Member Article

In the corporate world, there is a novel type of enterprise labeled “startup,” which is known for its rapid growth, partly, because of the fact that it is highly related to the general use of information and communications technologies (ICTs) and the latest business trends. Given the rapid growth and scale that characterizes a successful startup, one of the initial considerations when launching a business of this type, and one that will significantly impact the way the company is managed, and the relationships with and between shareholders and investors, is the law under which the company is organized.

With this in mind, and as an introduction to a series of articles we will be publishing focusing on startups, we briefly summarize the reasons why organizing a startup under Panamanian law could pose benefits for its creation, capitalization, hiring of personnel, operations, financing, and eventual sale or public offering.

Before elaborating on the benefits of submitting a business to Panamanian law, it should be noted that according to the World Bank’s Doing Business 2020[1] report, Panama obtained a score of 92 out of 100 regarding the ease of starting a business, and one of 80 out of 100 on the ease of obtaining credit. The average score for Latin America and the Caribbean was 79 and 52, respectively, which positions Panama as a leading country in the region. This, coupled with the fact that its legal currency is the United States of America dollar, and the interconnectivity that it offers to the region thanks to its geographical location, positions Panama amongst the best Latin American countries to start a business in.

Once an entrepreneur has a concrete idea that he or she wants to develop and commercialize, the first step he or she must take when entering the world of startups is to incorporate its business. The main advantage of starting a business by way of a corporation is the fact that the company will have its own legal personality, separate and distinct, for all its acts and contracts, from that of its founder and shareholders.[2] It would be ill-advised for a founder to carry out her commercial activities in a personal capacity due to the implicit risks of each business, so, having a corporate structure that limits the liability of the shareholders is paramount. Undoubtedly, the most common legal vehicle in Panama is the corporation, which is regulated by Law No. 32 of 26 February 1927 (the “Corporations Law”), and details the requirements for the constitution, shareholding structure and administrative bodies, among others, of the corporation. The Corporations Law dictates that to incorporate a company, two or more persons of any nationality and domicile must execute the Articles of Incorporation before a local Notary Public; once the Articles of Incorporation have been recorded as a Public Deed and registered in the Public Registry, the corporation effectively acquires legal personality.[3] This incorporation process is relatively simple and can take between 4 - 6 business days. However, it is important to engage legal counsel, who, in compliance with the Corporations Law and the regulations over resident agents, will act as resident agent and carry out the due diligence prerequisites needed for the resident agent to act as such, and will ensure that the Articles of Incorporation contain everything that the Corporations Law requires and that the process be carried out correctly so that the law will produce all the effects and meet all the practical needs of the respective business.

It is also important to mention that there are other types of commercial entities in Panama, such as limited liability companies (“LLCs”), for example. However, for purposes of a startup, corporations are the preferred legal entity because of their flexibility in the offering of shares to the public, among other reasons. One of the most common ways in which a startup raises capital to finance its operations is through the sale of shares to investors (generally “angel investors” or “venture capital investors” will request shares in exchange for their investment). If the startup is organized as an LLC, the company’s articles of incorporation, which is a document that is recorded in the Public Registry, must be modified every time participating quotas are sold to an investor, therefore, each of these sales will need to be recorded in the Public Registry.[4] Furthermore, the members that have paid for an LLC’s participation quotas in full will have the right to vote in the deliberations of said LLC, [5] which means that LLCs may not issue participation quotas that consist, exclusively, of economic rights. Conversely, a corporation may issue or transfer its shares through private documents, and such shares may be of different classes and grant different economic and voting rights (for example, special voting rights for the class of shares issued to the startup's founders). The latter is relevant when it comes to public offerings of shares, or even private placements targeting sophisticated investors.

Regarding taxation, Panama’s fiscal regime is governed in accordance to the Territoriality Principle which establishes that a natural or legal person is subject to the payment of income taxes only on income that is generated within Panama, that is, through operations or activities carried out within the territory.[6] Our Tax Code establishes that activities such as directing operations that are being carried outside the territory, from an office in Panama, and distributing dividends that come from income not produced within the territory, for example, do not give rise to taxable income in Panama. This means that a startup organized under Panamanian law would only pay taxes on the income that is generated by its Panamanian operations, which can represent significant savings for a company in its seed stage.

Additionally, Panama provides for a series of tax incentives that could be applicable to a startup depending on its business. There are laws that exempt from paying certain taxes and grant tax credits, among other incentives, to industrial manufacturing, agro-industrial and marine resource re-purposing companies[7]; companies located within the Fundación Ciudad del Saber complex that are dedicated to research and innovation in scientific, technological, humanistic and cultural fields; [8] companies established within the Panamá-Pacifico Area;[9] companies established within Free Zones;[10] tourism companies and investors in such tourism companies;[11] multinational companies’ headquarters;[12] and micro, small and medium-sized enterprises,[13] among others. Our second article will address these in detail, so stay posted for future articles of this series.

For those startups that need to import talent from abroad, there are also immigration incentives in place, such as temporary resident permits for trusted personnel, executives, experts and / or technicians, among others. This could be advantageous for startups interested in having advisors or mentors in key positions of their startups to guide the founder in financing rounds, for example.

Having said all this, it is important that each business idea be evaluated considering the provisions of the law so that decisions are made based on the particulars of each case and the advantages that may be offered by Panamanian legislation are harnessed at their highest level. We are at your service for any questions you may have on these issues.

For more information on these matters, please visit our website Startup Series, an informative space designed for entrepreneurs and independent professionals who seek to improve their business initiatives, or contact:

[1] https://www.doingbusiness.org/content/dam/doingBusiness/country/p/panama/PAN.pdf

[2] Article 251, Commercial Code of the Republic of Panama.

[3] Article 1, Corporations Law

[4] See Law 4 of 9 January 2009.

[5] Article 3, Law 4 of 9 January 2009.

[6] Article 694, Tax Code of the Republic of Panama.

[7] Law No. 76 of 23 November 2009, as modified to this date.

[8] Law Decree No. 6 of 10 February 1998.

[9] Law 41 of 20 June 2004, as modified to this date.

[10] Law 32 of 5 April 2011.

[11] Law 80 of 8 November 2012.

[12] Law 47 of 24 August 2007, as modified to this date.

[13] Law 8 of 29 May 2000, as modified to this date.