Startup guide for Panama

February 06, 2006

Panama has a great business climate and is a popular place to setup business for foreigners.

While there is lots of information about offshore companies and retiring there on the net, I have yet to see a comprehensive quick guide to starting up a business there. As I have been involved with a couple of startups there I will try to give a personal insight to the things the offshore vendors don’t tell you.

Warning stay away from various of the companies preying on foreigners with dodgy investments and dubious visa schemes. Use only good law firms and get personal recommendations from other expat business owners.

Overall it is easy to be in Panama as a foreigner.

Legal structures

While Panama as such has no specific IBC (International Business Company) legislation it is a very popular offshore jurisdiction. This means that Panamanian companies are good and very well known entities world wide.

If you are in Panama you should be able to find a lawyer who easily who will do the whole thing including government fees for about $500. If you aren’t in Panama yet it would probably be best to use one of the larger law firms but they do charge up to $1000 for the same thing.

You can of course also be a sole proprietor and be in a partnership. However the standard company is by far the most popular way of doing business for foreigners. It is quick and easy to register and allows you to get started while visas and other slow stuff is taken care of.

Read more about Panamanian Companies here: What kinds of companies can I incorporate in Panama

Tax

Contrary to popular belief Panama is NOT a low tax country. However it does make it fairly easy to structure your business in such a way that you can be well off.

The basic rule is that Panama taxes income generated in Panama. So foreign source income is tax free. Now foreign source is determined by where the income is generated. So if you are in Panama running an operating a business with all your clients outside of Panama, you are strictly speaking earning money in Panama and not abroad. Even though you are invoicing abroad.

With internet businesses things are a bit more complicated. Different countries have different rules and I’m not sure if Panama accepts a foreign server taking orders as being foreign sourced income.

See more about Corporate Taxation in Panama .

Staying informal

One thing I do have to say is that there are many foreign entrepreneurs operating out of Panama with Panamanian companies, who never pay a dime of income tax. Much of this is due to the complexity of what makes something foreign source.

If you aren’t doing any business with Panamanians and you are just doing it out of your apartment you can probably skip most of the paperwork mentioned below. As long as you aren’t annoying any Panamanians you are essentially a business tourist. I would however try to make myself official if you start making considerable money. The City of Knowledge incubator program (see below) might not be a bad alternative if you want to get official straight away.

Free zones

Panama has some excellent free zone laws that make lots of these questions moot. In particular the Colon Free Zone and the City of Knowledge are interesting.

Colon Free zone

The Colon Free Zone seems very well managed and is suited for importing and exporting physical goods. It is the shipping hub for all of Latin America and the Caribbean, so it might not be a bad place for setting up an Amazon like place for the region. If you are primarily selling to Europe or the US it’s not that good a deal.

Procedures for joining up I am told are relatively straightforward and rents are cheap. The actual Free Zone is huge and is the second largest in the world after Hong Kong. Most people commute there by train or car from Panama City as the actual city of Colon is not that nice.

The free-zone is very popular with Indian, Arab and Jewish entrepreneurs. But you also find Americans, Europeans, Panamanians, Colombians etc.

The City of Knowledge techno-park

Going through the site and taking the tour, this place looks fantastic. It is based in the old Fort Clayton, which was the site of the US Southern Command. The facilities are superb although 20 minutes from the city center. There is plenty of good accommodation available within the park as well. The following are some of their benefits:

• Zero income tax from high tech sources
• No import duty on equipment
• Easy to get visas for you and other staff
• Cheap rents

They have an incubator program which is really nice. This is not an investment incubator, but rather they put you up at a very low rent (I think it’s about $100pm which includes a nice little office, receptionist, all services and internet). In turn I believe they take equity although they don’t really say so upfront. The offices and facilities are excellent.

Once you grow larger there is the techno park as such where they have larger offices available. You can get huge spaces that are suitable for hosting and call centers for not much money. There are I believe 2 data centers in the park with possibly more on the way.

The only real problem is that they run a very long rigorous approval process. I know people who have gone through it, but it is way to rigorous for many entrepreneurs patience. Since I was there last time there has come a new government, I don’t know if this process has improved. It might be.

Tax registration process

You will get a business number known as a RUK, which is like the US Federal Employers Tax ID. Normally your lawyer will do this for you. This is issued by the Ministry of Economy and Finance.

Business license

Once you have a company and you want to be real and official you need to get a business license from the Ministry of Commerce & Industry.

You need an official business address for this. If you are working out of your apartment wait for this until you need an office and employees. Your lawyer needs to do this, but it is fairly cheap. My guess is it should cost less than $50 including govt fees.

If you are going to hire some one

If you aren’t planning on having any employees you can thankfully skip this part. If you do need to hire people and you aren’t planning on going for a visa where you need to hire locals, you should seriously consider signing people on freelance contracts known as “Contratos de Servicios Profesionales”. Most professionals and younger people prefer this anyway.

