An Introduction to Real Estate

Investment in Panama

A growing tourism and retirement market has contributed to the growth of Panama's real estate market in the last decade. Each day, Panama City's skyline is covered with construction cranes for high-rise buildings, both commercial and residential. Recent years have also seen the development of Pacific side beach areas as second homes for residents and investments for overseas investors.

Panama has a population of 3.7 million in ten provinces, each divided into districts and corregimientos. Moreover, Panama's aboriginal tribes have five comarcas, or special indigenous areas. The main cities are Panama City, the capital, located in the Province of Panama. Here, the majority of the country's commercial activities take place. In addition, Colon City is located in the Province of Colon, which hosts the Colon Free Zone. David is the capital of Chiriqui, where the country's agriculture, cattle, and farming activities take place.

It is also the nation with the largest per capita consumption in Central America. In addition, it is the country with the second largest economy and fastest growth in Central America. Panama's GDP is dominated by tolls from the Panama Canal, but commerce, banking, financial services, and tourism are also major contributors.
It has some influences from Spanish legal tradition as well as Roman law, which forms the basis of Panamanian law.
This is the country's highest court and its apex judicial authority.
Several provinces make up the country: Bocas del Toro, Chiriquí, Coclé, Colon, Darien, Herrera, Los Santos, Panama, Western Panama and Veraguas.
Regions: Embera, Guna Yala, Ngobe-Bugle Comarca, Kuna de Magugandi y Kuna de Wargandi.

The Republic of Panama is a great place to own commercial property

The two main ways to acquire property rights in the Republic of Panama are: (1) through the purchase of a title of property, which applies to properties duly recorded and with title in the Public Registry of Panama; or (2) by obtaining title over a right of possession ("right of possession") for property in areas without recorded titles. In the region, Panama has one of the most technologically advanced and reliable public registry systems. The Public Registry Office maintains records of all titled properties in Panama. The website and offices of the Public Registry provide quick and easy access to information about titled properties.

The constitution of Panama prohibits foreign ownership of property within ten kilometers of either border of the Republic of Panama. Additionally, it restricts private ownership of islands, except for those titles acquired legitimately prior to the Constitution, which can be expropriated by the government by paying the corresponding indemnity. With respect to beach-front properties, property within 22 meters of the highest tide line on the Pacific coast and 10 meters on the Atlantic coast may not be titled, nor may permanent improvements be built on them, although concessions for their use may be granted. In Panama, the process of acquiring a titled property is generally carried out as follows:

Due Diligence of the property - The buyer should complete a title search at the Public Registry, review property maps at the Land Authority ("Autoridad Nacional de Tierras"), verify the property's tax status at the Ministry of Economy and Finance, verify that no late payments are due or accrued on utility bills, as well as verify any recorded restrictions, liens, and encumbrances on the property, which should appear in the Public Registry. Promissory

Purchase Agreement -

By putting down 10% to 30% of the total purchase price, this agreement secures the property, allowing time for due diligence and obtaining bank financing for the acquisition. Third parties may be affected by the promissory purchase agreement, which may be a private document or recorded in the Public Registry.

A public deed of purchase and sale is executed by a notary public in the Republic of Panama, where the terms and conditions of the sale are recorded. It is the seller's responsibility to provide evidence of the payment of property transfer taxes, which will be reviewed by the notary public, as well as free and clear certificates for property taxes, utilities, and condominium fees (if applicable). The buyer of the property is generally responsible for paying notarial fees and expenses, as well as the registration fees at the Public Registry. A copy of the notarial public deed is then filed for registration at the Public Registry. Upon registration, title to the property will have effectively transferred to the buyer.

Obtaining title over rights of possession ("Derecho Posesorio") is a separate process for land and properties that are not titled. Rights of possession grant land use privileges that are essentially acknowledged based on the occupation, maintenance and use of the land over a period of time; however, they do not grant their holder title over the property. Rights of possession may be transferred to a third party through a public deed to sell the rights of possession.

Obtaining title over rights of possession can be a lengthy and cumbersome process. This is because the holder must prove to the Land Authority that he has used and maintained the land over an extended period of time. Testimonies from neighbours may be required, among other elements, to prove the existence of the rights of possession. To constitute title to the property, a resolution from the Land Authority recognizing the rights of possession is registered at the Public Registry.

Leasing

A lease agreement for real estate in Panama is governed by the principle of contractual freedom, the Panamanian Civil Code and Law 93 of 1973.

The main types of lease agreements are:

Less than US$150.00 per month for residential lease agreements.
A residential lease agreement with a monthly rental fee exceeding US$150.01.
Lease of commercial property.

Residents who rent their homes for less than US$150.00 a month have preferential rights and protection under Law 93 of 1973. In the event that a buyer is found for the leased property, and the lessee has paid the rental fees on time, he must accept the Lease Agreement. Furthermore, the lessor cannot increase the rental fee without the approval of the Ministry of Housing.

It is permissible to contract by the principle of contractual freedom for residential leases over US$150.00 a month and commercial leases exceeding US$10,000 a month. The contract must meet only the main requirements stipulated in the leasing laws.

