or voting rights in general), board seats, or to be involved or actively participate in the management and operation of the company. However, founders must be sure to document every investment from friends and family, and have in writing all rights that are being granted to such investors.

In addition, ideally there will be:

i. A subscription agreement in which, among other things, the startup agrees to issue the shares and the investor agrees to transfer the money; and
ii. An adhesion to the shareholders’ agreement in order for both the investors and the founders to be clear on what are the rules of the game.

Nonetheless, there are certain rights that, due to their long term implications, founders should pay special attention to when thinking about granting them to friends and family investors, such as anti-dilution rights or the right to block subsequent rounds of financing, which might destroy the attractiveness of the startup from an angel investor or a venture capital investor’s perspective. Consulting a lawyer, even at these early stages, would be advisable so that founders may understand the reach of these provisions and will help save time and money down the road.

Next up, are the so-called “angel investors”. These are high net-worth individuals that will invest much more money into the startup than friends and family, will contribute their expertise, and will, occasionally, serve as mentors to the founders. Consequently, angel investors will likely require a certain level of control over management, and will ask for special approval rights over at least certain major decisions of the company, such as the sale of the business or a substantial part of its assets to a third party, or an exit to capital markets (an initial public offering or “IPO”). Although some angel investors may not be very sophisticated, they will often have legal counsel involved to assist them in negotiating better terms in a subscription agreement, or even bargain for convertible notes. Similarly, the founders must make sure to have a lawyer looking out for their best interest during negotiations with an angel investor.

Finally, the venture capital firm or “VC Firm” is where startups get the biggest investments from (if they get to that stage). VC Firms are highly sophisticated and will negotiate intensively to get the best deal possible from their perspective. They will often require the startup and past investors to agree to certain terms in exchange for their investment. For example, a VC Firms will often negotiate for drag-along clauses in which other shareholders of the startup will be required to vote in favor of resolutions that a majority of the shares voted for. This is designed to ensure that minority shareholders will not be able to veto acts that the majority of the shareholders are in favor of.

Typically, these key terms, and others which we discuss below, are negotiated through a term sheet, which will serve as a basis to be used to draft the documents that will be signed in order to formalize the VC Firms’ investment.

The Terms:

Every time a startup founder decides to go through a financing round, he/she must be prepared to negotiate the economic and control aspects contained in the securities or financial instruments being offered. Thus, below we list the most important terms that we consider should be taken into account when a startup is raising capital, regardless of whether it is friends and family, an angel investor or a VC Firm.

1. Investment Type

A founder must decide what securities or financial instruments he or she will give in return for the investment. The investment may be, for example, in exchange for preferred stock with certain liquidation preferences (which we will discuss later); or convertible notes, which act as debt that is convertible into a class of shares when and if a certain condition is fulfilled.

The type of investment is relevant, because it will affect the amount of money that a founder will receive when the company goes through a new round of financing or the company is sold, or taken public through an IPO.

2. Valuation

Valuation refers to the value of the startup before (“pre-money”) and after (“post-money”) the investment. This is relevant because it will determine the percentage of the company the founders are selling, and how much they are diluting their participation, after finalizing an equity financing round.

For example, if during a seed series financing round, an investor puts US$ 500,000.00 into a startup with a US$ 2,000,000.00 post-money valuation, that means that the founder is selling 25% of his/her company in exchange for the investment. To determine the valuation of a startup, both the intrinsic data about the business (revenue, number of users, etc.) and the market value of the company (what investors are willing to pay for the company), must be taken into consideration.

NOTE: Take note that the “authorized capital”, as defined by Panamanian law, is not necessarily related to the valuation of the company, and that the nominal value of the shares will not necessarily define the price for which the shares of a Panamanian corporation may be sold.

3. Conversion Rights

Investors in funding rounds will require that they be issued shares which may be preferred and with a right to convert to common shares at any time. This may mean that if an investor is unhappy with the way a company is being run and decides to exercise it conversion rights, the investor will gain voting rights, which may lead to additional control over the company, and, in that case, there will be a risk that a founder is ousted a director or officer. To deter investors from converting their preferred shared into common shares before a liquidity event (usually defined as a sale of the company or a substantial part of its assets and/or stares) takes place, founders will typically offer liquidation preferences and participation rights (discussed in “4” and “5” below).

