Tropiland

I’ve been hearing a lot of “blah, blah” lately about how the real estate market in Panama, and in Boquete in particular, is starting to come around and how the tides are changing and what not.

Well, to all those who inundate the web and media with “all-is-nice-and-rosy-in-Boquete” type of propaganda, I have news for you: if you build it, they will not come! Not in the middle of a recession still going and especially not from the US.

Panama is a popular destination for expats, and for good reason. But there are some critical traps that you should be aware of if you’re looking to buy Panama property.

The first trap to watch out for is the Panama property tax law; for years, the government stimulated the real estate industry by promising property tax exoneration for up to 20-years for all new Panama properties. That is to say that, in order to qualify, a project must have been permitted no later than July 1, 2009.

For this reason, you see a lot of empty pits in Panama City where developers were technically within the law and are now frantically trying to pre-sell their Panama properties.

One of their key sales points is that if you buy their  Panama condo, you won’t have to pay property tax for 20-years… what they don’t tell you is the plain and simple truth– in order to qualify for the tax exemption, the building must be completed by December 31, 2011.

The chances of all these new condo developments being completed by December 31, 2011 are slim to none… and slim’s out of town. That will leave new buyers stuck paying extra Panama property taxes.

The other thing to keep in mind is that even if a building does qualify, the Panama property tax exemption only applies to the actual construction, not the land value. Condo owners must still pay their share of taxes on the value of the land that the condo tower was built upon.

Ordinarily this would seem like a trivial sum… but many developers are now petitioning the government for a substantially inflated land value; this increases the developer’s cost basis and lowers their income tax while simultaneously increasing the government’s tax revenue at the buyers’ expense.

The second trap to watch out for is title– a lot of  Panama properties have cloudy title, meaning that multiple parties often have claim to a single Panama property. These disputes grow from generations of sloppy record keeping, shoddy land surveys, squatters’ rights, and the neighbors’ ever-encroaching fences.

In Panama, possession truly is 9/10  of the law, and judges uphold this standard.

Title insurance companies now operate in Panama, which makes the transaction less risky… but a lot of property for sale is actually untitled, what is known as “Right of Possession” property, or ROP for short.

Panama ROP property holders are not registered with the government, and the buyer is effectively paying for use of the land, not ownership.  A lot of buyers are OK with this distinction, but that will now surely change.

The government has recently stepped in with a new mandate that will effectively stick ROP landholders with an enormous fee for recording ROP as titled ownership. The fee applies to ROP land above 5-hectares and will cost anywhere from $10,000 to $625,000 per hectare.

My guess is that there will be a flood of sellers trying to unload their ROP land to unsuspecting buyers who don’t know about the new law. Don’t be one of them.

The third trap in Panama is unreliable information.  In developed countries, property transactions are a matter of public record. In Panama, however, most sales are kept private.

How? Many properties in Panama are owned not by an individual, but by a Panamanian corporation. When it comes time to sell, the parties exchange shares of the corporation, not title to the property. In other words, the owner of the property is still the corporation, but the corporation’s shareholders have changed.

As there is no public database of shareholders for Panamanian companies, the property transaction is effectively kept private, and no one will ever know how much the property actually closed for.

The lack of reliable information in Panama generally gives rise to unsubstantiated rumors, especially from real estate agents. Naturally, it is in their best interest to spread rumors about how properties are still selling for high prices because there is always a greater fool willing to believe it.

Most Panamanian real estate agents are notorious for this, and if you’re in the market for property I would advise you to exercise extreme caution, regardless of how slick s/he may sound.  As a foreigner, it’s very easy to get steered into overpaying for the wrong deal based on rumor and misinformation.

Photo, Courtecy of LA PRENSA/ Jihan Rodriguez

The project to expand the Canal has increased the value of these lots, which used to be managed by the United States before the signing of the Torrijos-Carter treaty, which recognized Panamanian sovereignty over the Canal.

There are 5.000 hectares of undeveloped land surrounding the Panama Canal.

Such lots are interesting for touristic endeavors or for installing maritime or logistic facilities. The Panama Canal Authorities and the Recovered Goods Unit of the Economy Ministry are already planning their development.

One of these areas, Fort Sherman, is expected to become “a major touristic center. The first steps to develop it are similar to what was done in Howard. There, the Government hired a consulting company (C4T Tourism Business & Planning) for $266.000, to develop a master plan.

There are a lot of articles and posts online on why, where and how to buy a panama property fueled by the (now fading away) Panama real estate “boom”. The economic swamp of the last couple of years has forced a lot of property owners in Panama to reconsider their investment or retirement strategies and put their Panama home for sale. Here is our suggestion on how to sell your home in Panama.

If you’re trying to sell your property in Panama, you may find the listing process confusing – especially if you are used to a MLS-type system.   Selling in Panama requires a different mindset and if you understand how the system works, you’ll find it easier to get results.

