INTRODUCTION

Once the client has identified the land or property he intends to buy, we must determine if such property is titled property or "rights of possession".  Titled property is registered property in the name of the owner before the Property Section of the Public Registry of Panama.

Rights of possession is a “de facto” occupation of Government land (Mostly in the countryside) by one (1) or more individuals.  The possession of such land is subject to a lease from the Government [Administrative Concession granted by The Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance], if the client can prove that his/her/its activities on the land will be beneficial or positive for the community.  Rights of possession exist in most islands and beach front properties.

PROMISSORY SALES CONTRACT

It is recommended to have a promissory sales contract executed between the seller and the buyer, which is usually authenticated before a notary public and sometimes registered before the Property Section of the Public Registry of Panama.  This contract will give both parties certainty to the following:

If the property is, for example, an apartment or a house, which is still in plans, the promissory sales contract is a must, for which the seller will not be able to transfer title until the construction of the apartment building or the house is finished and the corresponding permits have been issued by the authorities.

Usually, at the time of execution of the promise, the buyer effects a down payment  of 10% to 20% of the purchase price, which can be placed in escrow or be paid in full on behalf of the seller, depending on the circumstances.

Expenses and fees involved with the preparation, notarization and/or  registration of the public deed containing the promissory sales contract of real estate property will depend on the circumstances and the purchase price.

SALES CONTRACT AND REGISTRATION OF TITLE

Once the seller has delivered all pertinent documentation needed for the closing to the buyer, the buyer must notarize and register the title before the Public Registry of Panama.  Usually, at the time of execution of the deed containing the final sales contract, the seller should receive from the buyer an irrevocable promissory letter of payment (bank guarantee), issued by a local bank, conditioning final payment to the registration of the title in favor of the buyer.

The seller has to pay a transfer tax on real estate property of approximately two percent (2%) of the value of the land or the purchase price, whichever is higher; and, a capital gains tax of ten percent (10%), before the closing, among other things.  As previously stated, new residential units are exempted from the two percent (2%) transfer tax only once, upon the first sale.

If the parties involved decide to buy the shares of a corporation, which owns a piece of real estate property, the buyer is obligated to withhold and pay to the fiscal authorities on behalf of the seller, five percent (5%) of the purchase price as capital gains tax.  If the capital gains tax that the seller has to pay out of the sale of his/her/its shares is less than the five percent (5%) of the purchase price retained by the buyer, the seller then has the right to be reimbursed for the credit.

REAL ESTATE TAXES

Annual real estate taxes on new constructions are exempted in accordance to the following rules:

1. Any constructions, which construction permit is approved as of September 1, 2006, will be exempted from annual real estate taxes in accordance to the following schedule:

RESIDENTIAL USE                                                                      YEARS OF EXEMPTION

Up to US$ 100,000.00                                                                                        15 Years
In excess of US$ 100,000.00 and up to US$ 250,000.00                                   10 Years
In excess of US$ 250,000.00                                                                                5 Years

ANY OTHER USE                                                                        YEARS OF EXEMPTION

Any value                                                                                                            10 Years

NOTE: THE ABOVE IS TRUE, REGARDLESS OF WHEN THE IMPROVEMENTS OR CONSTRUCTION IS DECLARED OR REGISTERED BEFORE THE PUBLIC REGISTRY OF PANAMA.  THESE EXEMPTIONS WILL APPLY, AS LONG AS THE LAW IS IN FORCE.

2. Any constructions, which construction permit is approved before July 1, 2009, will be exempted from annual real estate taxes for 20 years, as long as the improvements or construction are/is declared or registered before the Public Registry of Panama, on or before December 31, 2011.

NOTE: THE ABOVE IS TRUE, EVEN IN CASE OF CONSTRUCTION PERMITS ISSUED AS OF SEPTEMBER 1, 2006.  IN OTHER WORDS, IN ORDER TO BE ENTITLED TO THE 20 YEAR EXEMPTION, THE IMPROVEMENTS OR CONSTRUCTION HAVE/HAS  TO BE RECORDED BEFORE DECEMBER 31, 2011.