4. Liquidation Preferences

A liquidation preference is a very important and highly negotiated economic term in a funding round. The liquidation preference refers to the amount of money that the holder of a particular class or series of shares has the right to when and if the startup goes through a liquidity event.

Typically, an investor in a funding round will negotiate for a liquidation preference in the shares he/she is acquiring, in order to receive a certain amount of money per share if a liquidity event takes place. A common liquidation preference clause will say that the investor has the right to receive a per share amount of “X times the original purchase price of the shares, plus declared but unpaid dividends”. It is important to keep in mind that the liquidation preference, as its name indicates, gives the investor preference over the other classes or series of shares, thus, the investor that holds the liquidation preference gets paid before other classes or series of shares. A liquidation preference below “1x” would not make much sense, given that the investor would want to, at the least, recover his/her investment. However, investors may negotiate for a higher multiple (i.e. 1.5x, 2x, 3x and so on).

5. Participation Rights

In addition to a liquidation preference, startups may need to offer participation rights in order to make the investment more attractive (depending on the stage they are in and the successfulness of their business model). Participation rights are usually paired up with liquidation preferences, and the investor will have both if a liquidity event takes place.

During a liquidity event, a holder of shares with a liquidation preference and participation rights will have the right to receive payment for its shares before the holders of other classes or series of shares, and participate in the sale of the company as if its preferred shares had been converted into common shares. This combination of liquidation preference and participation rights is designed to ensure that the investor will at the least get back its investment (in the event that the company is sold for a price below the investor’s purchase price), or participate in the sale of the common shares and get a “premium” for assuming the risk at the time he/she made his/her investment (in the event the sale is over the investor’s purchase price).

Example A: Imagine that Investor A invests $20,000.00 for 20% of Startup S.A. in a seed series round (US$ 100,000.00 post-money valuation). In exchange for the investment, Investor A receives preferred shares with “1x” liquidation rights and participation rights. Thereafter, Startup S.A. is sold for US$ 1,000,000.00. If Investor A only had a liquidation preference, it will only get its initial US$ 20,000.00 investment back. On the other hand, if Investor A has a liquidation preference plus the right to participate in the sale, it will receive the initial US$ 20,000.00 investment back, and the participation rights will entitle Investor A to an additional US$200,000.00 (20% of US$1,000,000.00), as if the preferred shares had been converted.

If the situation is the opposite (Startup S.A. is sold for less than US$ 100,000.00), a liquidation preference guarantees that the investor will at least get back its initial investment.

Keep in mind that, as mention in section “3” above, investors will negotiate for preferred shares with the right to convert to common shares. Liquidation rights deter the conversion of the shares, because if the investor converts, then it loses its preference, and will only be able to participate in the sale of the company. The risk is that the company sells for a lower price than the investor’s purchase price and the investor loses its investment.

6. Composition of the Board of Directors

As one of the most important control aspects of a negotiation, an investor in a funding round will typically require the right to appoint at least one director to the board of directors in exchange for its investment. This guarantees that the investor will be represented in the board of directors and that the investor will be able to vote in board meetings, thus have control over the decision-making of the business.

7. Protective Provisions

Investors will negotiate for veto powers over certain major decisions of the company. Friends and family, and angel investors will seldom negotiate for veto powers. VC Firms on the other side, will require veto powers over, for example, mergers/change of control, incurring debt for over a certain amount, declaring dividends, and increases or decreases of authorized capital of the company, among others.

Founders will need to decide what type of major decisions they want to give investors control over. The important aspect here is that founders make sure that the same protective provisions are granted to investors of the various financing rounds. If different classes have different veto powers over major decisions, making decisions will be difficult and time consuming.

8. Antidilution

This is a term that a founder must be clear when entering negotiations with a potential investor. Generally, antidilution clauses will determine which shareholders get diluted when a new financing round takes place, and how much those shareholders will be diluted. This is relevant because, if not well defined, a founder may lose control of his/her company by diluting too much of his/her percentage in the company.

Keep in mind that each business and its financial needs must be evaluated taking into account their particular situations (amounts being raised, number of investors and shareholders, among others), so as to determine what economic and control terms deserve the most attention. We are at your service for any queries you may have on these issues.

For more information on these topics, please contact:

Pablo Epifanio


Tel: 265-7777 ext. 7783

Email: [email protected]


Miguel Arias M.