If you can, list your property with every real estate agent in town.  Why?  Well let’s start with a bit of background.

In the absence of an MLS, ’open listings’ are the norm in Panama .  You’ll find a considerable overlap between the listings held by different real estate agencies and the best way of getting exposure for your Panama property is to make sure that as many agencies as possible know it’s for sale.

At a minimum make sure you list with the major players.  They should be easy to find.  Type ‘Panama real estate’ into Google and make sure your Panama property is listed with all the brokers appearing in the top 5. Good brokers will also have a prominent office location in the area where you’re selling (or close to it) and a smattering of property signs (unless of course they’re trying to ‘hide’ a particular listing from competing brokers).

Your goal is to keep your property front of mind so that it is presented to all possible prospects.  Remember that in the absence of a MLS your broker is trying to ‘list’ as many properties as possible – taking a volume approach – in the hope that one or two will sell.  They are unlikely to be particularly vested in your listing and any time and expense spent on marketing your property can easily go un-rewarded if a competing broker sells the property first.

So it makes sense to make the listing process as easy as possible.  You don’t want your property withering away in a “to-do” pile. So expect to take on some of the leg work yourself.

Write a compelling description of your property (we’ll go into what makes a compelling listing in later posts), set out the viewing instructions, gather your paperwork and collect together some good photos. Then send the information to each agency and follow up on a regular basis.   Some sellers even take the extra step to prepare a set of electronic and printed flyers for each agency.  (If you do this, remember not to put your own contact details on the materials as brokers will be reluctant to pass this out.)

You may think that you can shortcut this process of multiple listings by offering one agency an exclusive living.  But, unless you own the last beachfront property on a hugely popular beach, or broker collaboration is the norm in the area, singing an exclusive listing may not be in your best interest.  In the absence of an MLS, there is no guarantee that the agent will share the listing with other agencies.  And even if they do, all agencies with the exception of the listing agency will view the exclusive listing as one that does not pay a ‘full’ commission, as the listing agency will expect a commission share.  So check how things work in your region before you decide to sign an exclusive agreement.

Though experts’ predictions for the Panama property market and economy in 2010 are not as bright as the predictions of a couple of years ago, the consensus of opinion is still for considerable growth in the value of Panama properties and Panama rental income if not over the short or the medium term then definitely over the long-term — of course depending on who you speak to.

One thing that is not in dispute is the fact that wages of Panamanians at large have increased by a great deal in the last few years. Despite this fact, developers tending to target the luxury market has left a shortfall of  Panama property that is affordable to Panamanians and these people are currently forced to rent their accommodation. This is great for buying Panama properties to let.

Unfortunately this is irrelevant to most  foreigner Panama property buyers, who either want to take holiday renters so they can use the Panama property themselves, or so that they can make higher returns. None the less, growing affluence in the community can only be a good thing, because there will be demand for luxury Panama properties from the internal population years down the line; as affluence spreads more people can afford to go to and to send their children into school, which breeds even more affluence into the future.

There are even a few predictions going about that suggest the level of borrowing for the Panama canal expansion will see traffic through the Panama canal drop in the coming months and years. Maybe it will, maybe it won’t but again, in terms of the bigger picture the Panama canal expansion will bring massive economic growth and increasing affluence from its completion in 2014 onwards.

Between 2005 to mid-2008, property developers in Costa Rica witnessed enormous increases in property launches and sales as vacant land on the ocean and in the highlands was developed into second homes for North Americans and Europeans.

There were three key factors supporting the boom:

• Political stability – Costa Rica has had over half a century of uninterrupted democracy, making it one of the most stable countries in the region.
• Its long-standing as an eco-tourism destination – Costa Rica’s express commitment to environmental conservation and it’s rich biodiversity have enabled it to develop a unique “eco” travel product.
• US retiree haven status – With more US citizens venturing abroad, Costa Rica has benefited enormously from its retiree haven status.

But since the global economic collapse the Costa Rican Real Estate landscape has changed.  Large scale, ultra leveraged properties have suspended operations, others have stalled or cut-back on the more ambitious aspects of the master plan, and prices have been cut for the first time since the boom.

Still, asking prices in the luxury end of the housing market (ie: master-planned communities, resort developments and condo projects catering to the international buyer) have held up relatively well compared with the sharper declines experienced in the developed world.  Our year-on-year numbers to September 2009 show relatively modest fall of 8.75% for serviced lots, 3.73% for condos and 8.92% for single-family homes across the main master-planned communities.

Optimists will find some solace in the fact that Costa Rica has been shielded somewhat from the collapse in house prices witnessed in the developed world. It’s relatively underdeveloped mortgage market, formerly considered a weakness, has meant that it has avoided the rampant foreclosures that have tugged at the bottom of the market in the US.