Private lease contracts can be registered with the Ministry of Housing, which provides a preprinted lease form and allows the security deposit to be deposited with the ministry; or they can be registered with the Panamanian Public Registry.

All lease agreements with a term of 6 years or more must be executed before a Notary Public in the Republic of Panama and recorded in the Public Registry. Third parties are notified of the lease's existence by registering it in the Public Registry.

Lease payments for commercial lease agreements are subject to a 7% service tax known as "Impuesto de Transferencia de Bienes Muebles y Servicios", or by its acronym ITBMS, payable by the tenant and reported to the tax authorities by the landlord.

Permits and Approvals In Panama, development and construction upon properties requires a series of permits, which will vary depending on the nature, scope and type of the project. The following permits are the principal authorisations to take into consideration before starting a project:

A construction permit from the municipality where the property is located requires an Environmental Impact Study (EIS) to be obtained from the Ministry of Environment. Depending on the type of project that is being developed, the process of completing an EIS can take 15 to 30 days or longer. An EIS must be prepared by an independent environmental consultant who is duly certified or registered with the Ministry of Environment.

Construction Permit from the Municipality - Obtaining a construction permit is required prior to beginning any work on the property. The application is generally filed by the licensed architect of the project and reviewed by the Work and Construction Department, who must be provided with, among other items, the evidence of ownership of the property, evidence of the existence and good standing of the companies who will develop the project, land use certification, approvals issued by the Fire Department Safety office, two copies of the blueprints of the project, approval of the Ministry of Public of the Environment, proof of registration of the applicant with the Technical Board and the municipal good standing certificate. The cost of the permit is usually 1% of the project value.

Occupancy Permit - Upon the completion of the project, an occupancy permit is required prior to use of the property or registration of any special property regimes. The Fire Department Safety Office conducts routine inspections during construction. It must issue a final approval before the occupancy permit is granted by the Municipality. The Municipality will also inspect the construction. Once all the permits are issued, the owner of the property must register the improvements in the Public Registry, and apply for any special property regimes.

Special Property Regimes - Commercial and residential buildings in Panama are generally subject to the Horizontal Property Regime, where each individual apartment is granted a property number and each owner is part owner of the common assets of the buildings, such as the land on which the building is located and common areas. Application for this special regime is made before the Ministry of Housing and the resolution of approval of the regime must be recorded at the Public Registry.

Taxes in Panama are collected and managed by the General Direction of Income of the Ministry of Economy and Finance. Panama has made paying taxes easier for companies. This allows for payments of property taxes and transfer of property taxes to be made at the National Bank of Panama and other banks with a banking license.

When purchasing property in Panama there are several taxes to take into consideration, namely:

Property Transfer Tax - Transfer tax must be paid by the seller at the moment of transfer of the property. This tax is approx 2% of either the sale price stated in the purchase and sale contract or the registered property value, whichever is higher.

Capital Gains Tax - Capital gains tax is payable on the profits made by the sale of property at the rate of 10%. The seller of the property has the obligation to pay 3% on the sale price or the registered property value, whichever is higher. This is an advance on the income tax payable on the seller's capital gains. The seller has the option to consider the 3% tax payment as the definitive income tax to pay for the capital gains. If the sum withheld exceeds the amount resulting from the application of the 10% rate to the gains obtained from the sale, the seller may file a special tax return to credit the sum retained and claim the excess resulting as a credit in his favour.

Real Estate Taxes ("Impuesto de Inmueble") - All land located within Panamanian territory as well as improvements to them are subject to this tax, with the exception of the following properties:

The state, municipalities, or an association of municipalities.
Autonomous or semi-autonomous entities, subject to their own regulations.
State-sanctioned worship or churches.
Public or social welfare programs.
A family homestead.
Treaty exemptions or state contracts.
Labour unions, provided the real estate is not used for profitable activities.
Those with a taxable base (including improvements) that does not exceed US$30,000.00.
Agriculture or cattle farming, if the registered value (valor catastral) does not exceed US$150,000.00.

Private educational institutions undertaking to offer scholarships to needy students and private hospitals undertaking to assist needy patients may deduct these sums from the tax amount to be paid.

The progressive combined tax rate and the base for the calculation are as follows:

The tax rate will be 1.75 percent of the excess over $30,000.00 of the taxable base, up to $50,000.00.
1.95% of the excess of $50,000 on the taxable base, up to $75,000.00.
2.10% of the excess over US$75,000 of taxable income.

The alternative tax rate and base for the calculation of this tax, applicable to properties that have requested an appraisal for this purpose, is the following:

Up to US$100,000.00 in land and improvement 0.75%
Over US$100,000.00 1.0%

Real estate tax must be paid according to the official assessment value, which is usually the declared value on the sale document. The maximum annual percentage of assessment is 2.10%, which is based on the value of the land and plus the declared value of the improvements built on it.

The taxable base will depend upon the total value of the land plus all improvements. Real estate transactions at prices higher than the appraisal value will automatically increase the value of the property for tax purposes. Certain properties and improvements to them are exempt or can obtain exemptions from real estate taxes according to special incentive tax laws.

Real estate taxes on properties (but not on land) may also be exempt for newly constructed properties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.