Panama offers a wealth of opportunities for both domestic and foreign business owners since it has one of the friendliest and most dynamic economies in the entire globe. Panama is a prominent choice for companies who want to increase their presence in Latin America because of its import and export markets and foreign direct investment.
This guide navigates you through numerous aspects of establishing a subsidiary in Panama – the various types, incorporation procedures, compliance rules, and taxes.
What are the types of subsidiaries in Panama?
You can open the following types of subsidiaries in Panama:
- Limited Liability Company (LLC)
- Branch office
What Are The Steps to Set Up a Subsidiary in Panama?
Follow the given steps to set up the following subsidiary types in Panama:
Limited Liability Company
Draft the company bylaws
Writing the LLC’s bylaws in conformity with local corporate law is crucial. Therefore, it is highly advised to work with a local expert in creating the bylaws. After completing this step, you must have a notary public certify the company bylaws.
Register the bylaws
The Public Registry of Panama must certify the legality of the LLC’s bylaws. This government agency ensures that the company’s bylaws adhere to all legal standards set forth by Panamanian law. The LLC will be regarded as a legal entity registered in Panama and subject to Panamanian law if the statutes are approved.
Obtain a Tax ID
You must apply for a tax identification number for the business to conduct business in Panama legally. By registering the corporation with the General Directorate of Income, you can get the “Single Taxpayer Registry” (Registro nico de Contribuyente, or RUC) tax identity number for Panama (DGI).
Obtain a commercial license
You must contact the DGI and the Ministry of Commerce and Industries to obtain the business license. You must specify the city where the LLC will conduct its business activities. After getting the business license, you must register the LLC in the appropriate municipality based on the district of your business address.
Companies situated in the district of Panama are registered in the municipality automatically after they get a business license. However, you may need to submit the relevant document in person in the case of other districts.
Open a bank account
You must submit the following documents to open a bank account for your LLC:
- Identification and residence proof of all shareholders
- Bank reference letter in favor of the shareholders
- Income proof, financial statements, or a copy of income tax return
- Annual expense estimation and income of the company in Panama
Legalize important documents
To establish a branch office in Panama, you must legalize the following documents from a notary or an equivalent official:
- Document of incorporation of the business and any amendments
- Document provided by the government entity of the company’s country of origin that proves its legal existence and validity
Submit minutes of the Board of Directors to the Public Registry
The minutes should include the following information
- Setting up and opening of the branch in Panama
- Presence of a minimum of $10,000 as authorized capital for operations in Panama
- Designation of a Resident Agent authorized by the parent company to legalize the branch documents
- Appointing a legal representative to attend to business matters in Panama
- Balance sheet of the company certified by an authorized public account from the company’s country of origin
Obtain a local Tax ID
The national tax authority provides the relevant tax identification to business entities in Panama. The identification helps in filing taxes and invoices for legal transactions.
Benefits of Setting Up a/an Panama Subsidiary
If you are a well-known brand or an up-and-coming one, the Panamanian market gives you a great opportunity to improve your brand value. By opening a subsidiary and selling the same goods, you can increase the footprint of your company and establish a strong presence.
Another benefit of registering a branch in Panama is the decreased burden associated with tax filing and other administrative requirements. The country offers numerous tax incentives and does not pressure shareholders to be present in the country for business purposes.
By establishing a subsidiary in Panama, you can focus on country-level initiatives and adapt your strategies. This means that while you are more liable, you are also better able to ensure compliance and avoid any regulatory annoyances.
Documents to prepare when opening a subsidiary in Panama
As mentioned above, you need the following documents to open a subsidiary in Panama:
- Identification and address proofs of the shareholders
- Income proofs or financial statements
- Incorporation documents of the company
- Minutes of the Board of Directors
- Bylaws of the company
Post Incorporation Compliance
After registering your subsidiary in Panama, you must follow the given compliance rules:
Appoint a legal representative
According to Panamanian law, every legal entity or business must have a Legal Representative. This individual is chosen to represent the business in all legal proceedings and serve as its public face. As a result, they have the authority to act in the company’s best interests.
A Legal Representative may be either a foreigner or a citizen of Panama without any limitations. Make sure the individual you choose to serve as your legal representative is well-versed in local legislation and the potential consequences of the firm failing to meet its yearly or monthly corporate commitments.
Register a local fiscal address
Register your subsidiary at the National Tax Authority (Dirección General de Ingresos) to declare monthly and annual tax returns. The registration requires a fiscal address, where you will receive all correspondence from various authorities.
Declare monthly and annual taxes
Depending on whether your company engages in commercial activity within the nation, your company may need to file monthly or annual tax declarations. Therefore, it’s crucial to ascertain your company’s financial obligations to the national authorities. Companies unaware of their yearly obligations risk paying more taxes than necessary or accidentally filing false tax returns. A reliable EOR partner in Panama, like Multiplier, can help you avoid any problems with your tax declarations.
Taxes on Subsidiaries in Panama
An LLC in Panama is subject to a fixed income tax rate of 25% on all Panama-sourced earnings. The tax base for companies with income higher than 1.5 million USD is greater of:
- The net taxable income calculated normally, or
- 4.67% of the gross taxable income (not including the exempt and foreign-based income), also known as the alternate calculate of income tax (Calculo Alternativo del Impuesto sobre la Renta or CAIR)
On the other hand, a branch office is subject to dividend tax via definitive withholding tax of 10% of the net taxable income. As the Panamanian laws consider a branch office separate from its parent company, the entity has its own tax liability and accounts.
Tax incentives for subsidiaries in Panama
Panama provides the following tax incentives to subsidiaries:
- Foreign tax credits with countries who have signed a DTT with Panama
- Entities registered in free zones are exempted from import duties on goods, income tax, export tax, sales tax, and selective consumption tax on royalties from exportation activities. Other than trading activities, other businesses that also qualify for the tax exemption include academic institutions, research centers, assembling factories, high technology businesses, semi processed or finished products processing businesses, services businesses, environmental service businesses, general services, logistics services businesses, and manufacturing businesses.
- Companies in the tourism sector are given several tax benefits if they have signed a tourism agreement with the government
- Individuals and corporations in the agricultural sector are exempted from tax if their gross yearly income is less than USD 250,000
- The Law No. 54 of 2001 grants tax exemptions to call centers operating in the country
- The Law No. 41 of 2004 gives tax benefits to companies established in the Panama Pacific Economic Zone
How Multiplier’s EOR Service Can Help You Expand in Panama?
Setting up a subsidiary in Panama can be challenging if you are unaware of the relevant laws and regulations. Even though the country welcomes investors in various sectors, you need to have an expert guide you through the nuances of growing your team in Panama.
With Multiplier, you can seamlessly onboard, manage, and pay your global employees and grow your team in Panama. Our experts guide you in establishing your international teams’ processing and legal aspects. With Multiplier’s digital platform, you can onboard employees in minutes, pay them in local currency, and pay relevant taxes on time. Connect with us to learn more about setting up a global team in Panama.