After the twenty (20) year period expires, the first US$ 30,000.00 (If the land is urban) and the first US$ 150,000.00 (If the land is for agricultural use) over the value of the land are exempted and taxes on the remaining difference on land and the improvements (construction) will be applied progressively, as follows:

1.75% over US$ 30,000.00 up to US$ 50,000.00

1.95% over US$ 50,000.00 up to US$ 75,000.00

2.1% over US$ 75,000.00

PREFERENTIAL INTEREST RATES

There is an incentive[1] of lower interest rates overt a mortgage loan for the purchase of any new residential unit of less than US$ 80,000.00 vis a vis the effective interest rate applicable in the country at a given time, based on the following rules:

1. The preferential interest rate cannot exceed FOUR PERCENT (4%) below the applicable effective interest rate in the country in connection with residential units with a registered value of more than US$ 30,000.00 and up to US$ 65,000.00.

2. The preferential interest rate cannot exceed TWO PERCENT (2%) below the applicable effective interest rate in the country in connection with residential units with a registered value of more than US$ 65,000.00 and up to US$ 80,000.00.

3. In the case of residential units with a registered value of less than US$ 30,000.00, the applicable preferential interest rate will, from time to time, be established by the authorities.  Such interest will be reimbursed by the Government to the financial institutions as a fiscal credit.

The following cases are excluded from this incentive:

1. Residential units with a registered value above US$ 80,000.00.

2. Fractioned loans granted to one or more buyers of residential units, which in total exceed US$ 80,000.00.

3. Loans for the purchase of new residential units, if potential owners or beneficiaries are already enjoying this incentive.

The effective annual interest rate currently in force in the Republic of Panama has fluctuated between 6% and 7% in past few years.  This interest is reviewed every three (3) months.

RIGHTS OF POSSESSION

“Rights of possession” is, a “de facto” occupation of the land, which is often the case in the country side, most islands and beach front properties.

There are two (2) kinds of rights of possession:

1. Those located in national land, which include beaches, beach front land, marine bottom and islands, up to two hundred (200) meters from the high tide mark towards inland, which are in the custody of the Nation, and which are subject to the jurisdiction of the Directorate General of the Surveyor of the Ministry of Economy and Finance.

This kind of rights of possession, located in national land, can be further divided into those subject to title and those subject to an administrative concession (lease).  As we will later explain, those rights of possession subject to an administrative concession are all beaches, beach front land, marine bottom and islands.

2. Those located in agricultural land, which have been allocated and transferred to the Department of the Agrarian Reform of the Ministry of Agriculture for the specific purposes to grant titles for agricultural use, outside the two hundred (200) meters from the high tide mark towards inland, and which are subject to the jurisdiction of the Department of the Agrarian Reform of the Ministry of Agriculture.

Therefore, in order to have lawful occupation of the land, one must either seek a title or file an Administrative Concession, which is a long term lease from the Government.

If the rights of possession that the client intends to buy are subject to title, a petition must be filed before the Directorate General of the Surveyor of the Ministry of Economy and Finance or before the Department of the Agrarian Reform of the Ministry of Agriculture of Panama.  Expenses and fees in connection with this process amount to US$ 3,500.00 to US$ 5,000.00, approximately and it usually takes between one (1) or two (2) years, depending on the complexity of the case and location of the land.

On the other hand, following is a description of the process that must be accomplished in order to apply for a concession of land in Panama, if the land you intend to purchase is not subject to title, but subject to an Administrative Concession or a long term lease from the Government (Rights of Possession), which is the case of most beaches, beach front land, marine bottom and islands.

A concession is a long term lease contract from the Government, which is granted for at least, ten (10) to twenty (20) years.  The Government will establish the lease price that the client will have to pay every year, based on the area and the value of the land.  Just to have an idea, in some cases the Government has charged US$ 250.00 per year for ONE THOUSAND SQUARE METERS (1,000.00 Square Meters).  So, if the land has TEN THOUSAND SQUARE METERS (10,000.00 Square Meters), the applicant to the concession would have to pay a lease of US$ 2,500.00 per year.  This is just an example of the past.  The laws are currently under revision and will change.

