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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 |
Angelica Ortiz |
| Corporate-related inquiries:
Kharla Aizpurúa O. |
Miguel Arias M. |