Published on Wednesday 6th April 2016
What are the most common forms of bank financing in your jurisdiction?
All types of bank financing are found in Panama: bilateral and syndicated, secured and unsecured, domestic and cross-border, for general corporate purposes and project finance.
Are any governmental or central bank registrations or approvals required for a foreign lender (being a lender not incorporated in your jurisdiction or operating through a branch or office outside of your jurisdiction) to lend to a borrower in your jurisdiction?
Under the laws of Panama, there are no such registrations or approvals required for foreign lenders.
Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, a borrower in your jurisdiction to contract debt obligations in a foreign currency or to remit funds abroad?
Under the laws of Panama, there are no such foreign exchange restrictions to, or registrations or approvals required for, a borrower to contract debt obligations in a foreign currency or the remittance of funds abroad. Panama has no mandatory legal tender currency, although most transactions are effected in US dollars.
Are there any governmental or central bank registrations or approvals required for the prepayment of loans abroad?
Under the laws of Panama, there are no such registrations or approvals required for the prepayment of loans abroad.
Are any mandatory governmental or central bank deposits required to be made from loan proceeds?
Under the laws of Panama, there are no such deposits required to be made from loan proceeds.
Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.
There is no specific legal framework for adopting moratorium measures.
Describe any environmental liabilities and any other areas of lender liability that may arise as a result of the activities of a borrower or the realisation of a security interest.
In general, a lender would not incur any environmental liability merely as a result of the granting of a credit facility to a particular borrower or the realisation of a security interest. Notwithstanding this, it is possible, in theory, that a lender who is foreclosing on a mortgage and who has acquired control over the mortgaged property could be exposed to environmental liability if such a lender fails to manage the environmental hazards of the property and as a result of such failure the land or other surrounding properties are polluted or contaminated.
Are interest payments or loan fees subject to a withholding tax?
Interest and fees earned by foreign domiciled lenders on loans and other credit facilities used to finance business operations in Panama or the proceeds of which are utilised in Panama are deemed to be Panamanian source income subject to income tax in Panama. As a result, 50 per cent of the interest or fee payments to foreign domiciled lenders are subject to income tax withholding at the general corporate income tax rate of 25 per cent. No income tax withholding is applicable to interest or fees earned by foreign domiciled lenders if the loans or other credit facilities are not used to finance business operations in Panama or the proceeds thereof are not utilised in Panama.
Interest and fees earned by lenders domiciled in Panama on loans and other credit facilities used to finance business operations in Panama or the proceed of which are utilised in Panama are deemed to be Panamanian source income subject to income tax in Panama. Such interest payments and loan fees paid to lenders domiciled in Panama are not subject to withholding income tax. Such lenders are responsible for paying its income tax due at the applicable rate.
What other taxes or mandatory fees, for example, transaction, registration or documentary, apply to loan transactions?
Value added tax, known in Panama as ITBMS, applies to loan fees at the standard rate of 7 per cent when the lender is domiciled in Panama.
In addition, stamp taxes apply to the loan transaction documents, including agreements and contracts, when the loan is subject to income tax in Panama. Stamp taxes must be paid on each original copy of the loan or credit agreement and are calculated at a rate of US$0.l0 for each US$l00 of the face value of the principal obligation, as expressed in the loan or credit agreement. Stamp taxes do not apply to documents related to loan transactions that are not subject to income tax in Panama.
Notary public fees and public registry fees would apply as well, in particular if the facility is secured by one or more mortgages or by the transfer of assets to a trust (fideicomiso).
Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?
The main difference between a domiciled lender and a lender in a foreign jurisdiction is the form of payment of the income tax, given that lenders in Panama are responsible for paying the income tax due and lenders in a foreign jurisdiction are subject to withholding of income tax by the borrower located in Panama.
Lenders domiciled in Panama are subject to income tax at the general corporate income tax rate of 25 per cent on the entity’s net taxable income.
Income tax is reported and paid within three months after the end of each fiscal year.
The ITBMS rate applicable to loan fees charged by lenders domiciled in Panama is 7 per cent. Local entities pay ITBMS on a monthly basis based on a credit and debit system under which each entity pays the difference between the ITBMS it collected during the immediately preceding month as a result of performing taxable activities and the ITBMS that such entity was charged by third parties during the same period. ITBMS must be reported and paid within the first 15 calendar days of the month immediately following the month for which such ITBMS is to be paid.
On the other hand, the income tax obligations of entities domiciled in foreign jurisdictions ordinarily must be fulfilled through income tax withholdings on payments made by Panamanian entities to such foreign entities. The amount to be withheld would be the applicable corporate income tax rate (currently 25 per cent) over 50 per cent of the taxable amount remitted abroad as payment. As a result, the effective income tax withholding rate would be 12.5 per cent over the gross taxable amount.