In order to determine the course of action, we must first identify the land that you intend to purchase.  Then we need to determine if such land is located in national land under the jurisdiction of The Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance or in land allocated to the Department of the Agrarian Reform of the Ministry of Agriculture.  We must also determine if such land is titled and owned by an individual or corporation or if on the other hand, such individual or corporation has only rights of possession over the land, because he/she/it has been occupying it for a number of years.

Initial due diligence investigations to determine the legal status of the land you intend to purchase will cause expenses and fees, which will depend on the location of the land.  This effort will be coordinated with our local contacts (surveyors).

Once the land has been identified and investigated, the client must secure a survey of the land.  Expenses and fees in connection with this survey will depend on the location and area of the land.

Expenses and fees in connection with the preparation and execution of a purchase agreement of rights of possession will depend on the location of the land and the purchase price, among other things.

LEGAL STATUS IN CONNECTION WITH THE OCCUPATION AND USE OF BEACHES, BEACH FRONT LAND, MARINE BOTTOM AND ISLANDS

Article 255 of the National Constitution of the Republic of Panama considers beaches, beach front land, marine bottom and territorial waters as property of public use or public domain, which cannot be subject to title or private ownership.  However, a recently enacted piece of legislation (Law No. 2 of January 7, 2006) allows titling of islands, up to 30% to 50% of their territory, depending on various circumstances and governmental policies towards tourism activities.

The law defines beaches: as the strip of land between the low tide water mark and a parallel line to the high tide water mark; beach front land: as the strip of land between the high tide water mark and a parallel line at ten (10) meters towards main land; and, marine bottom: as the part of the national territory covered by the territorial waters up to the low tide water mark[2].

In accordance with Paragraph 3 of Article 116 of the Fiscal Code, flooded lowlands by high tides, including mangroves, are considered of public use or public domain.[3]

Article 286 of the National Constitution of the Republic of Panama designates insular land as conditionally transferable for specific developmental purposes of the country:

On the other hand, Article 121 of the Fiscal Code states that “a foreign natural or juridical person or a national juridical person, which all or part of its capital stock is foreign, cannot acquire property located less than ten (10) kilometers from the borders of the Republic of Panama.”

Thus, taking into consideration the restrictions and exceptions previously mentioned, national land and 30% to 50% of islands may be acquired in title by particulars and/or be subject to lease or barter thru the Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance, as stated by Article 99 of Law No. 56 of 1995.

In the same context, Paragraph G of Article 2 of Law No. 63 of 1973 reaffirms that  the Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance has competence over the administration, sale and lease of national land, with the exception of specific land destined for agricultural purposes or agrarian reform, which competence corresponds to the Department of Agrarian Reform of the Ministry of Agriculture.

Now, within the agrarian subject, Articles 26 and 27 of the Agrarian Code stipulate that “all flooded land by the high tides, including mangroves, as well as all land between the coast and two hundred (200) meters towards main land”, are not subject to title thru the Department of the Agrarian Reform of the Ministry of Agriculture.

Nevertheless, and in spite of the fact that all land of public domain, including beaches, beach front land and marine bottom, are not subject to title, the Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance may grant administrative concessions over such land, for its temporary use and exploitation.

Notwithstanding all of the above, there are some titles or property rights recognized to particulars over beaches and beach front land and islands, which have been constituted prior to the  National Constitution of the Republic of Panama of 1941.  All titles or property rights over beaches and beach front land and islands granted prior to the National Constitution of the Republic of Panama of 1941, are still registered in the name of their proprietors and constitute acquired rights that cannot be disregarded.

The occupation and use of beaches, beach front land, marine bottom or territorial waters and islands without proper authorization from the Directorate General of the Surveyor (Cadastre) of the Ministry of Economy and Finance or the Maritime Authority, as it may correspond, constitutes a clear violation of specific constitutional and legal dispositions and will cause severe monetary sanctions to perpetrators and the demolition of any constructions made.

The police authorities have the duty to comply and enforce the law and should prevent the illegal occupation and appropriation of beaches, beach front land, marine bottom and islands.

In many parts of the country there is a conflict with local governments (Municipalities) and what is considered to be municipal property and what really is property of the Nation.  Some  Municipalities claim as theirs certain land that is national land.  Some others have sold such national land or have granted concessions over it, in clear violation of the law.