You need to register at the social security board. Talk to your lawyer about registering it. You will need to make social security contributions for each employee.

Secondly you need to file copies of the employment contract at the Ministry of Labour.

Finally the City Council

Once you have your business license you need to finally register for city tax at the City Council.

Someone will stop by the offices to calculate your tax rate.

Rough tax rates

Corporate income tax is 30% of Panama sourced income. There is also a $250 per year company tax for all companies.

Value added tax is called ITBMS and is at 5%. I don’t think this is necessary if you are just selling abroad via the internet. Check your lawyer.

Business environment

The business enviroment is good and very flexible. There are lots of foreigners as well as Panamanians in business.

One thing which is probably true of most of Latin America is that if you interact with other business people, banks, government and even your own employees you need to dress and look smart. The scruffy long haired bay area dot com geek millionaire may have money, but would never be accepted as anything but a gringo backpacker.

Also the rule of thumb with dealing with any clerks and what have you office staff in both banks, governments etc is that you need to realize that they will protect their job no matter what. This means your signature needs to be the exact same as on your passport, you always need all the paper work in order or you will need to make 2 trips.

Government

The government is much larger than you might think. They do tend to get in the way of many things. My recommendation is to avoid them as much as possible. Use lawyers when you need to.

See the World Banks Doing business in Panama for some ideas of how this is problem.

The solution to these problems is to remain informal for as long as possible. Don’t worry this is not a dastardly moral crime in Panama, just a matter of survival. You do need to find out what you need to do.

Banks

Panama is known as a dangerous offshore banking haven. But in reality they cleaned their act up about 5 years ago. This means that in reality it is very difficult to open bank accounts there now for foreigners.

That said you can do it, but you need to get all your paperwork in order. Contact the bank before you arrive in Panama. You will most likely need bank references and a bunch of other stuff. The easiest way is to ask your lawyer to help you out.

I have covered this before in Panama banking round up.

Credit cards

I recommend that you stick with your home credit cards. If you really need a credit card there are two options for foreigners:

• Card secured by 150% of credit limit in a savings account
• Prepay credit cards. These are fairly easy to get. At least if you already have a bank account

Merchant accounts

I recommend Credicorp bank who are very experienced and have partnered with First Data.

Customers

It is best for most business to focus on international business. But you may be able to find local clients. In particular the following areas could be of interest:

• Shipping
• Import/Export
• Banking
• Gaming/Betting
• Call centers

In particular the last 2 are in growth at the moment.

Partnering

It is possible to partner with local companies. Business people are normally friendly and open to at least hear you out. Please remember as I said above to dress smartly (basically suits) for all business meetings. Buy one locally like I did if you haven’t got one.

Also expect that decisions may be slow. You also might not get a straight no. People do not like to let you down nor do they like to loose face. It is very important as well to realize that if you need something done out of the ordinary you need to talk to someone at the top. In banks for example it is impossible to start at the clerk and work up. You need to find a contact somehow, maybe through your lawyer or social events.

Investors

There is lots of money in Panama. There are lots of banks and rich people. It is however virtually impossible to get a part of this.

If you are lucky you might find some US angel investors there, but this is a long shot.

Cost of living

One of the really great things about Panama is that you can live a really comfortable and modern life at a very low cost. I think it makes a great place too bootstrap globally.

You can find comfortable 1 bedroom furnished apartments in the $500-600 pm price range although they wont be the latest model. For $800-1000 pm you can get a really nice luxury apartment in a new building.

There are tons of great very modern office space available right now. If you need an office you are really spoilt for choice. You should be able to get a smallish office for $300-500.

Internet is good and plenty but it will cost you a little bit more than you are used to. Not outrageously though. The lowest rates start often at around $15pm and go up to around $120pm. If you are running this to your house get the personal account. There are both ADSL, Cable Modem and Wireless services available.

Food is cheap by any standards both in supermarkets and restaurants. You can easily find a decent steak for $5-7 in a restaurant. See this post about average meal cost for more.

Immigration

My recommendation is if you are bootstrapping to come as a tourist. Many, many foreign entrepreneurs do this. You get a 3 month stamp when you enter Panama. Many people go for a visa run to Costa Rica or Colombia for a few days so they get another 3 months.

If you are planning on a more permanent establishment there are various kinds of investors visas. Google it there are more than I can think of right now.

The various free zones also have good visa programs bundled in.

It is really worth finding a very good lawyer for this as there are some pretty dodgy players on the field. Ask other foreigners for advice. Also if you are asked for a bribe to help things around, DO NOT DO IT!! If your lawyer recommends it find another lawyer. You can lose your visa, go to jail, pay fines and not much will happen to the lawyer and government official.

Conclusion

Panama is a great place to do business. The only real problem is the paperwork involved. Armed with a good lawyer and a bit of patience you will get through it.

There are many foreign entrepreneurs in Panama, many of whom would never leave again. This is not just because of the business advantages, but also because the quality of life is fantastic.

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