The income tax withholding mechanism does not apply to foreign entities that have a branch in Panama, because each Panama branch of a foreign entity is deemed to be a Panama tax resident, is assigned a taxpayer identification number upon incorporation and has the obligation to report and pay income tax on its Panama source income.
Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?
Panama has negotiated double taxation treaties with Austria, Bahrain, Barbados, Belgium, South Korea, the United Arab Emirates, Spain, France, the Netherlands, Ireland, Israel, Italy, Luxembourg, Mexico, Portugal, Qatar, the United Kingdom, the Czech Republic, Singapore and Vietnam. Panama has ratified the double taxation treaties with Mexico, Barbados, Portugal, Qatar, Luxembourg, Spain, the Netherlands, Singapore, South Korea, Italy, France, Ireland, the Czech Republic, the United Arab Emirates, Israel and the United Kingdom. As of February 2015, the double taxation treaties with Mexico, Barbados, Qatar, Spain, Luxembourg, the Netherlands, Singapore, France, South Korea, Portugal, Ireland, the Czech Republic, the United Arab Emirates, the United Kingdom and Israel are in force.
Do any financing structures receive favourable tax treatment, such as prepayments of exports?
Under the laws of Panama, the following financings are exempt from taxes:
Describe any limitations on interest rates or the ability of lenders to charge default interest under loan agreements.
Under the laws of Panama, there are no limitations on the ability of lenders to charge default interest, except that the payment of such default interest must be agreed by the parties in the loan agreement or sought in judicial proceedings.
Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.
Under the laws of Panama, there are no restrictions on the application of the choice of foreign law, except that no provisions of foreign law will be applied by Panamanian courts if such provisions are contrary to the public policy of Panama.
Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.
Under the laws of Panama, any final judgement entered in a foreign court against a borrower for the payment of money in connection with an outstanding loan would be recognised, conclusive and enforceable in the courts of Panama without re-trial or reconsideration of the merits of the case, subject to the issuance of a writ of exequatur by the Supreme Court of Panama. In order to issue a writ of exequatur, it is necessary that:
Upon the closing of a loan, what procedural requirements (execution formalities, notarisation, registration, recordation or filing) should be observed to ensure that a loan agreement or related judgment is enforceable in your jurisdiction?
Other than the due execution and delivery of the loan agreement by each of the parties thereto, there are no procedural requirements to be observed under the laws of Panama for the enforceability of the loan agreement. However, if such execution and delivery occurs outside of Panama and the loan agreement is to be used as evidence in the courts of Panama, the signatures of the parties to the loan agreement will need to be authenticated by a Panamanian Consul or pursuant to the 1961 Hague Convention Abolishing the Requirement of Legalisation of Foreign Public Documents.
In addition, certain types of security documents that would secure the debt arising from the applicable loan agreement might need to undergo certain procedural requirements. For example, mortgages are required to be in the form of public deeds and registered with the Panamanian Public Registry, and trust agreements that are not in the form of public deeds are required to be notarised.
Does a loan agreement in English need to be translated or locally registered to be enforceable in your jurisdiction?
The enforceability of a loan agreement in Panama does not depend on the language in which such loan agreement is entered into or on any type of registration. However, if a loan agreement originally entered into in a language other than Spanish is to be used as evidence in the courts of Panama, such loan agreements will need to be translated into Spanish by a Panamanian licensed translator.
Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?
Under the laws of Panama, it is not necessary that a foreign bank be registered in Panama in order to enforce any rights under loan documentation.
Are foreign lenders treated any differently than local lenders in enforcing loan documentation in the courts of your jurisdiction?
Under the laws of Panama, there is no difference in the treatment given to foreign and local lenders in the enforcement of loan documentation in the courts of Panama.
Is consideration required for the enforceability of a contractual obligation or guarantee?
Under the laws of Panama, consideration is required for the formation of any contract and, therefore, also for such contract’s enforceability.
To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?
It is not necessary that a loan, to be enforceable in Panama, be evidenced by a promissory note or a título ejecutivo. However, if the loan to be enforced is evidenced by a título ejecutivo, the enforcement proceedings should take less time. Not all promissory notes constitute título ejecutivo and, therefore, not all promissory notes are useful to shorten the enforcement proceedings.
To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?
Please note that personal guarantees in Panama are not always in the form of avales. The most common form of personal guarantee in Panama is the fianza. The aval in Panama is a particular type of personal guarantee that is issued by the guarantor signing the applicable guaranteed documents and adding the phrase válido por aval (or an equivalent phrase). Avales are valid only for certain types of negotiable instruments, such as bills of exchange, checks and promissory notes. However, fianzas can be used to guarantee obligations under loan agreements. It is acceptable to have a fianza guarantee the obligations under a loan agreement and have an aval on the promissory note issued in connection with the same loan agreement, as long as, at the time of enforcement, the lender does not seek collecting on both obligations.