ADMINISTRATIVE CONCESSION ON RIGHTS OF POSSESSION

Provided that the land is not titled and not subject to a title, and before anybody can file a petition for a concession, an environmental impact study must be conducted and approved by the Natural Conservation Authority of Panama (ANAM), if the land under concession is ONE HECTARE (10,000.00 Square Meters) or more.  In other words, if the land is under ONE HECTARE (10,000.00 Square Meters), no environmental study  is required, except when the land is going to be used for activities for which the law requires such report (For example: a restaurant or a hotel business).  This report has to be prepared by an authorized or certified biologist in the Republic of Panama.

Expenses and fees in connection with the filing of any concession and all related documentation vary from one case to another, depending on the extension of the land, purchase price, location of the property, among other things.

PANAMANIAN CORPORATION

We suggest that any business, purchase of real estate property or concession be conducted or requested under a corporation (Please see our literature in connection with the operation of Panamanian Corporation). This will make it easier for future sale of the land and all purpose business activities, plus it limits the beneficial owners’ liability.

In order to proceed with the incorporation of the corporation, the client must provide the following information:

NOTE: WE REQUIRE A COPY OF THE PASSPORT OF EACH DIRECTOR.

• Name of each officer of the corporation.  The corporation must have, at least, a President, a Treasurer and a Secretary.
  
  
• Name and address of each shareholder and the percentages in which the shares will be distributed.  If the shares are to be issued to the bearer or in nominative form, or both.
  
• Any other particular information that you may deem convenient and that should be conveyed in the articles of incorporation.
  
  
• If the client requires any other additional documentation, such as a power of attorney or "good standing certificate" of the corporation (For example: Opening of a bank account).

Every Panamanian Corporation must pay an annual franchise tax (Law No. 6 of February 2, 2005, increased the annual franchise tax to US$ 250.00 for the first year and to US$ 300.00 for each consecutive year and regulated its payment) of US$ 250.00 for  the first year at the moment of its incorporation and of US$ 300.00 for each consecutive year thereafter: a) before July 15th of every year, if incorporated between January 1st and June 30th; and b) before January 15th, if incorporated between July 1st and December 31st, to maintain the full effectiveness of the corporation.  For all legal purposes, full effectiveness of a corporation shall be deemed to be it's valid registration at the Public Registry of Panama.

Default on the payment of this tax will cause a fine of US$ 50.00 per year or fraction thereof, and will stop the registration and/or issuance at the Public Registry of Panama of any documents, certifications and/or resolutions related to the corporation.  If tax plus fine (US$300.00 + US$50.00) are not paid before the corresponding due dates of the following year, it will cause an additional fine of US$ 300.00 per year or fraction thereof.  If all taxes plus fines are not paid for ten (10) consecutive periods / years, the corporation will be automatically stricken from the record (Public Registry of Panama) and it will be considered legally dissolved and non-existent.

COMMERCIAL LICENSE

A commercial license type “A” will serve to develop whole sale commerce and any type of services inside the national territory of the Republic of Panama, including hotel services. That is, if the corporation is going to received income from sources inside Panama.  If the corporation will only receive income from sources outside Panama, even if it is managed from/inside the Republic of Panama, no taxes will have to be paid and no license is required.

Please be advised that retail commerce has been exclusively reserved to Panamanian Nationals by Constitutional mandate.  Some liberal professions such as medicine, law and architecture, among others, are also expressly reserved to Panamanian Nationals by law.

However, any foreigner that has acquired Panamanian Nationality and that has complied with local regulations to practice a specific profession, may do so.  Panamanian Nationality may be acquired after five (5) consecutive calendar years of presence in the Republic of Panama with the status of a permanent resident visa (Immigrants).

Other than what has been previously stated, foreigners can engage in any type of commercial licit activities inside the Republic of Panama.

            After the license is approved, any tourist related activities are entitled to important fiscal incentives.  In order to benefit from those incentives, the applicant must file a petition before the PANAMANIAN BUREAU OF TOURISM.  Details, expenses and fees can be provided upon request.