Alvaro Tomas, partner and Vice President of Operations of the Fiduciary Unit of Morgan & Morgan
The Panamanian government has issued Law 99 of October 11, 2019, which establishes a General Tax Amnesty Law (“Amnesty”) that includes the elimination, for a limited period, of the penalties and surcharges caused by non-payment of the obligations with the National Treasury for corporations and private interest foundations. This law also includes amnesty for various types of interests and penalties resulting from non-payment of other taxes (for example: property or income tax).
Tax Amnesty Terms
The Amnesty Law will be extended until February 29, 2020 with exoneration as follows:
Full exoneration (100%) for those who pay in October and November 2019;
95% for those who pay in December 2019;
90% for those who pay in January 2020 and;
85% for those who pay on February 29, 2020.
The aforementioned Amnesty is the perfect opportunity to bring your legal vehicle into good standing without additional charges or to proceed with its dissolution instead of being struck off (which is the legally correct manner).
At Morgan & Morgan we have a range of seasoned professionals working alongside the young talent that can help you with the administration of your corporate vehicles and foundations. Please write to [email protected] if you are interested in more information.
Morgan & Morgan opened its first offices in The Bahamas since 1991. We created MMG (Bahamas) Ltd. as a corporate service and later on, in 1996, founded MMG Bank & Trust Ltd., which started our financial unit´s successful path into the financial service industry.
Our board of directors decide in the mid-90s that The Bahamas was going to be one of our prominent jurisdictions because this sovereign country has become a well-recognized and reputable international financial center, with a modern and robust legislation, governmental supervision oriented towards facilitating business ventures and has an enviable workforce of seasoned and educated professionals.
We have seen its democratically elected governments navigate successfully through the tough times the smaller international financial centers have had to deal with given the shame and blame attitude of certain multinational organizations and communities. The Bahamas has been wise and steadfast in their positions and negotiations fully aware of the negative impact on the financial services industry as a whole a wrong decision might have. We value that at Morgan & Morgan. Also, the fact that we can fly directly several times a week to Nassau, from our headquarters located in Panama City, is also a big reason we feel comfortable with his jurisdiction.
But, what and why do we offer services and products to our clients from The Bahamas?
For myriad of good reasons apart from the gorgeous weather and waters. The Bahamian governments has always been investor friendly and have created a series of incentives that make the island a good venue for a variety of industries such as tourism, financial services, corporate services, insurance, marinas, real estate, among others. The friendly tax environment includes no income tax, no capital gains tax, no estate tax, no withholding tax, no dividend tax and no payroll tax to those who work in the Bahamas. But for a Value Added Tax of 7.5% on some goods and services, tax benefits abound.
We have also seen the creativity and the also the want to fill the markets needs attitude of the regulators. What better example of this is the creation of the SMART Fund legislation. In these times of fiscal compliancy and an international effort to exchange of information, clients must be happy to mitigate their tax burden. Therefore, cost efficient vehicles, that protect assets, help with estate planning and reduce the effective tax rate will be well viewed by clients.
The Bahamas SMART Fund
We´ve recently activated our SMART (Specific Mandate Alternative Regulatory Test) fund license provider MMG Fund Services Ltd. For wealth and tax planning in Brazil, SMART Funds have become a very useful and efficient tool. This vehicle has been promoted with certain success in Brazil by the Bahamian authorities. Brazilian residents are taxed globally, that is on their income anywhere in the world. Most of the financial income obtained outside Brazil is taxed at a rate of 15% except for dividends, which may be taxed at up to 27.5%. For a Brazilian client with a portfolio of ordinary or preferred shares paying dividends frequently, current taxes would reduce investment return dramatically. SMART Funds are an alternative that, on one hand, differ payment of taxes over dividends by capitalizing them and, on the other, upon redemption of the shares from the SMART fund, said income would be taxable at 15% only, producing a 12.5% savings.
There are seven “models” of the SMART fund that investors can choose, but for a private individual or family, the most common model is the SMART fund 4 Model. The features of this SMART fund are:
- No offering memorandum is required – a term sheet is optional, but not mandatory.
- No more than five individual investors.
- Operates as a private investment company.
- Subject to an annual certification to the Securities Commission or Unrestricted Fund Administrator.
- Investors can waive requirement for an annual audit.
- Can have an ISIN Number and Bloomberg Ticker.
As you can see, we at Morgan & Morgan are very comfortable offering products and services and we have a range of seasoned professionals that can help you choose the correct fund structure for your family. Finally, let us congratulate the Bahamas Financial Services Board on their 20th anniversary and thank them for making our job a little bit easier
Alvaro E. Tomas and Carlos Ernesto Gonzalez Ramirez, partners, Morgan & Morgan
What has made corporate stalwarts such as Maersk (shipping), Procter & Gamble (consumer goods), LG (electronics), Caterpillar (construction equipment), CEMEX (construction materials) , Nike (sports equipment and apparel) and Heineken (breweries), just to name a few, choose to establish their headquarters in this small country with a population of merely 4 million? The answer lies in great part in the vision of a well-known lawyer who, given all the benefits Panama already afforded foreign companies, decided to take it to a whole new level.
We all know that Panama has a privileged geographical position, nestled between the two America’s and a stone’s throw away from the Caribbean. Almost 6% percent of the entire world’s trade goes thru the Panama Canal. We know that it uses the US Dollar as currency, has a solid and competitive financial center, an enviable port and logistics system, the second largest free zone in the world, a service based economy and the region’s best airport and cargo facilities. Moreover, it enjoys a good climate the whole year round, its tourism industry is growing at breathtaking speed, its is free of natural disasters, its capital -Panama City- is filled with world class hotels and restaurants and the political and social stability of a democratic country.