Are there any restrictions on loans to multiple borrowers or on a guarantee in respect of a loan to an affiliated entity?
Under the laws of Panama, there are no restrictions on simultaneous loans to multiple borrowers. Also, there are no restrictions imposed on guarantors with respect to their providing guarantees to affiliated entities.
Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?
Panamanian law permits any person to provide a guarantee to any other person. However, if the guarantor is in the business of providing guarantees (for example, if the guarantor is an insurance company); such a guarantor will be required to comply with all laws and regulations governing such business.
Is there a distinction between the granting of a security interest and the perfection of a security interest?
There is a distinction under the laws of Panama between the creation of a security interest and the perfection of such security interest. A security interest in Panama is created by agreement between the parties (which agreement, in some cases, may be required by law to comply with certain formalities). At the time of its creation, the security interest is enforceable between the parties thereto. Such security interest, however, is not enforceable against third parties, namely, third parties could share in the applicable collateral, if the perfection formalities have not been complied with.
Under the laws of Panama, different types of collateral may require different types of security interests. In part, this is because the floating charge does not exist in Panama, with the sole (and recent) exception of the possibility of a general pledge with respect to the pledger’s assets if located outside of Panama. As a result, depending on the types of collateral involved in the transaction, the parties may need to execute mortgages on real estate, mortgages on moveable property, pledges of capital stock, assignments of rights and other security documents. Each type of collateral has its own formality for perfection. For example, a pledge of capital stock is perfected by delivery of the share certificates with a stock power in blank, while an assignment of rights is perfected by giving notices to the persons or entities that are subject to the correlative obligations.
What is the most common form of granting and perfecting a security interest in moveable assets?
As indicated in question 25 above, the type of security interest will depend on the type of asset. If the applicable movable asset consists of an investment account, a pledge of that account will be necessary, although a new and untested law permits chattel mortgages over rights such as bank accounts. If it consists of equipment, a mortgage of such equipment might be the best approach (unless the borrower is willing to part with the possession of such equipment, in which case a pledge thereof would also be feasible).
What is the most common form of granting and perfecting a security interest in real estate?
Under the laws of Panama, the only form of granting and perfecting a security interest in real estate is through a mortgage in the form of a public deed that is subsequently recorded with the Panamanian Public Registry.
What is the most common form of granting and perfecting a security interest in receivables and accounts?
With respect to receivables, the form of granting and perfecting a security interest therein is by assigning such receivables to the lender and notifying the payer thereunder that such receivables have been so assigned. With respect to accounts, the form of granting and perfecting a security interest therein is to enter into a pledge agreement in the form of a public deed between the account holder and the lender and by notifying the account bank that such account has been pledged. A new chattel mortgage law which, at the time of writing, remains untested, would permit a mortgage over receivables and/or bank accounts. However, it is not entirely clear how the mortgage over the bank account would be enforced.
Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?
Under the laws of Panama, it is possible to transfer assets to a trust (fideicomiso) for the benefit of a lender. Such a structure is used with some frequency in Panama as a means of obtaining collateral for a loan. However, strictly speaking, such a structure should not be deemed to create a security interest. Rather, it constitutes a transfer of legal title to an entity that is under the control of the lender, which entity will then use those assets for the benefit of the lender pursuant to the terms of the trust agreement.
Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?
see question 29 above.
Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?
Although under the laws of Panama certain types of assets either cannot legally be pledged as collateral or can be pledged subject to certain restrictions, most of those types of assets or restrictions are not relevant to standard loan transactions. The most relevant assets that cannot be pledged as collateral are the assets of the Republic of Panama, for which reason any loan to the Republic of Panama needs to be unsecured.
Describe any restrictions on enforcement of security. For example, any statutory regime that may stay the enforcement of the security or provide that enforcement is limited to public sale through the courts.
It is well established under the laws of Panama that secured creditors of a debtor can foreclose on collateral. Except perhaps, when a regulated entity such as a bank is intervened, the ability of the secured party to foreclose on the collateral should not be delayed or affected even if such regulated entity is subject to insolvency proceedings. This fact is not affected by staying orders, even if the bankrupt entity is a regulated entity.
Under Panama Law, chattel and real property mortgages must be enforced through judicial proceedings (the new chattel mortgage law permits extrajudicial enforcement, but the applicable regulations have not been issued at the time of writing). Pledges could be enforced out of judicial proceedings if the pledge agreement so provides and a mechanism for the appraisal of the pledged assets is included in the pledge agreement.
Describe any other relevant legal considerations in connection with loans to a borrower in your jurisdiction.
Lending by foreign banks in Panama is very flexible. Although the business of lending to the general public is regulated, lending to a specific borrower, without being engaged in the business of lending to the general public in Panama, is not regulated. As a result, it is very easy for foreign banks to make loans to Panamanian borrowers. Also, there is no limitation on the interest rate that may be charged by banks on their loans.