But property pessimists will doubtless point to the high profile project suspensions such as the St Regis Project, the Rosewood Residences at Costa Carmel and La Punta Papagayo in Gunacaste. They may also insist that with re-sales (sales from end-user to end-user) continuing to undercut developer direct prices, the data under-reports the extent of the decline and there are more falls to come.

Perhaps it’s time for Panama’s real estate developers to take the hint and start adjusting their prices as well. Even though prices are generally lower in Panama than Costa Rica, the global economic crisis dictates that Panama real estate developers need to make the shift in order to offer a competitive product.

The titling process of property with Rights Of Possession (ROP) status in Panama has been a long, counter intuitive, frustrating, and confusing one for all foreigners and expats that, for one reason or another, purchased ROP property in Panama with aspiration of obtaining title and retiring on or using it  in small scale tourism projects.

After a long wait Panama now has an enacted law (Law 80, formerly known as Project Law 71) that has replaces Law 23 of the Torijos administration and attempts to settle the titling of island and coastal property in Panama.

A copy of the  signed and enacted Law 80 in Spanish can be downloaded here.

Susan Guberman Garcia is an American expat (owner of ROP land in Panama) that has been following the ROP saga for a number of years now and is considered an expert in the issue (at least in Panama’s expat circles and cyber forums). Recently, she wrote a concise summary of all key points of Law 80 as they apply to all ROP owners in Panama. This article originally appeared in Don Winner’s Panama Guide. I am presenting it here for the benefit of my visitors and I encourage all comment participation and/or questions.

Requirements For the “Right” To Title Your ROP

In order to qualify for the “right” (though its not really a “right” as first worlders understand that term) to title, either free (1st 5 hectares) or by buying the land from the government, you have to demonstrate, to the satisfaction of the Catastro bureaucrats who are in charge of this whole process (or to a court if Catastro disputes your ROP claim) that (1) you; or (2) the person you got your ROP from; or (3) a combination thereof, have occupied the land for at least 5 years in a material, peaceful, uninterrupted manner, with the “animus of ownership” (ie, you act as though you own the property). (Articles 1, 3.)

How Can You Prove Your ROP Status?

You can prove this by any method generally accepted in the judicial code, such as: oral testimony, documentation, certifications by local or national authorities (for example, the police, correijdor, mayor, municipality, Reforma Agraria, Catastro, etc.). (Article 3). Examples of this would be your ROP purchase documents, certifications from some government agency (which buyers of ROP usually get from Reforma Agraria, Catastro, or the municipality), affidavits from the corregidor, statements and testimony by your neighbors, your contractor’s bill, etc. etc. etc. If you live on your ROP or run a tourism or other business there, this will be very easy to prove. If you don’t live on it, haven’t built anything on it, it may be harder, so you should probably get a small dock, a bodega or something up on it as soon as possible if you’ve been waiting for retirement ot build. Fence it, sign it, put a caretaker on it, hire a management company to oversee it for you.anything to demonstrate that you are acting as an owner would with respect to the land.

What if there is a dispute over the legitimacy of your ROP claim?

(Article 3). If there are conflicting claims to the same ROP, boundary disputes, or the government refuses to accept your proof, some form of alternative dispute resolution will be held and if the dispute cannot be resolved, it will be referred to the courts.

The first 5 hectares of your title will be free.

This was an important victory for the locals and for the expat retirees and small tourism providers in the coastal/island areas. 5 hectares is more than 10 acres, and that’s a lot of land. Assuming titling will be permitted (this is a big “IF” for island ROP owners, see below), you will be able to title up to 5 hectares (assuming you can prove possession of that amount) at no cost. You won’t have to buy it from the government and you won’t have to pay administrative costs to title it. (Article 5). The free titles are the ssame as any other title (ie, if you re-sell your freely titled land, you will have to pay transfer tax, capital gains tax and any fees and costs normally associated with the sale of titled property. (Articles 5, 6).. The 5 free hectares will be available whether you are a natural person, corporation, or foundation, and regardless of your residency or citizenship status, so long as you can prove “possession.”

But you won’t be able to game the system on the 5 free hectares by splitting up your ROP, “selling” it to new corporations, etc. prior to title. If you hold your ROP via corporation you will have to disclose all shareholders and dignitaries, and if you hold your ROP in a foundation you will have to disclose all beneficiaries as well as dignitaries. Moreover, this disclosure, like the rest of the title application process, will be public; no more anonymity for any corporation or foundation that applies to title its ROP. Moreover, legal entities will have to submit a financial statement along with their application (Articles 7, 9, 11). The government reserves the right to investigate your bona fides if it thinks you are trying to get more free hectares than you are entitled to.

How much will it cost to title ROP?