Tel: 507-265-7777 ext. 7687

E-mail: [email protected]


15 de septiembre de 2020

Dos iniciativas legislativas debidamente aprobadas y promulgadas nos brindan la oportunidad de poner al día nuestros tributos y obligaciones frente al Fisco Panameño. Hablamos de la extensión de la Amnistía Tributaria y la Ley de Pronto Pago que resumimos a continuación.

Amnistía Tributaria

Desde el ejercicio fiscal 2019, se inició un proceso de regularización tributaria que brinda a los contribuyentes la oportunidad de poner al día sus obligaciones tributarias ante la Dirección General de ingresos (DGI), con la entrada en vigor de la Ley 99 de 2019, de amnistía tributaria, modificada y extendida mediante la Ley 134 de 2020.

A la fecha, mediante la Ley 160 de 2020, los principios introducidos originalmente por la Ley de Amnistía se mantienen muy similares, ahora con las siguientes características y vigencia:

Tributos incluidos

Impuestos, tasas y contribuciones especiales causados y morosos al 29 de febrero de 2020.

¿Quiénes pueden acogerse a la amnistía?

  • Personas naturales y jurídicas e inmuebles morosos.
  • Se incluyen los contribuyentes que tengan arreglo de pago en curso, así como aquellos que tengan cobranza administrativa como en el cobro coactivo.
  • Contribuyentes y agentes retenedores.
  • Contribuyentes con liquidaciones adicionales o cualquier requerimiento de pago frente al Fisco que se encuentren pendientes de decisión, siempre que se desista previamente de la acción o los recursos presentados.

Fecha de vencimiento para la presentación de formularios y declaraciones

A partir de la entrada en vigor de la Ley 134 hasta el 31 de diciembre de 2020, se establece como plazo para presentar ante la DGI los formularios que debieron presentarse hasta el 29 de febrero exentos de multas si corresponden a:

  • Informe de donaciones.
  • Informe de contribuyentes no declarantes.
  • Planilla 03.
  • Informe de Fondo de Jubilaciones, pensiones y otros beneficios.
  • Informe de Aseguradoras.
  • Certificación de intereses sobre préstamos hipotecarios residenciales sin interés preferencial.
  • Informe 43.
  • Informe de ventas con tarjeta de crédito.
  • Informe 930.
  • Declaración jurada de rentas de personas naturales, personas jurídicas y de zona libre.

Plazo de condonación de intereses y recargos morosos por impuestos causados y vencidos.

El período de amnistía tributaria se concede hasta el 31 de diciembre de 2020. Si el pago de los tributos causados y morosos se realiza posterior al 29 de febrero de 2020 hasta el 31 de diciembre de 2020, se condonará hasta el 85% de la totalidad de intereses, recargos y multas.

Plazo de duración de los arreglos de pago.

Si el convenio de pago se realiza en el mes de febrero de 2020 y hasta el 31 de diciembre de 2020, se condonará el 85% de la totalidad de los intereses, recargos y multas, siempre que hayan abonado el 25% del impuesto nominal adeudado. Se extiende el plazo para el cumplimiento del arreglo de pago realizado hasta el 29 de febrero de 2020, hasta el 31 de diciembre de 2021. Los arreglos de pago realizados con posterioridad al 29 de febrero de 2020 y hasta el 31 de diciembre de 2020, deberán ser cancelados en su totalidad hasta el 30 de abril de 2021.

Regla de Pronto Pago

Mediante la Ley 161 de 2020 se concede un beneficio de descuento del 10% del monto total a pagar para aquellos contribuyentes con renta bruta inferior a B/2,500,000.00 que paguen, dentro de los tres meses siguientes a la promulgación de la Ley o sea hasta el 2 de diciembre de 2020, los tributos que se causen o que debieron pagarse entre el 20 de marzo de 2020 y el 31 de julio de 2020.

Impuestos incluidos

  • Impuesto sobre la renta con excepción del impuesto sobre la renta retenido a los trabajadores y a los no residentes.
  • Impuesto de Aviso de Operación.
  • Impuesto Complementario.
  • Impuesto de Inmuebles.


De los contribuyentes que paguen dentro del plazo del beneficio del crédito del 10% serán condonados.

Intereses, recargos y multas

De los contribuyentes que paguen dentro del plazo del beneficio del crédito del 10% serán condonados.

