With roughly 4 million inhabitants, Panama is one of the smallest Latin American countries—but it’s also one of the fastest-growing economies in Central and South America, with an annual GDP growth of 5.56% in 2018. This growth is due not only to the country’s business-friendly tax rates that’ve attracted companies from all over the globe; its commercial capital, Panama City, offers a wide range of business opportunities across several sectors.
Many foreign investors have successfully set up a legal entity in Panama—and foreign commercial interest in the Central American jurisdiction isn’t expected to diminish any time soon.
The Panamanian Tax System
One of the main reasons foreign investors establish a presence in Panama is for the tax benefits. The local territorial tax system allows that Panamanian onshore companies are taxed at a maximum income tax rate of 28%, depending on annual earnings. Offshore companies operating outside of Panama, however, may in most cases avoid the annual income tax altogether. Perhaps unsurprisingly, more than 500,000 companies have registered with the Panamanian jurisdiction to benefit from these generous tax policies.
Beyond its alluring income tax rate, Panama’s low Value-Added Tax (VAT) is a huge draw for companies and tourists alike; the VAT amounts to only 7% for most goods, except, for example, for alcohol (10%) and tobacco (15%).
A Unique, Strategic Trading Location
International trade is one of the main pillars of the Panamanian economy. The major reason is the country’s favorable geographic location, acting as the interlinking puzzle piece between North, Central, and South America. Ease of access to both the Pacific and Atlantic Oceans means that Panamanian ports provide strategic positioning for businesses looking to streamline their trade routes on both sides of the Panama Canal, ranging from neighboring Guatemala to the U.S. and Japan. In 2016, Panama’s total exports amounted to US$8.8 billion, while import activity generated US$27.8 billion (OEC), making it a premier trading nation in Central America.
Fast Fact: Most of the imports coming into Panama are passenger and cargo ships, underlining the strategic importance of connecting the world’s two largest oceans.
A Wide Range of Sectors, Numerous Investment Opportunities
Diversity among sectors is one of Panama’s greatest strengths, and this varied investment landscape continues to attract equally diverse foreign businesses. Statistically, wholesale trade/retail and financial and insurance services are the sectors receiving the most FDI. However, other sectors are steadily attracting more international investment, as well. These sectors include construction services, software development, and imports and exports, among other growing sectors. These sectors (and the domestic and foreign businesses of which they are comprised) continue to benefit from Panama’s free trade agreements (FTAs) with some of the world’s largest economies, including the U.S. and Canada.
One market that should be mentioned explicitly is the real estate sector; it’s one that has proven quite profitable for many investors. The reasoning behind its profitability is twofold: real estate is subject to significant appreciation after buying it, meaning that an organization’s real estate stands an excellent chance of gaining value and generating a high return. Second, many retirees migrate to Panama to enjoy the its warm climatic conditions, natural diversity, and high living standards in its cities.
Bilingual Panamanian Population
In almost every Latin American country, language barriers impede foreign investors from a fast and steady incorporation process, as most only command English, rather than Spanish. Panama, however, distinguishes itself with 8% to 14% of its inhabitants being bilingual, handling both English and Spanish. This accommodates not only tourists, but also international businesspeople desiring to establish their business or trading within Panama.
Ease of Market Entry
Several South and Central American countries come with a company formation process stacked with bureaucratic red tape and regulations, making it hard for investors to efficiently establish a business there. In Panama, on the other hand, the market entry process is facilitated through flexible laws and regulations. The process includes the following main steps:
- Create and sign the company bylaws
- Register the company with the corresponding local authorities
- Obtain the commercial license and company tax ID number
- Open the corporate bank account
By opening a local Panamanian bank account, investors receive a number of benefits, including high protection, privacy, and anonymity.
A Stable and Fast-Growing Economy
Over the past decade, Panama has proven to be one of the strongest economies in Latin America, and the prospects provided by The World Bank Group suggest that there is no slowing down in the near future. By 2020, Panama is expected to have an annual GDP growth of almost 6%, ranking it within the top 30 fastest-growing economies in the world. The Panamanian government’s 5-year Strategic Development Plan 2015-2019 is supported by inclusion and competitiveness with five themes:
- Enhancing productivity and diversifying growth
- Enhancing quality of life
- Strengthening human capital
- Improving infrastructure
- Improving environmental sustainability
The consequence is that demand for new goods and services will continue to grow, due to higher income and a growing middle class. Additionally, even though the Panamanian Balboa—which is pegged to the U.S. Dollar—is the official currency, the U.S. Dollar is usually used in all the business transactions, implying economic stability.
Establish a Legal Entity in Latin Panama with an Experienced Partner
Investors looking to set up a legal entity in Panama are met with a prime global expansion destination. It’s a growing market with many benefits, including low tax rates, several attractive business sectors, and an appealing ease of entry. If your organization is looking to move into Latin America for the long-term, then setting up a legal entity in Panama may the best choice for establishing that presence. Ready to make moves and break into the Latin American market? Let’s make it happen.