For titling of land over 5 hectares, you will have to buy the land (again) from the government. The law contains a table of prices (Article 7). The price table divides the coastal and island areas into various zones, and each zone has two prices: One price if you title from more than 5 to 25 hecatres, and a higher price (often 250% higher) if you apply to title more than 25 hectares. The prices range from a low of $1,000 per hectare (for the outer Bocas and Chiriqui islands) to a high of $300,000 per hectare (!) for the “urban” and “near urban” areas of Isla Colon in Bocas del Toro). (NOTE: There is no “urban development” anywhere in Bocas del Toro, and I can’t imagine where this ridiculous price came from.)

The price table incorporated within Article 7 is subject to revision every 3 years. The government must hold a public hearing before revising the prices.

Can’t pay for your title? The government will loan you the money

If you want to title more than 5 hectares of your ROP but can’t afford to pay right away, the government has arranged with Banco Nacional de Panama to offer loans at the current prime rate. A mortgage lien will be placed on the land and you won’t be able to sell the mortgaged land unless you pay off the loan first (but you can bequeath it to your children or give it to your spouse without first paying it off.) (Article 7).

Protected areas not eligible for titling and ROP may not be recognized

If your ROP is in a designated protected area (like a forest reserve, for example), you cannot title it. Moreover, your ROP will not be honored unless you purchased the area before it was designated as a protected area. If you did, you will be allowed to continue to occupy it but you can’t title it. (Article 10).

Island ROP holders may or may not be allowed to title

Due to the government’s restrictive interpretation of Article 291 of the constitution, there is no guarantee in this law that island ROP holders will ever be allowed to title. In order for any island land to be titled under this law, the President and his Cabinet must first issue a decree declaring any particular island area (or if they wish, all island areas) to be a “special development area” and that specified development goals will be met by allowing ROP holders to title. This is a loophole big enough to drive a truck through. It is quite possible that titling will be allowed only for specific types of uses, or even limited to specific developments (which you can bet money will be owned by those who are “connected” politically. There is no guarantee in this law that ANY ROP holders on islands (other than those who have tourism businesses, see below) will ever be allowed to Furthermore, the government can declare any island area it wants a “strategic area” where titling won’t be allowed. If such a “strategic area” declaration is made, the ROP holders will be offered a 20 year concession. (Article 13).

NOTE: Article 13 appears to conflict with Law 2, which remains good law except as expressly amended by Law 80. . Article 1 of Law 2 expressly grandfathered all existing ROP rights to the extent they existed prior to January 2006, and relieved the holders of any obligation to obtain a concession. Since Law 80 does not repeal or amend that Article, there is a potential conflict of laws here, depending on how the government chooses to implement this Article (and Article 22, discussed below).

Also, if you have a tourism business and your island ROP is within the tourism development zone specified by Law 2 (and any implementing regulations or decrees re Law 2) you will be allowed to title. Moreover, Law 80 expands the scope of tourism businesses who are allowed to title to micro, small and medium sized tourism businesses, whereas Law 2 only allowed large tourism projects to title. (Articles 14, 24.)

What if you have a titling application already in process?

Law 80 is retroactive in that it will be applied to titling procedures that area already in the hopper but not yet completed, including the price table, if your titling application is based on an existing claim of ROP rights. If its not based on existing ROP but is simply a purchase of unoccupied untitled land from the government, the price table will apply but the procedures will be based on the Public Procurement Act and Judicial Code. (Articles 16-19).

Fines and penalties

You will be fined if you violate beach access laws and public use easements. (Article 12). You can also be fined if you are occupy land without a title or a contract (such as a concession) unless you can prove that you have occupied the land for at least 5 years, under the definitions of “possession” above. Furthermore, your home can be demolished unless the government chooses to lease it to you instead.

*NOTE: This provision clearly conflicts with Article 1 of law 2, which guarantees all possessory rights that existed prior to the signing of that law, which was January 2006. Since Article 1 of Law 2 is not expressly repealed or modified in Law 80, this sets up a conflict of laws dispute if the government chooses to initiate penalties against someone who meets the requirements of Law 2.

Procedures for purchasing or concessioning untitled land that is not currently occupied by you or anyone else.

This law sets up procedures for anyone to apply to purchase or lease (via an administrative concession) from the government untitled coastal or island land that is currently unoccupied by anyone., and modifies some existing laws and procedures regarding such contracts. (Articles 25-33).

Titling your ROP may be mandatory

(Article 34). This article appears to provide that titling your ROP will be mandatory for any region which the government declares to be a region of “mass regularization and titling.” From the use of that term in Article 1 and 3, it appears that, at least for coastal regions (but not islands), this law itself declares coastal zones to be areas of “mass regularization and titling” immediately, and leaves it open to the President’s Cabinet to declare all or some island areas to be such as well. If so, then your titling is mandatory, not optional (get ready to pay property taxes!). This article expressly states that all “beneficial holders” will be notified that they have 30 days to make application for title. If they do not, their titles will be registered anyway, complete with a limiting lien and mortgage in favor of the National Bank of Panama.