Tasa Única

Se extiende hasta el 31 de diciembre de 2020 el plazo para el pago de la Tasa Única, sin la generación de la multa, para las sociedades anónimas, sociedades de responsabilidad limitada y cualesquiera otras personas jurídicas, así como las fundaciones de interés privado que debiera ser cancelada al 15 de julio de 2020.

Arreglos de Pago

La Ley de Pronto Pago incluye otra regla de Convenios de Pago con la DGI. Si se trata de tributos que se causan o deben pagarse entre el 20 de marzo de 2020 y el 31 de julio de 2020, se permite celebrar arreglos de pago cuyo plazo para el cumplimiento total no exceda del 30 de abril de 2021. La condonación de los recargos e intereses correspondiente a los tributos adeudados en el plazo indicado será progresiva y dependiendo del mes en que se celebre el respectivo arreglo de pago. Se establece igualmente, que los recargos y multas (excluyendo los intereses), se eliminarán en su totalidad si se cancela el monto adeudado antes del 30 de abril de 2021.

Nos mantenemos a su disposición para aclarar lo que estimen prudente. Favor contactarnos en [email protected] o directamente a:

Inocencio Galindo

Socio, Morgan & Morgan

[email protected]

Amanda Barraza de Wong

Asociada Senior, Morgan & Morgan

[email protected]

Angélica Ortiz

Asociada, Morgan & Morgan

[email protected]

Panama, September 14, 2020. Morgan & Morgan advised BofA Securities, Inc., Mizuho Securities USA LLC., and SMBC Nikko Securities America Inc., in an issuance by Banco Latinoamericano de Comercio Exterior (Bladex) of five-year term bonds for US$400,000,000.00 with a fixed coupon of 2.375%, under Rule 144A and Regulation S of the United States Securities Act of 1933.

Partners Francisco Arias G. and Roberto Vidal, and international associate Miguel Arias M. represented Morgan & Morgan in this transaction.

La Resolución No. DM-212-2020 del 29 de julio de 2020 del Ministerio de Trabajo y Desarrollo Laboral (MITRADEL), publicada en Gaceta Oficial Digital el día 31 de julio de 2020, modifica el artículo primero de la Resolución No. DM-163-2020 del 18 de junio de 2020, en relación a la vigencia de los permisos de trabajo vencidos durante los meses de marzo a julio de 2020, conforme a lo siguiente:

  • Se extiende hasta el 31 de diciembre de 2020, la vigencia de los permisos de trabajo vencidos en el mes de julio de 2020.
  • Se mantiene la extensión de la vigencia otorgada a los permisos de trabajo que vencían originalmente durante los meses de marzo a junio de 2020:
    • Permisos de trabajo vencidos en el mes de marzo, tendrán vigencia hasta el 31 de agosto de 2020.
    • Permisos de trabajo vencidos en el mes de abril, tendrán vigencia hasta el 30 de septiembre de 2020.
    • Permisos de trabajo vencidos en el mes de mayo, tendrán vigencia hasta el 31 de octubre de 2020.
    • Permisos de trabajo vencidos en el mes de junio, tendrán vigencia hasta el 30 de noviembre de 2020.
  • Esta resolución empezará a regir a partir de su promulgación en Gaceta Oficial.

Panama, August 27, 2020.
Morgan & Morgan is pleased to announce that our firm has been shortlisted for two awards in the Women in Business Law Americas Awards 2020 organized by Euromoney Legal Media Group. The awards recognize firms and women lawyers across a spectrum of practice areas, jurisdictions, and sectors, providing a snapshot of the most advanced teams working in the legal profession today.

Morgan & Morgan is shortlisted in the following awards: 

Pro Bono – Latin America

Talent Management – Latin America

In addition, our attorney Mayte Sanchez Gonzalez is finalist in the following category: 

Best in Commercial Arbitration

The awards winners will be announced on September 17, 2020. 

More information on this recognition is available here.

27 de agosto de 2020

Desde el año pasado, la Dirección General de Ingresos, mediante decretos ejecutivos y resoluciones reglamentarias dispuso los lineamientos para la utilización y aplicación de los créditos del Impuesto de Traslado de Bienes Materiales y Servicios (ITBMS) generados producto de las retenciones practicadas por los agentes de retención de este impuesto, en el caso de los consorcios o sociedades accidentales. Hasta mayo de este año, se permitía la cesión a otros dos contribuyentes de dichos créditos, los cuales podían ser aplicados solamente en dos períodos fiscales.

