My friends at Mossack Fonseca have a great newsletter and always put forth a great perspective on laws and common sense when investing in Panama and many other places in the world. Here is an excellent article written by Mr. Rigoberto Coronado on the subject of buying property here in Panama.
Ever since Panama began its republican life, a little over one hundred years ago, it has legislation governing the acquisition of immovable property, which has been kept despite the passage of time and its deeply rooted determination to faithfully protect the institution of public and private property, including the important component of ensuring legal certainty for local and foreign investment.
Let us review the matter stressing on some important aspects that will provide a clear understanding of how to purchase property in Panama.
Purchase and Sale Procedures
The first step when deciding to purchase a property in Panama is to hire local professionals who can guide you as you explore many possibilities prior to giving a deposit, incurring obligations or purchasing the property itself. Although Panamanian legislation, as well as the Centralized Property Registry and property owners, to which I shall refer later, make it easy for any person to perform certain checks, it is no less true that for others it takes active participation of trained third parties to make their investment even safer.
A few examples illustrating the aforementioned initial step are verification of the seller right to dispose of the property, that same is not a security for any kind of obligation or restricts the right of disposal resulting from a lien, the existence of joint ownership regulations, usufruct rights on specific areas, limitations, and in general that the property in fact constitutes what you had seen.
Now, going back to the chronological order of events, after considering it appropriate to enter into the relevant agreements, it is necessary to carry out the corresponding verifications before proceeding to sign documents which will set out the conditions for transactions to purchase a property. Currently a considerable number of real estate transactions take place in Panama, a significant number of which initiate with the signing of Promise to Purchase Agreements, also known as Deposit agreements, or Options to Purchase in other jurisdictions.
These kinds of agreements usually establish special clauses that are often not included in the final Purchase and Sale Agreements or Bills of Sale as their principal purpose is to guarantee on behalf of the promissory seller, property owner or its developer, as well the promissory buyer, that there is an intent to buy or sell, as the case may be, and a list should be drafted indicating minimum conditions required, such as price, settlement of down payments, property delivery date, final Purchase and Sale Agreement terms, delivery date extensions, description of the property being sold, its dimensions and characteristics as well a termination clause under which the agreement may be terminated by the promissory buyer or the promissory seller, with the consequence as provided for in the agreement.
It is important to stress that the Promise to Purchase Agreement is not mandatory prior to purchasing a property, that is, you are not required to sign an agreement of this nature in all cases, but it is mentioned as it constitutes a common practice in the real estate sector, almost a must.
After negotiating the terms of your Promise to Purchase Agreement and notifying the property owner of the date of completion of the construction project, whether same is a story, apartment, villa, house, office or the like, at certain point you will need to pay the property purchase price or at least deliver a bank letter that guarantees the seller that the price will be irrevocably settled by a given bank, usually a local banking institution. This shall be applicable when you prefer to make the final payment by such means, as you may also make direct payments to the seller or developer without the intermediation of a local bank or simply because it was not necessary to secure funding to purchase the property.
The acquisition will be completed when in your capacity as a purchaser, either directly or using a legal form to that end, as I will further explain below, you subscribe together with the seller the Bill of sale whereby a Panamanian Notary Public shall attest to the negotiation carried out before him/her, by which one party transfers to the other property ownership, with particular characteristics and restrictions that may exist, and this Bill of Sale shall be presented to the Public Registry for registration. It should be noted that Panamanian civil law puts the burden of responsibility on the seller to respond to the buyer for legal and peaceful possession of the property for sale and possible latent or hidden defects, but this topic shall be covered in another publication.
What Taxes are Applicable?
In relation to taxes applicable to property transfer, the Panamanian tax law stipulates the obligation to pay two taxes relating to property sale. The first one is a transfer tax, which represents two percent (2%) of the sales value, and the second tax is for profit obtained from the sale, ten percent (10%) of the difference between the property acquisition amount and that of its sale value. Nevertheless, as regards the latter tax, in accordance with current tax law, the seller is required to pay an amount equal to three percent (3%) of the total sale value or that of the immovable property, whichever is higher, as an advance Income Tax payment, this three percent (3%) of the total sale value applied as the final income tax amount payable on profit. Where this three percent (3%) of advance tax payment exceeds the amount resulting from applying the ten percent (10%) rate on profit from sale, the seller may file an affidavit indicating the payment made. The surplus, at the seller’s request, may be refunded in cash or as a tax credit for payment of taxes imposed by the Directorate General of Revenue.
Both taxes are the responsibility of the seller and shall be paid prior to signing a Bill of Sale.
Once the property has been registered at the Public Registry in favour of the purchaser, same will be responsible for the annual payment of such property tax, which is calculated based on the property value. In some cases it is possible to obtain a temporary waiver of the property tax by reason of special laws that grant this tax benefit.
Forms of Property Ownership
In Panama, as in other countries of the region, there are some common forms of property ownership organized as horizontal property, i.e., apartments, stories, offices and apartment and residential complexes, among others, as well as those known as sole ownership property, which are nothing but property not subject to any joint ownership regulation and they usually include houses, farms, ranches, etc.
The State grants possessory rights to individuals in areas near the sea on plots of land that do not have land titles registered at the Public Registry. This is an example of situations that may also be found in Panama, and although these are not proper forms of property ownership, it is worth mentioning same, as when trying to acquire immovable property that are affected by such specific conditions, one should consider making evaluations to foresee situations that could arise in the future.