This process is fraught with potential problems. In order to “notify” ROP holders, there would first have to be a complete survey of all ROP lands to identify them. And what if you are shown on the survey has having 30 hectares but you choose to title only the free 5 hectares, or 5 free and 5 paid, leaving the rest untitled? And what if (as so often happens in Panama with legal procedures), there is a problem with identification and notice?

Can the government sell your ROP to somebody else?

Furthermore, there is an obvious conflict between Article 35 and Article 4, which states that if a holder of ROP does not apply to title, the government can sell it to someone else. So which is it? Will you be automatically titled whether you want it or not I(and thereby obligated to pay property taxes), or will your land be sold out from under you if you choose not to title it or choose only to title part of it (giving the government the right to take any part of the property you choose not to title and award it to someone else for a price?) This article (which purports to give the ROP holder nothing more than a “right of first refusal” is in direct conflict with the express promises of the government during the discussion and hearing process for Law 80 that all existing ROP rights will be respected and if you have legitimate ROP you need not fear confiscation whether you are allowed to title it or whether you choose to title it or not. Furthermore, Article 4 expressly conflicts with Article 1 of Law 2 of 2009, which is not repealed nor modified as to that Article.

The third (and final) debate began yesterday at about 5:00 p. m and finished at 8:10 p. m. with the approval of Law 80 – formerly proposed law project 71 -  (41 to 21 representatives in favor) which recognizes land Rights of Possession and regulates the qualifications for titling  of coastal and island property in Panama.

Opposition leader and deputy of the Democratic Revolutionary Party, Juan Carlos Arosemena asked the Assembly to “think and kick the project back to second debate”. The approved Law 80 (formerly proposed law project 71) repeals  Law 23  of  April 23 ,2009 that was proposed and enacted the National Assembly under Torijos’  PRD  administration.

Deputy José Blandón of the Party Panameñista said that that Law 23 lead to  very low land prices that were both unrealistic and unfair from the government’s point of view.

With Law 80 (formerly proposed law 71), both natural and juridical persons will have the right to title for free 5 hectares or less on the coasts and islands of Panama. Nevertheless, to title more than 5 hectares, buyers  and ROP holders will have to adhere to a price table unique to each area: From Punta Chame up to Gorgona  Beach 60 thousand dollars per hectare. From Portobelo  to Palenque  42 thousand dollars per hectare. The highest price results in Isla Colon  in Bocas Del Torro with 300 thousand dollars per hectare (ouch!!!).

Amidst all the political gong-show that has always been a part of the Rights of Possession issue, the bottom line is clear: If you want your island or coastal land title you need to fork over big cash. Also, the era of blatant beach front land grabbing by sleek investors is over (theoretically).

The number of approved permits during the first 10 months of the year reflects a level similar to that of last year (however 0.1 %  more). Last June this indicator shot to 261 %, because that was the expiration date of the 20-year property tax exoneration and a lot of building projects rushed to get their approval.

Since then, the trend has been distinctly negative, with  much pronounced downfalls like those of July (-55.4 %), August (-46.7 %) and September (-49.2 %).

The residential sector turned out to be especially affected. Up to  October, the fall with regard to the previous year was 21.3 % and only in June numbers were better in respective months in the previous year. Some months, like July and September, experienced decrease of 70 %.

In parallel,  premixed concrete production fell as expected. In September 2009, the decrease in production was 5.6 % compared to the first nine months of 2008.

On the other side of the scale, there is the commercial sector, which showed a strong upward trend of 69.4 % compared  to the first 10 months of2008. According to the  Department of Economy and Finance, the commercial sector building increase,  is a part due to the  vision of investors, who are taking advantage of new opportunities  in  tourism and in the commerce.

I am a bit skeptical about this last assessment, unless MEF know something I don’t. Surely this huge commercial construction expansion is a combination of factors that have nothing to do with tourism and commerce and more to do with multinational companies coming to Panama to take advantage of the tax haven incentives. I could, of course, be wrong…

The recent proposed Law 71 (currently being debated in Panama’s national Assembly) amending previous Law 23 on Island and Coastal Land Titling has sent a strong wave of concern amongst foreign nationals (especially Americans being the largest expat community in Panama) who, in the past, have invested in buying land in Panama that was under Rights Of Possession (ROP) status.

Almost all American ROP holders in Panama that wrote us inquiring about the status of the ROP saga voiced their fear that their ROP land could be expropriated if the new Law 71 pre-requisites are not met.

During a forum held in Panama City late last month, Fianance Minister Vallarino assured ROP holders that the “E” word has no play at all in the new Law and that their investments are safe. However, being this Panama, Americans who have invested in ROP land are not at ease at all.

I recently stumbled upon a file on one of the garden variety Yahoo forums that are growing in popularity in the Panama expat scene. The file is a copy of the trade treaty signed by both the United States and Panama that sets the frame for all American investments in Panama and vise versa (ROP land or any other land for that matter is considered an investment).