The person who fathered this law, Dr. Eduardo Morgan González, states “the sole purpose of this law was to introduce special legislation to attract and promote investment, create jobs and transfer knowledge and technology, in the process making the Republic of Panama more competitive in the global economy by optimal use of its geographical position, physical infrastructure and international services.”
For a better understanding of the benefits that Law no. 41 of August 24, 2007 may offer corporate clients searching for a place to establish their base of operations for Latin America, we summarize the most important aspects of said piece of legislation:
Definition of Multinational Headquarter (MHQ)
A global or regional headquarter is defined as a legal entity that provides services of the following nature or any combination thereof:
- Management and/or administration of companies belonging to an economic or corporate group in a specific geographic area or globally, including strategic planning, business development, managing and/or training of personnel, operation, control and/or logistics.
- Logistics and/or warehousing of components or parts required for the manufacturing or assembling of any products manufactured by the company.
- Technical assistance to companies of an economic or corporate group or to customers having acquired products or services from any such companies, for which the latter shall be under the obligation to provide support services.
- Financial management, including treasury services, of an economic or corporate group.
- Accounting for an economic or corporate group.
- Drawing plans as part of designs and/or construction works, in the normal course of business of the headquarters or any subsidiaries thereof.
- Electronic processing of any activity, including the consolidation of operations of an economic or corporate group. This service includes network operations.
- Consulting, coordinating and monitoring marketing and advertising strategies for goods or services produced by an economic or corporate group.
- Support of operations and research and development of products and services of an economic or corporate group.
- Any other analogous service previously approved by Cabinet.
The MHQ group capital must be equal or more than US$200 million.
Law No. 41 provides for several tax benefits, both at corporate and personal level (for management).
At corporate level, tax incentives are:
- Total exemption on Income Taxes. Since Panama has a territorial tax system, and since the MHQ will be operating offshore (providing services to its operations outside Panama), there is no taxable income. Given the case that the MHQ provides service to a local operation, such local operation will have to be provided through a separate legal entity (another company), and any transfers of funds from that entity to the MHQ will have to retain 12.5% as income tax.
- Possibility of negotiating a tax scheme. A MHQ will not pay taxes in Panama, but if for reasons of global tax planning it wants to pay taxes, it can do so through an agreement with the local tax authorities. This agreement can include the tax rate, and any other provision that the MHQ deems necessary, provided that such provision is not against Panamanian public policy or morals.
- Exemption from sales tax for services rendered to relate corporations abroad. MHQ invoicing to offshore operations are not subject to the 7% sales tax.
- It is important to point out that exemptions from these taxes do not include exception from filing tax information with tax authorities.
Foreign personnel of the company with a Multinational Headquarters License that is covered by a Permanent Employee Visa for a Multinational Headquarters Company (“Visa de Personal Permanente de Sede de Empresa Multinacional”) will not generate income taxes if payment is received from abroad. They are also exempted from Social Security contributions. However, for these employees and their dependents the company must provide private health insurance, which must be issued by an insurance company with license in the Republic of Panama.
Additionally, holders of a Permanent Employee Visa for a MHQ may import their household goods free of import tax and may import a vehicle for its family use every 2 years. However, sales taxes must be paid.
These tax exonerations will not apply to Panamanian employees or other foreign employees that are the holders of a visa different than a Permanent Employee Visa for a MHQ, which will be subject to the tax norms and provisions in force in the Republic of Panama.
Please note that Law No. 41 creates three (3) visas specifically for foreign employees of the MHQ. These visas are processed before the Ministry of Trade and Industry. These visas are:
- Special Visas for Permanent Personnel of MHQ. These visas are issued to foreign personnel at a managerial or executive level, and to their dependants. The visas will be issued for a 5 year period.
- Special Visas for Temporary Personnel of MHQ. These visas are issued to any personnel of a MHQ that has to come to Panama for activities related to the MHQ. It has a maximum duration of 3 months. This type of visa also eliminates the requirement of obtaining a working permit or any other permit from any governmental authority.
- Special visas (permits) for special events. These visas are to be issued to personnel of the MHQ that come to Panama to attend a specific event. These visas are only for MHQ personnel that hold a nationality which requires a visa to enter the country. All other personnel will not need to apply for this visa if coming only for a specific event or short visits, such as meetings, planning, technical training, etc.
Please note that the Permanent Employee Visa for a MHQ shall be given for a term that may not be longer than the term established in the employment contract, which shall in no case be longer than five (5) years. Holders of these types of visas will not be required to obtain a work permit (usually required for all other types of visas).
Labor regulation incentives
Law No. 41 exempts MHQ from the application of labor quotas, in the case of holders of Special Permanent or Temporal Permits for Permanent or Temporal Personnel of MHQ. These means that the proportion of 10% foreigners to 90% Panamanians required by the Labor Code, does not apply when foreigners working with the MHQ are holders of these Special Residence Permits.
In order to benefit from all of these incentives, a MHQ will have to apply for a license before the Licensing Commission for Multinational Headquarters.
As a final note, special areas in and around Panama City are being developed with modern infrastructure, logistical systems, communications, schools and housing to cater to the amount of executives and personnel of MHQ that are moving to live in Panama.