Recientemente, mediante la Resolución No. 201-5006 de 17 de agosto de 2020, se amplía el marco de aplicación de los créditos y además de los consorcios o sociedades accidentales, se reconocerá también a las sociedades regulares en los siguientes términos:

“Este crédito sólo será reconocido a las personas jurídicas regulares y sociedades sin personería jurídica, que por sus características actúen como agente de retención o como retenido y presenten una solicitud donde comprueben fehacientemente que se mantienen operativamente inactivos o que haya culminado la obra o proyecto para el cual fueron creados por lo que se les hace difícil poder recuperar y aplicar este crédito.”

Como mencionamos anteriormente, la utilización de los créditos fiscales de ITBMS sólo se permitía durante dos períodos fiscales; sin embargo, la Resolución No. 201-5006 que comentamos permite que sea aplicado por períodos subsiguientes en los siguientes términos:

“Informar a los contribuyentes que el crédito fiscal del ITBMS que se generó como consecuencia de la retención de los agentes de retención de este impuesto, podrá ser aplicado en el período fiscal en que se reconoce y períodos subsiguientes.”

El resto del procedimiento de reconocimiento y aplicación de dichos créditos se mantiene de la siguiente manera:

  • El contribuyente deberá estar al día con el pago de todas sus obligaciones tributarias para solicitar este reconocimiento del crédito.
  • El crédito reconocido podrá ser aplicado a dos contribuyentes obligados del ITBMS, para el pago de una deuda por este impuesto, por cada periodo fiscal, previo acuerdo entre las partes. Para esto deberá presentar formal solicitud ante la Dirección General de Ingresos, señalando las generales de los contribuyentes a quienes desea ser aplicado dicho crédito, el porcentaje que le será cedido, el porcentaje que se aplicará y el período a aplicar.
  • El crédito reconocido no podrá sr utilizado en un porcentaje mayor al cincuenta por ciento (50%) por período fiscal. 

Nos mantenemos a su disposición para aclarar lo que estimen prudente. Favor contactarnos en [email protected] o directamente a:

Amanda Barraza de Wong
Asociada Senior, Morgan & Morgan
[email protected] 

Angélica Ortiz
Asociada, Morgan & Morgan
[email protected]

Panama: The Shipping Law Review

Panama, August 24, 2020.

Juan David Morgan Jr., partner and head of the Shipping and Admiralty Litigation practice of Morgan & Morgan, was part of the experts of the seventh edition of The Shipping Law Review. This publication highlights the leading jurisdictions and critical features of regulations concerning the handling of maritime disputes.

The online Panama chapter is available here.

Or a PDF version is available to download here.

At the beginning of a startup’s life, the use of financial resources in the most efficient way is of vital importance. It is for this reason that the incentives that a country can provide to an entrepreneur and his newly formed company can potentially determine how and how much that company will grow.

In previous articles in this Startup Series, we summarized the advantages of incorporating a startup under Panamanian law, and briefly mentioned some of the incentives that exist in our legislation. In this new edition, we will expand on some of the applicable special regimes, so that founders can be generally aware of the most relevant incentives for his or her field.

Panama is the ideal jurisdiction to develop all kinds of entrepreneurial initiatives due to its wide array of special commercial regimes and its state-of-the-art logistics facilities. From Panama, activities that have effects outside of Panama, such as the distribution of products at the regional level or assembly of products destined to be exported, can be carried out. These activities have specific tax rules, which are covered by special trade and fiscal regimes. With this in mind, and considering that a startup depends on exponential growth in a short period of time, understanding the different incentives and regimes available can boost the business from its early stages.
In addition to the tax advantages provided by the Principle of Territoriality, which we have already discussed, there are a number of special regimes in Panama that, although not expressly created for startups or entrepreneurial businesses, are designed in a manner that could be used to stimulate the economic activities in which the startup is involved. Undoubtedly, amongst the special regimes that could be applicable to startups are the incentives for companies dedicated to research and innovation in scientific, technological, humanistic and cultural fields that are located within the City of Knowledge Foundation complex.

  • For innovative companies located within the City of Knowledge Technopark, there are important tax incentives such as: the exemption from import tax on the machines, equipment, furniture, vehicles, devices and supplies necessary for the development of said companies; exemption from the Tax on Transfers of Movable Personal Property and Services (“ITBMS”) on machinery, equipment, vehicles, devices and supplies that are acquired and necessary for the development of said companies; and exemption from any tax, duties, or encumbrance imposed on the remittance of money abroad when such remittance or transfer of funds is carried out for some purpose of the companies.

