Panama financial services company: legal entity or marketing gimmick?

For several years clients have been approaching us with typical Panama corporation Articles of Incorporation, accompanied with a typical Class A business license (in Spanish "Aviso de Operacion") claiming that this is a "financial services company".  Several websites also promote this product:

For people looking to set up an offshore finance company, as they are commonly referred to, a Financial Services Company in Panama has proven particularly popular. 

A “license,” known as an aviso de operacion in Spanish or “Operational Status” in English, can be obtained from the Panama Ministry of Commerce. This license allows the company to provide such offshore financial services as:

• Payment Processing
• Factoring
• Bullion Trading
• e-Currency Exchange
• Asset Management
• Financial consulting
• plus a few other activities which can be added on request.

The aforementioned list of offshore financial services would be considered “unregulated” in Panama. Simply put, these do not require the more rigorous supervisory license necessary for businesses such as offshore banking, insurance, broker-dealer, lending, fiduciary and cash transmittal services, all of which have paid-in capital requirements. If you are looking to set up an offshore financial services company for these more rigorously-licensed business types, please contact us. Below we discuss the simpler “license” in more detail.

Previously issued as the “Type A Commercial License” by the Ministry of Commerce in Panama, the license now bears a new name, but is the same registration document for a business that, among other things, will be issued with a domestic tax ID number. This means that, in order to keep it in good standing, an annual tax declaration must filed, which will disclose that all income from the company was derived from external (non-Panamanian) sources.

From Sovereign Management & Legal blog

Another website touts:

Panama Licensed Financial Services company 
A Panama bearer share company with the special financial services license specially prepared to cover whatever financial services that do not require a more onerous license and are desired to be offered (e.g. electronic payment processing, debit card marketing / issuance, bullion trading, forex, factoring, leasing). This specially designed Type A Commercial License is useful for banking purposes and other situations which require proof of a license to handle third party funds. We prepare a carefully worded English translation of the Spanish original that then has an apostille affixed for use with banks 

From LB

What sounds like a dream come true is actually an oversight in the overlapping of several Panama agencies dedicated to enforcing financial laws.  The granting of the Aviso de Operacion allows owners of said company to fool foreign banks into thinking that they are entities supervised by a government financial regulator.  

Firstly, there is no special type of entity in Panama laws called the "financial services company".  The types of business entities are corporations, limited liability companies, partnerships and a few others based on their shareholder structure and liability.    All Panama business entities or individual doing business with other Panama businesses are required to have an Aviso de Operacion business license, as opposed to pure offshore companies which do no business with other Panama businesses or are engaged in legal exceptions (such as landholding of one property).  However, once the step is taken by a Panama company to have an Aviso de Operacion, immediate notice of its existence is given to taxation authorities such as the General Revenue Directorate, the Social Security Administration and the local Municipality which are able to inquire as to the nature of the activities by the Aviso holder.

Some of the other websites include several caveats about this product:

A license from the Ministry of Commerce can be obtained which can allow the company to provide such financial services as Payment Processing, Factoring, Leasing, Precious Metals Trading, Bill collecting and related services, Debit & Credit Cards, Trading in Gold, Silver, Platinum plus other activities which can be added on request. The company can further engage in any lawful enterprise, but the license is specific to the activities listed above. The most important activity for most clients is the Payment Processing. With this license, the company can demonstrate to any bank or other institutions and authorities, that the company is authorized to manage third party funds in its accounts. Many banks these days require that a company can demonstrate origin of funds and beneficial ownership. A company with third party funds in its account and no government issued license to show that demonstrates that it is authorized to hold and process such funds, will risk having its accounts frozen. This entity has proven indispensable for use in conjunction with licensed offshore bank entities.

Main Disadvantages:

Not a financial institution as such. This company should mainly be used for payment processing, usally for a financial entity registered in another jurisdiction. These licenses still do not allow the company to engage in securities (brokerage or investment fund), savings and loan (financiera) or fiduciary (trust company) services which are regulated differently and all require a different type of license with minimum capitalization (usually $500,000) and public audit requirements. The Panamanian government is very serious about this. 

From Avia

Once this financial services company has the Aviso de Operacion, immediate notice is given effective 2013 to the Municipality of Panama city.  They will levy a $50 monthly signage tax and every year thereafter there is the obligation of filing a Panama city tax return.  A municipal tax on gross income is levied under a schedule, which has a general rate of 0.08%.   The resident agent of the corporation must have received an email from their friendly Municipal tax collector reading:

Señor(a)

...