Here are the main excerpts discussing investment policy:

“…Under this treaty, the parties also agree to international law standards for expropriation and compensation; free financial transfers; and procedures, including international arbitration, for the settlement of investment disputes….International law standards shall apply to the expropriation of investments and to the payment of compensation for expropriation…”

“…The model BIT also confers protection from unlawful interference of property interests and assures compensation in accordance with international law standards. It provides that any direct or indirect taking must be: for a public purpose; nondiscriminatory; accompanied by the payment of prompt, adequate and effective compensation; and in accordance with due process of law and the general standards of treatment discussed above. The BIT’s definition of “expropriation” is broad and flexible; essentially “any measure” regardless of form, which has the effect of depriving an investor of his management, control or economic value in a project can constitute expropriation requiring compensation equal to the “fair market value.” Such compensation, which “shall not reflect any reduction in such fair market value due to . . . the expropriatory action,” must be “without delay,” “effectively realizable,” “freely transferable” and “bear current interest from the date of the expropriation at a rate equal to current international rates.” The BIT grants the right to “prompt review” by the relevant judicial or administrative authorities in order to determine whether the compensation offered is consistent with these principles. It also extends national and MFN treatment to investors in cases of loss due to war or other civil disturbance. The BIT does not provide, however, a specific valuation method for compensating such losses.”

“Compensation upon expropriation and transfers-The Panama text essentially adopts the U.S. model’s definition of what constitutes a lawful expropriation but its elaboration of “adequate compensation,” uses the term “full value” and not “fair market value,” as used in the model. (Article IV, paragraph 1.) Given the other assurances contained in the Panama BIT, this difference is not substantive. The Panama text also specifically acknowledges that the estimate of the full value of an investment “can be made using several methods of calculation.” (Agreed Minutes, paragraph 4.) This merely emphasizes an issue which is implicit in the U.S. model text. Concerning the payment of interest, the text does not specify that such payment be from the date of expropriation. Further, since Panama uses U.S. currency, there is no provision requiring that payments be freely transferable “at the market rate of exchange on the date of the expropriation.” For the same reason, Article Vl of the Panama text, on transfers, is much less specific than the U.S. model. The text asserts only that current and capital transactions shall remain “unrestricted” and “free”.

“…General scope of treaty-The Panama text provides that the treaty will not apply to any existing dispute which predates the entry into force of the treaty, unless the dispute comes within the terms of Article IV (“expropriation”) and does not predate ratification by more than three years. (Article XIII, paragraph 2.)”

“…ARTICLE IV

1. Investment of a national or a company of either Party shall not be expropriated, nationalized, or subjected to any other direct or indirect measure having an effect equivalent to expropriation of nationalization (“expropriation”) in the territory of the other Party, except for a public or social purpose; in a non-discriminatory manner; upon payment of prompt, adequate and effective compensation; and in accordance with due process and the general principles of treatment laid down in Article II(2). Such compensation shall amount to the full value of the expropriated investment immediately before the expropriatory action became known; include interest at a commercially reasonable rate; be paid without delay; be effectively realizable; and be freely transferable.

2. Consistent with Article I(d), if either Party expropriates the investment of any company duly incorporated, constituted or otherwise duly organized in its territory, and if nationals or companies of the other Party, directly or indirectly, own, hold or have other rights with respect to the equity of such company, then the Party within whose territory the expropriation occurs shall ensure that such nationals or companies of the other Party receive compensation in accordance with the provisions of the preceding paragraph.”

“…With respect to expropriation by either Party, any dispute-settlement procedures specified in an investment agreement between such Party and such national or company shall remain binding and shall be enforceable in accordance with, inter alia, the terms of the investment agreement, relevant provisions of the domestic laws of such Party and treaties and other international agreements regarding enforcement of arbitral awards to which such Party has adhered.”

“…If the dispute between the Parties cannot be resolved through the aforesaid means, and unless there is agreement between the Parties to submit the dispute to the International Court of Justice, both Parties hereby agree to submit it upon the request of either Party to an arbitral tribunal for binding decision in accordance with the application rules and principles of international law.”

Over my years in Panama, I’ve seen time and again pieces of legislation and treaties of the sort being “adjusted” by sleek lawyers and powerful politicians to fit the needs of the government of the time or the business plan of powerful families and their friends. As a holder of ROP land myself I can only pray that president Martinelli and his administration will listen to the expat concerns and adjust Law 71 so it can be a fair and honest instrument of justice.

Download and read the entire Panama-America Bilateral Investment Treaty in our Tropiland Files section.

As of last September, Law 49 (passed by Panama’s National Assembly and enacted into law by president Martinelli) is the new tax law of the land (Panamanian territory). As promised, the law implements long anticipated reforms in Panama’s taxation protocol.

General property appraisals by the state and capital gains tax on sale of properties are two areas that were revamped by this new Panama tax law.