There are also special regimes that provide incentives to industrial manufacturing, agro-industrial, and marine resource transformation companies. Companies engaged in these activities may obtain an Industrial Development Certificate by filing a request to the Ministry of Commerce and Industries in which, among other things, they must describe the activity of the company and the product or products that are currently being manufactured. The certificate confers benefits to its holders, such as the reimbursement of 35% of all disbursements made for research and development of new and improved processes, product features or the creation of new products. Additionally, the losses suffered by the companies holding the aforementioned certificate during a fiscal period will be deductible throughout the following five fiscal periods, at the rate of 20% per year. It is important to mention that companies will not be able to take advantage of the benefits conferred by this law if, among other things, they already enjoy other tax benefits, or if they are located in special zones, free zones, fuel free zones or any other zones that are established in the future by special laws.

Other important incentives that deserve mention are those afforded to companies established within the Panama-Pacific Area, which will enjoy exemption from import tax on all types of merchandise, equipment, service, products and other goods introduced to the Panama-Pacific Area, exemption from ITBMS, exemption from export and re-export tax, among others. Companies established within Free Zones, tourism companies and investors in tourism companies; and headquarters of multinational companies are also afforded with exemptions and tax benefits that a startup could take advantage of, if applicable. Lastly, Panamanian legislation grants incentives to multinational companies that establish their base of operations for Latin America in Panama (these head offices are known as the Multinational Headquarters or “SEM” for its name in Spanish), such as exemptions from income tax for services provided to entities domiciled abroad that do not generate taxable income in Panama and exemption from sales tax for services rendered to entities domiciled abroad that do not generate taxable income in Panama, among others (for more information on the SEM special regime, click here).

It is important to highlight that, as a commitment to reinforcing international tax transparency, Panama has been part of the Base Erosion and Profit Shifting (BEPS) initiative since 2016, and that regimes such as SEM and Panama-Pacific comply with such substantive rules aimed at ensuring consistency, transparency and belonging in all its activities.

Equally relevant for startups, are incentives for micro, small and medium-sized enterprises (MSMEs). The law under which these incentives are granted defines MSMEs as follows:

  • Micro-enterprise: One that generates gross revenue or annual turnover up to the sum of US$ 150,000.00.
  • Small-sized enterprise: One that generates gross revenue or annual turnover between $ 150,000.01 and US $ 1,000,000.00.
  • Medium-sized enterprise: One that generates gross revenue or annual turnover between US $ 1,000,000.01 and US $ 2,500,000.00.

Startups wishing to benefit from this regime must submit a request to be listed in the Business Registry of the Authority for Micro, Small and Medium-sized Enterprises (AMPYME). Such request must provide, among other things, a suitable income statement or letter from an accountant certifying the company’s annual turnover (recently constituted companies are exempted from this requirement). Thereafter, the MSME must register with the General Revenue Office (DGI, for its name in Spanish) for its special regime to be incorporated into its taxpayer profile. Once the company is registered, it will be exempt from paying income tax for the first 2 fiscal years, counted from the date in which the MSME was registered in AMPYME. Note that, as a temporary measure aimed at mitigating the effects of the COVID-19 crisis, the income tax exemption afforded to MSMEs has been extended to cover the first 3 fiscal years, counted from the date in which the MSME was registered in AMPYME. In addition, such enterprises may participate in AMPYME’s Business Development Program, gain access to the Seed Capital Fund Competitive Program and the PROFIPYME Financing Program, the Microcredit Financing Fund for Small and Medium-sized enterprises, and will be given priority in public bids in which there is a tie between two companies.

All that said, it is clear that Panama offers a significant number of special regimes and tax benefits. These regimes may well be taken advantage of by a founder who wishes to establish his or her company in Panama and grow his or her startup in a short period of time. Given the need for a startup to achieve scale quickly, having the government’s support and incentives is beneficial and could be a component that a potential investor takes into account when investing in a startup. Finally, each business must be evaluated so as to determine whether the incentives mentioned herein are applicable. We are at your service for any queries you may have on these issues.