Immovable Property Guarantees
Originated by the growing demand for property in Panama over the past two decades, some laws have been enacted to modernize institutions that guarantee such assets and the authorities have also responded in defense of consumer rights when there has been the need to do so.
For example, Panama has introduced and strengthened regulations relating to the obligations of providers of new residential buildings, lots of land with or without basic services, urban or rural, as well as immovable property in general, who must establish, clearly and in writing, the terms and conditions of the work guarantee. If there are various coverage guarantees, these must be properly listed. In practice, developers of real estate projects offer one year guarantee on construction defects that do not involve ruin, which I will explain below.
Moreover, by law it has been determined that advertisement of new residential constructions is an integral part of a sales agreement signed between the seller and the purchaser and that announcements appearing on flyers, pamphlets, books or any other means distributed by the seller are binding on the seller and enforceable by the purchaser.
Promise to Purchase Agreements and Sale and Purchase Agreements of new constructions of lots of land, with or without basic services, urban or rural, and of movable property in general, must include the date of transfer or agreed upon for the transfer.
In the event of nonfulfillment of the term agreed upon to transfer a property for reasons not ascribed to the seller, such as weather factors and material shortages, among others, explanation shall be provided in writing as to why the property transfer was not made on the date agreed upon. In case of failure to comply with the tern agreed upon, the purchaser may terminate the agreement, and the total amounts paid shall be refunded with no penalty whatsoever.
Likewise, it is mandatory that agreements express the total amounts payable, and situations requiring price adjustments due to increase in costs of the building materials.
It is also the buyer’s right to request proportional price reductions for new constructions, when their conditions or final specifications have varied substantially from those previously established in the relevant agreement.
In addition to these provisions, an old civil statue with contents identical to those of the Spanish Civil Code of 1889 are still in effect in Panama, which states that the contractor of a ruined building as a result of construction defects shall be liable for damages if such ruin occurs within ten years of the conclusion of the work. On this particular issue, Panamanian courts, emulating Spanish court decisions, have adopted a position relating to the extent of responsibility for claims in cases of ruin or destruction of property, by which liability falls not only to the developer of same, but also to the promoter, owner or seller of the immovable property.
Recording Systems and Public Trust: Legal Certainty
In Panama the Property Registry is centralized in one government office called Public Registry of Panama, which has been functioning since 1913 after the evolution of institutions that existed before that period. The Public Registry, in addition to recording property titles, their history, liens and all their charges, entries related to companies, ships, aircraft, mortgages, powers of attorney, among other acts, that are subject to registration are also made. Traditionally entries were done at the Public Registry for properties through a system that used the extract of information contained in the Bill of Sale which was transcribed in large books called Property Volumes. With the passage of time, modern mechanisms were adopted such as microfilming of the information contained in the public deeds until adopting the current system under which all information submitted to this institution is digitally recorded, while always preserving chronological order of events and legal certainty as expected by users.
Since its creation, the Public Registry has been a cornerstone in the history of the Republic of Panama, as it is guided by principles such as legality, publicity, priority, chain of title, legitimacy and public trust.
As mentioned before, in regard to registration of land titles, its amendments, liens, and other acts, notaries public and legal practitioners, the latter who have been granted authority by the central government, play a major role, and as expressly provided for in the civil law, public trust has been bestowed upon them as regards acts performed and agreements executed by same. All purchase of immovable property shall be carried out before a notary public to subsequently be presented at the Public Registry for the corresponding registration.
Who can be the Purchaser? Is it More Convenient to use a Company to Purchase a Property?
Dear reader of this article, you may be the purchaser of real property in Panama whether directly on your own behalf or through your foreign company or what is even better, using a Panamanian corporation or foundation created for this purpose, which is ideal and what is usually done. A foreign national may acquire real property in Panama encountering no objection whatsoever, but there are some drawbacks that can be avoided by acquiring immovable property using legal entities or companies for that purpose.
If you are considering purchasing immovable property in Panama, be sure to check with your local attorney the benefits of doing so through a company which has been incorporated under the laws of this country. However, I wish to indicate that some of the advantages include following: the asset will be protected and separated from the other assets you own, a particularity resulting from being subject to company property right; you may dispose of the property through the transfer of the company’s shares owed by you or you may resort to joint ownership whereby other persons shall subscribe the portion of capital representing the proportion of the property acquired without having to divide same; you may order disposal of your assets and limit liability to third parties.
Taking a few minutes to discuss the best way to acquire an asset will lead you to carry out proper, transparent and convenient transactions, provided that you obtain adequate advice from experts who can assist in outlining a structure that will best suit your needs.
If you choose to use a Panamanian Corporation, What Kinds of Companies are Available in Panama?
Among the companies available, we may mention corporations, limited liability companies, limited partnerships and general partnerships. The first two, are most widely known and used.
A corporation widely used internationally is the ideal corporate vehicle for complex or simple business activities, local or foreign, as well as mere possession of assets, as is the case with immovable property
Mossack Fonseca & Co. professionals specialize in Commercial Law, Trust Services, Investment Advisory and International Structures. Mossack Fonseca & Co. has been a leader in the industry since 1977 and it has 47 offices worldwide.