Under the new law, condo taxable values are comprised of two components: the value of the land on which the condo building was contracted and the value of the improvements made on the condo.  The value of the land is taxable and distributed evenly upon all condo owners. As far as exoneration for 20 years goes, all condos now pay taxes both on land (reagrdless of being under 30K or not) and improvenents.

What follows, is a general overview of Law 49 presented here with the help of the law firm of Patton, Moreno & Asvat:

A. Franchise Tax for Corporations.
- Payments of annual Franchise Tax of B/.250.00 at incorporation and B/.300.00 in subsequent years will apply
to all national and foreign juridical persons, except for nonprofit associations.
- It is established the possibility to restore the legal personality of a corporation dissolved due to the lack of
payment of the annual franchise tax for a continuous period of 10 years, paying a fine of B/.1,000.00 during
the 3-years liquidation period.

B. Income Tax on capital gains for the transfer of immovable property.
- Base tax of 10% over taxable income from the sale of immovable property is maintained when the sale is not in
the ordinary course of business of the taxpayer. However, the taxpayer will be required to pay a sum
equivalent to 3% of the total value of the transfer or the cadastral value, whichever is greater, as an advance
on the income tax and may choose to consider this 3% as the final income tax payable in respect of profit.
- The taxpayer may request a refund in cash or the recognition of a tax credit transferable to other taxpayers,
when 3% of advance tax paid is greater than 10% of the profit from the sale.
- The taxpayer is given an opportunity to update the cadastral value of its property that will be used as base cost
in case of sale, before June 30, 2010.
- The properties for agricultural purposes endorsed by the Ministry of Agriculture pay a single, definitive rate of
3% instead of 5%.

C. Income Tax on capital gains for the transfer of securities.
- When the advancement of withholding tax (5%) exceeds the amount resulting from applying the 10% rate on
gains obtained from the sale, the taxpayer may request a refund in cash of the surplus or a tax credit for the
payment of taxes administered by General Revenue Department, which can be transferred.

D. Provisions applicable to companies established in Free Zones.
- Activities that can be considered as offshore operations within the Colon Free Zone and other free zones are
limited to billing services, repacking and similar, when they produce effects abroad. Commissions, storage and
warehouse services, leases, internal movement of goods and cargo are considered local activities.
- Companies located in any free zone of Panama shall pay the dividend tax or participation fee at a fixed rate of
five percent (5%) of the amounts distributed to its shareholders or members, regardless of the origin of the
source.
- It’s introduced a new obligation to withhold and remit to the Treasury 10% of 20% (i.e. 2%) of net profits after
taxes, to companies established in any free zones, when there is no distribution of dividends.
- It provides for imprisonment of 1 to 3 years for crimes of smuggling and customs fraud and 4 to 6 years in case
of recurrence, and fines of five to ten times the value of the good at illegal if it exceeds B/.50.000.
- It is clarified that the new loans granted within the Colon Free Zone shall be subject to payment of the Special
Compensation Fund Interest (FECI).

E. Property Tax.
- To calculate the tax base it shall be considered the highest value of any of the following:

1. the valuation of the property fixed by the Directorate of Cadastre,
2. the price set in any transfer of the immovable property, whether or not titled, including any sale, donation, payment in kind, prescription for the acquisition of TAX UPDATE: LAW 49 OF 2009 dominion, auction or any other form of transfer of a property that is not covered specifically in this section, and
3. the appraisal in inheritance proceedings.

- The alternative tariff rate for property tax shall be 0.75% on properties whose value of land and improvements does not exceed B/.100,000 and 1% for values above B/.100,000. The rate is not progressive. To qualify for this rate the taxpayer must file an affidavit on the updated value of the property until 30 June 2010.
- It is eliminated the possibility for taxpayers to request general or partial appraisals and subtotals, granting this power exclusively to the Directorate of Cadastre, which will order them ex-officio.
- Property with a value of land and improvements not exceeding B/.30,000 are exempt. Save for immovable property intended for social housing, over this amount does not apply the exemption to the land of estates subject to the Horizontal Property Regime, whose condominiums are attached vertically.
- A new table for calculating property tax subject to the Horizontal Property Regime is established:

• 1.40% for a tax base up to B/.20,000
• 1.75% for the tax base up to exceeding B/.20,000
• 1.95% for the tax base up to exceeding B/.50,000
• 10% for the tax base up to exceeding B/.75,000

- Improvements for residential use with a value up to B/.80,000 will be exempted from land tax for 20 years.
- New conducts are typified as tax evasion relating to property tax, such as the simulation of legal acts to reduce the cadastral value or total or partial failure to pay the property tax for itself or for another person. Tax evasion for these concepts will be sanctioned by the Department of Revenue by a fine not less than five (5) times or more than ten (10) times the amount defrauded or with imprisonment of two (2) to five (5) years.