Ciudad

El Municipio de Panamá le da la bienvenida a su sistema de Atención al Contribuyente y le comunica que el negocio ... S.A, con domicilio en Edificio ...  de conformidad al Registro Unico de Contribuyente otorgado por la Dirección General de Ingresos del Ministerio de Economí­a y Finanzas, ha sido clasificado e inscrito en el Municipio de Panamá, desde el di­a 24 de abril de 2013, bajo el No. de contribuyente 02-2013-..., de conformidad al Aviso de Operación # ... otorgado por Panama Emprende del Ministerio de Comercio e Industrias y le comunicamos que será aforado con las siguientes rentas de conformidad al Acuerdo Municipal N° 40 del 19 de abril de 2011:

Orden                   Actividad    Impuesto      Forma de Pago

1                     ROTULOS Año: 2013    25.00     ANUAL

De no presentarse en el término de quince (15) dí­as, se le aforará de oficio con las rentas anteriormente descritas.

Una vez informado usted de las obligaciones que tiene con el Municipio de Panamá, debe apersonarse al Departamento de Atención al Contribuyente, en la planta baja de la Torre B del Edif. Hatillo, Alcaldía de Panamá, en un término no mayor de quince (15) dí­as, contados a partir de la fecha de recibido de esta información, para entregar los siguientes documentos: ... IMPORTANTE:

Todo Contribuyente deberá presentar una Declaración Jurada donde se verifique con especificidad, la actividad lucrativa que se ejerce (Artículo 6, Numeral 2 del acuerdo 40 del 19 de abril de 2011).

Adicionalmente el Contribuyente deberá presentar una Declaración Jurada Anual del monto de sus ventas o ingresos brutos, obtenidos producto de sus operaciones en el Distrito de Panamá y que consten debidamente en los registros contables del contribuyente (Artículo 6, Numeral 3 del acuerdo 40 del 19 de abril de 2011).

La declaración jurada anual de ingresos brutos, a la que se refiere el numeral 3 del Artí­culo 6, deberá ser presentada dentro de los primeros noventa (90) dí­as calendarios contados a partir de la terminación del perí­odo fiscal de cada contribuyente.

De no presentar la declaración jurada anual de ingresos brutos dentro del plazo establecido, será sancionado con una multa de quinientos balboas (B/.500.00) y con el cierre del establecimiento comercial hasta tanto no se presente la declaración jurada anual correspondiente y pague el monto adeudado (Artí­culo 7, del acuerdo 40 del 19 de abril de 2011).

Puede realizar sus pagos en todas las dependencias del Municipio de Panamá, ya sea en efectivo o por medio de tarjeta de crédito.

Fundamento de Derecho: Articulo 84 y 87 de la Ley 106 de 1973, modificada por la Ley 52 de 1984; Articulo 4, 6,7, 10 y 77 del Acuerdo 40 de 2011 y Artículo 1, 3 y 6 de la Ley 5 de 2007.

Alcaldí­a de Panamá  

Since may resellers of Panama companies abroad have scarce knowledge of Panama tax law (other that foreign source income is generally free of income tax), they rarely mention that new changes to the Tax Code may also involve paying dividend tax when an Aviso de Operación is applied for.   Under Article 733, Panama companies must withhold 5% as tax on dividends even if they are paid out to shareholders out of foreign-source earnings:

Excepto por lo dispuesto en los literales b, d, h y k del presente artículo, solamente aquellas personas jurídicas que requieran Aviso de Operación para realizar operaciones comerciales e industriales dentro del territorio nacional, conforme lo dispuesto en la Ley 5 de 2007; ... quedan obligadas a retener el Impuesto de Dividendo o cuota de participación ... del cinco por ciento (5%) cuando se trate de la distribución de utilidades provenientes de renta exenta del Impuesto sobre la Renta prevista en los literales f y l del artículo 708 del Código Fiscal, así como de rentas provenientes de fuente extranjera y/o de exportación.

.

 Issuing bearer shares involves a higher dividend tax of 20% and even if no dividend is declared a 40% tax is payable on net earnings:

No obstante lo dispuesto en este artículo, los tenedores de las acciones al portador pagarán este impuesto a la tasa del veinte por ciento (20%).

La persona jurídica que distribuya tales dividendos practicará la retención, la que tendrá carácter definitivo. En caso de que la sociedad que distribuya dividendos tenga diferentes clases de acciones, el impuesto se pagará de conformidad con las tasas aquí establecidas y según el tipo de acciones.

Cuando la distribución sea menor del cuarenta por ciento (40%) de las ganancias netas o en caso de que no haya distribución, se aplicarán las disposiciones del impuesto complementario, con independencia del tipo de acciones que haya emitido la sociedad.

Not all is darkness for the companies with Aviso de Operacion.   The entry into force of double taxation agreements (DTAs) with several OECD countries and major business partners provides an opportunity for timely transfer pricing savings when proper advice is sought.  Although the likelihood of Panama tax authorities seizing bank accounts abroad of these Panama financial service companies is very low, it is better to factor in these risks when using these companies.