For more information on these topics, please contact:

Tax-related inquiries:

Amanda Barraza
Tel: 265-7777 ext. 7636
Email: [email protected]


Angelica Ortiz
Tel: 507-265-7777 ext. 1651
E-mail: [email protected]

Corporate-related inquiries:

Kharla Aizpurúa O.
Tel: 265-7777 ext. 7652
Email: [email protected]


Miguel Arias M.
Tel: 507-265-7777 ext. 7687
E-mail: [email protected]

Please not that, currently there exists a draft law seeking to modify this regime. We will comment on said changes in the event that it becomes law.

Informe de Sostenibilidad 2019

On July 22, 2020, the National Assembly approved, after a third debate, Draft Law No. 83 (the “Draft Law”), which regulates limited liability entrepreneurship companies (the “LLECs”) in Panama, and is now awaiting the signature (or veto) of the President of the Republic.

The Draft Law’s object is to “streamline and simplify constitution procedures” of these special legal entities, so as to reduce the costs and the bureaucracy that usually prevail in the path towards entrepreneurship, as well as to “promote job creation through a new form of business.” It is clear that this Draft Law is a great step towards the formalization of many businesses, furthermore, it is an additional incentive for Panamanians to start a business and contribute to the development of the local economy. However, it is necessary to evaluate whether this Draft Law, if signed by the President, will effectively contribute to the creation of an entrepreneurship “hub” in Panama, and if the entity is an attractive one for a startup.

As we have mentioned in the past, startups are characterized by rapid and exponential growth, and require large capital injections in a short span of time in order to finance their operations, achieve the necessary scalability to penetrate international markets and become true disruptors. It is for this reason that, as a premise, we pose that startups, by nature, should not be considered analogous to a micro, small and medium enterprise (MSME), given that they that grow rapidly and require a lot of capital, unlike MSMEs that grow gradually for extended periods of time and capital injection will depend on their scale over time. Within the applicable regulations, startups should not be defined based on the same criteria used to define MSMEs, because this would be an inadequate definition of what a startup is and of its potential. We underscore then, that according to Article 25 of the Draft Law, LLECs have revenue limits based on the definitions of micro and small companies, and that, if a company generates gross revenues above those limits, it would lose its status as an LLEC. This is inconvenient for a startup given its exponential growth. If a startup quickly gains scalability, its gross revenues can be very high from the beginning, however, high gross revenues do not necessarily mean that a startup is turning a profit. Measuring the status of a startup based on its gross revenues (which is effectively treating a startup as if it were a MSME) gives a false perception that the company is not, in effect, a fast-growing company. In the recommendations that emerged from a 2016 study published by the Organization for Economic Co-operation and Development (“OECD”) and entitled “Startup Latin America: Building Innovative Future” (hereinafter the “OECD Study”),   reference is made to, for example, countries like Chile and Mexico, leaders in the promotion of startups in Latin America, who opted to define a startup based on their performance (growth potential), innovative potential, global target market and capacity to meet the specific needs of a country or region.

In its Article 5, the Draft Law stipulates that LLECs may only be composed of members who are natural persons, effectively limiting the type of person that can invest in these companies. Although it is true that at the beginning of a startup’s life, the founders will likely be natural persons, it is possible that a startup would want to invite a capitalist partner to join the company (often, in addition to providing capital, these partners have vast experience and can serve as mentors or advisors). It is possible that these potential capitalist partners will wish to invest, for various reasons, through their own legal entities; so, this limitation on who can be members must be taken into account when considering the type of legal entity under which the startup will be organized. In addition, since private companies often have the ability to contribute seed capital to a startup, encouraging the private sector to devote part of its resources to invest in startups and encourage local entrepreneurial culture is key to creating a robust startup industry. On this, the aforementioned OECD Study commented that:

“[…] Commercial banks, development banks and investment funds could boost the region’s entrepreneurial ecosystems. The region still needs to channel more private capital towards productive investment, but for this to happen, countries will need to reform legislation to foster private investment, while investors will need to change their mindsets.”