E. Tax on the Transfer of Movable Goods and the Rendering of Services (ITBMS)
- Are subject to the payment of ITBMS: (a) the commissions from transfers of negotiable documents and securities in general, (b) the payment of commissions from banking and/or financial services rendered by entities legally authorized to offer these type of services, (c) the commissions or retributions paid to persons dedicated to real estate and goods brokerage, (d) the professional services to be provided to personas domiciled abroad, (e) leases of property destined for residential use for terms less than 6 months, (f) commercial fixed-line telephony, and (g) legal services provided to international trading vessels.
- On the other hand, the following services are considered exempt from this tax: (a) freight, (b) fixed-line telephony for residential use, (c) cargo loading and unloading operations, transfer in or between the ports and ancillary services rendered to the cargo in ports, (d) the repair, maintenance, cleaning and ancillary services rendered to vessels in transit within the territorial waters, and (e) commissions earned by travel agencies.

F. Tax on Notice of Operations.
- It rises from B/.40,000 to B/.60,000, the maximum annual amount of tax payable in respect of tax on Notice of Operations, at a 2% tax rate on the company’s capital. In the case of companies established in free zones, the tax basis will be 1% with a maximum of B/.50,000 annually.
- Are exempted from the requirement to obtain a Notice of Operations only the companies licensed as Regional Offices of Multinational Corporations and companies that are operating under special regimes, applicable to areas developed through the award of international processes for the selection of contractors.
- Financial institutions regulated by Law 42, 2001 shall pay a 2.5% annual tax on their paid capital as of December 31st each year, which will not exceed in any case B/.50,000.00.

G. Modifications to Law Decree 2 of 1998.
- It is clarified that the hotels which aim for a contract to operate gambling halls, must comply with luxury standards, according to international rules for four-star hotels.
- The Goodwill payment for new Managers and Operators of Full Casinos is fixed in B/.1,000,000 and B/.500,000 for Slot Machines’ Halls type “A”. The obligation to pay the Goodwill to the Gaming Control Board is established retroactively.
- Slot Machines’ Halls type “A” will pay to the State in a phased manner from January 1, 2014, the 22% of their gross income, versus 10% currently paid.
- Full casinos will pay 15% from January 1, 2012, versus 10% currently paid.
- It is regulated the transfer of company shares and the procedure for the appointment of officers of the companies that have contracted with the Gaming Control Board.

H. Others.
- It’s established a general principle by which any legal person requiring the issuance of a Notice of Operation is obliged to withhold the dividend tax regardless of source of income. For dividends from a Panamanian source,
the current rate of 10% is maintained and for income from foreign source or arisen from export operations, withholding shall be 5%.
- Article 733-A of the Tax Code, which provided for an exoneration from the withholding of 10% over the capitalization of earnings is repealed. Accordingly, retained earnings in a fiscal period that are capitalized in any subsequent period will be subject to payment of dividend tax and complementary tax.
- Limited liability companies shall pay taxes as legal persons, since it is removed the article that allowed to pay taxes by the partners in proportion to their equity participation.
- Will pay the rate of 1% of FECI the loans secured entirely by deposits and fixed-term savings held in banks located in Panama. On the other hand, loans agreed as automatic loans in life insurance policies secured by the value of the mathematical reserve or cash surrender value, which will be used to pay premiums for the same insurance life policy, are excluded from payment of the FECI.
- Selective tax on cigarette consumption is increased from 32.5% to 50%, also establishing that 40% of such tax is intended as a contribution to the National Cancer Institute, another 40% to the Ministry of Health and the remaining 20% to the Customs Authority to prevent smuggling of tobacco-derived products.
- It is typified as a crime of smuggling the possession or introduction of tobacco products to the national territory without having paid the corresponding taxes on their import or not complying with health regulations.

A lot of visitors and business acquaintances are asking about the requirements to obtain a “pensionado” (pensioner or retiree)visa in Panama. The benefits and discounts of a Pensionado in Panama are well documented on a number of websites and blogs online (here is one).

We would like to point out a pensionado benefit that (for some reason) is often overlooked or not understood: Property Tax Freeze.

As a Pensionado (Pensioner), you are entitled to request  the freezing of Property Taxes on your primary residence. This is done by applying to to the Ministerio de Economía & Finanzas, Dirección General de Ingresos (Ministry of Economy & Finance, Income Tax Department).

There are a number of requirements which must be met:
1. The property must be in your personal name.  This means that you should not hold the property through a corporation or Panamanian Foundation.  Proof of this must be provided, through a Certificate from the Public Registry ;
2. It must be your residence (it cannot be just a beach getaway or weekend house) and must be your only property (the aforementioned Certificate from the Public Registry must indicate that this is the only  Panamaproperty which you own);
3. Copy of your Pensionado Card, showing your Panama permanent residency and Panama pensioner status.

Upon sale of your Panama property, capital gains taxes are due on the seller’s part. Also property taxes will once more be due thereon, and the buyer does not acquire the right to the exemption.