Additionally, Article 7 dictates that “one to five persons […] residents of the Republic of Panama” may constitute an LLEC. From this, it is not clear whether only the persons who constitute the LLEC are required to be residents of Panama, or whether the LLECs are reserved for Panamanian residents, meaning that there can be no foreign members in LLECs. If the latter is true, then the effort to attract foreign investors and entrepreneurs to Panama would be frustrated and would further reduce the pool of capitalist partners that may invest in LLECs. According to a 2019 Forbes’ publication, 50 of the 91 billion dollar startups in the United States of America, which have a combined value of US $ 248 billion, were founded by immigrants. Hence, if Panama seeks to become an entrepreneurship hub, closing its doors to foreign ventures that turn to other countries in the region due to the limitations imposed by the laws in their jurisdictions does not contribute towards achieving this goal.

An important aspect of a startup is that relationships between shareholders and investors are extremely complicated and ever-changing. Allowing an LLEC to be created without seeking advice of an attorney can be good from the point of view of streamlining the process, but for a startup it can result in future complications, in the event that there is friction between shareholders or investors. This is why a startup’s articles of incorporation must have clear rules on, for example, shareholder rights and sale restrictions. In the absence of these, the shareholders of a startup must execute a shareholders’ agreement, so that corporate governance rules, as well as any other aspects of the company that they wish to regulate (such as capital commitments and dilution of shareholding) are duly agreed upon. Under the Draft Law, LLECs may be constituted through the filing of a “standard statute,” a model of which will even be provided by the PanamaEmprende portal. An entrepreneur is rarely thinking about the legal consequences of incorporating a company or the rules under which that company will be governed. That’s why it is important to seek legal counsel to which the entrepreneur can explain his or her needs and concerns, so that the attorney may produce documents that meet those expectations and better manage the problems that may arise in the future.

Amongst the most common methods in which a startup raises capital to finance its operations is through the sale of its shares; so, the shareholding structure of a startup will undergo various changes throughout its life. Additionally, often the shares sold in different financing series have different rights and obligations from those owned by founding shareholders (such as preferential liquidation rights and conversion rights), which provides an additional incentive for an investor to contribute capital to the startup. Under the Draft Law, LLECs, which have a structure similar to that of limited liability companies (“LLCs”), must keep “all the information regarding changes to their structure or their administrators and/or members” up to date. Thus, information regarding the members is not private and transfers or sales of participating quotas must be recorded in the Public Registry; a process which may be cumbersome and would add an additional layer of complexity to financing rounds, a fundamental phase of any startup. Additionally, nothing in the Draft Law seems to indicate that LLECs can issue participating quotas of different classes, which means that in a financing round, only participating quotas with the same rights, obligations and restrictions as the rest of the partners could be offered to new investors (same situation as with SRLs). Encouraging private investment in startups is an essential component of the development of these businesses, and shares of different classes with, for example, preferred liquidation rights, are part of the allure of investing in a startup. The Draft Law significantly limits the chance to attract capital to the LLECs.

It is thus clear that the corporation, which is widely known to both Panamanian and foreign investors, is the preferred legal entity for a startup since it allows transfers to be made through private documents, the shareholding structure does not have to be recorded in the Public Registry and the issuance of shares of different classes is allowed.

Finally, the treatment that would be granted to LLECs in government bidding proceedings by way of Article 36 could be prone to abuse. Under said article, individuals or legal entities that participate in public bids for better value and include one or more LLECs in their proposals will enjoy “an additional score of 5%”. This preferential treatment may cause consortia to include LLECs in their bids just to get the benefit of the additional score, and not because SERL truly contributes something to the consortium. Likewise, it is not clear how this benefit is administered — that is, whether it applies to both price scoring and technical scoring, or only the latter. This confusion may result in legal challenges to bid proceedings, which would have a counterproductive effect.

It is worth mentioning that, in principle, a law that encourages entrepreneurship and the creation of companies in an easy, dynamic way and under a streamlined process is a good step in favor of the startup industry. In fact, the OECD Study mentions several of the components contained in the Draft Law as important components for the promotion of startups, such as the simplification of the incorporation procedure, the promotion of entrepreneurial culture and implementation of strategies aimed at improving entrepreneurial-related education. However, for Panama to become a true hub of innovation and startups, there are several other aspects to be considered, such as the promotion and facilitation of investment, removal of entry barriers to certain industries such as financial and retail, the introduction of new financing methods such as crowdfunding and the provision of instruments that expedite such forms of financing.  We are at your service for any queries you may on have on these matters.

For more information, please contact:

Inocencio Galindo
Tel: 265-7777 ext. 7734
Email: [email protected]
Miguel Arias M.
Tel: 507-265-7777 ext. 7687
E-mail: [email protected]