INVESTMENT AND CAPITAL INCENTIVES

To lure United States operations into the Republic, Panama also offers extensive tax and other investment incentives. Under the Investment Incentives Act of 1970, industries located in Panama that produce manufactured goods for the domestic market may be granted income tax exemption on the excess of 20% of profits reinvested in fixed assets for expansion of plant capacity or production of new products. These above qualifying companies also may take 12.5% of annual depreciation of the value of equipment minus residual values, or at a fixed percentage of the declining balance. A company qualifying as above also may deduct from income tax an amount equal to 10% of salaries of non-administrative personnel and 50% of the cost of utilities for industries located in eight designated areas of the interior of Panama.

A revised Incentives Act passed in 1986 also grants industries located in Panama and producing manufactured goods for the domestic market a five-year 100% exemption from import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process. Partial exemption also may be granted on import duties and similar fees on imports of machinery, equipment and parts to be used directly for the production process. Partial exemption also may be granted on import duties and fees on raw materials and semi-processed products including containers and packages, as well as lubricants and fuels not available locally in sufficient quality or quantity or at competitive prices. Under Law No. 3 of 1986, enterprises located in any of the 12 designated districts in the interior of the country and which produce goods for domestic consumption are exempt from income tax for the first five years and pay 50% of the tax for the next three years on income from local sales. The exemption is 100% on income from buildings and land owned.

Manufacturing companies in Panama's Colon Free Zone that produce for export may be granted 100% tax exemption from income, export, sales and capital taxes for five years and are subject to the reduced rates of 2.5% to 8.5% on export income earned in the Zone after the tax holiday expires. An enterprise that exports a portion of its production receives the same benefits as a firm exporting its total production on a pro rata basis. A foreign company operating in Panama that is liable to taxes on its Panamanian income in the country of its parent corporation may opt to pay the income tax liability to Panama and qualify for a preferential loan equal to the amount repayable in five years at half the going rate of interest.

Moreover, manufacturing companies that produce for export may be granted for the duration of the contract 100% exemption from import duties and similar charges on imports of machinery, equipment and parts, raw materials, semi-processed products, and other materials including containers and packages, fuels and lubricants. All of the above exemptions are for periods of up to 15 years, with the exception of those in eight priority development areas, which are granted 20 years exemption. Under Decree No. 5 of January 19, 1979, companies engaged in assembly operations are exempted from income tax if a specific amount of Panamanian labor is employed. Companies established under Decree No. 5 of January 19, 1979 to engage in assembly operations are liable to 3% of the exempt taxes on imported machinery and equipment. During the term of the contract the company is entitled to a 10% exemption of import duties on the import of machinery, equipment, spare parts, raw material, oil and lubricants used in the assembly operations.

Under the legislation passed in 1986, it is no longer necessary for investors to sign a "Contract with the Nation" approved by the Ministry of Commerce and Industry. Instead, investors register in the National Industry Official Registry maintained by the Ministry paying a 10 balboa ($10) registration fee, valid for ten to fifteen years depending upon the district in which ventures are planned and an annual 50 balboa ($50) fee. In addition, an industrial company that receives a five-year income tax holiday is entitled to the exemption from the profits tax on exports, customs duties exemptions on machinery, equipment and spare parts, and special reduced depreciation rates.

In addition to substantial investment of Panamanian private capital, Hong Kong, Taiwanese, South Korean, and Japanese businesses are exploring Panama as a location for the development of light industries, tourism, and marine activity.

Relief for Shipping Operations

Since the end of World War II, Panama had become a haven for American ship owners seeking relief from the high taxes and wage rates which prevail in the United States and other countries of the world. Panama has one of the largest number of vessels registered of any country in the world and has progressed from second on the list to first in total tonnage. Shipping activities account for 20% of Panama's gross national product. Inasmuch as shipper's earnings are derived in great measure from outside of Panama, they are not subject to Panamanian taxes. In addition, since Panama grants the equivalent exemption to United States flagships, earnings derived from the operations of foreign corporations' ships registered in Panama are exempt from United States tax. New registrations under Panama's ship registry have been helped by the substantial improvement in the safety record of the fleet. Virtually all categories of casualties show improvement including incidence of collisions, fires explosions and those caused by mechanical problems. More than one-third of Panamanian ships are now inspected annually. In 1994 Panama introduced the certification procedures used by Lloyd's Register and by 1998 all tankers, bulk ships, passenger liners, 500 gross ton cargo ships and gas carriers will have to rate approval under the scheme. Other cargo ships and drilling units over 500 gross tons have until 2002 to meet the new standards. To be certified, shipping firms will have to create and continuously implement plans that safeguard the environment, ensure general safety and develop safe shipping training programs for ship workers and onshore employees.

In a many-faceted endeavor to build a better reputation for its registry, the Government has raised the number of ports where inspection is available from 270 to 350, and is checking registration applications more carefully while conceding that it may remain difficult to trace "ghost" owners. Fraud and bribery are being eliminated in the issuance of officers' certificates and new examinations are being devised for officers who are allowed to sail without a certificate on some ships of less than 200 gross tons. Some ship owners had been attracted by Panama's willingness to allow ship owners to use the Panamanian registry but fly the flags of other nations for a period of up to two years. By chartering a vessel to a company maintaining an office in a different country, the ship owner can take advantage of the latter country's import maintaining an office in a different country, the ship owner can take advantage of the latter country's import and export incentive programs when they are available only to national-flag shipping. The Panamanian registry lists over 12,000 ships with a combined tonnage of 70 million gross tons, which places Panama first and second worldwide, respectively, in these categories. Total tonnage of merchant ships of more than 1,000 tons exceeds 30 million tons. The registry has more than 3,000 Japanese ships. However, a few of them have shifted to the Marshall Islands registry which in 1990 started offering freedom from income, asset and withholding taxes to foreign maritime entities. The Pacific archipelago with many Japanese-speaking residents is being marketed as a ship registration site for Pacific Rim ship owners, particularly Japanese, who heretofore have favored the Panamanian registry. Panamanian vessels carry 16% of world trade.

Ship Registration Fees

Registration of vessels, which may be done by Panamanian attorneys or management servicing companies, is subject to a tax computed on the basis of $1 per net ton up to a tonnage of 100,000 tons with a minimum of $250. For tonnage exceeding 100,000, the charge is $0.50 per net ton while the rate is $0.20 per net ton for tonnage exceeding 500,000 tons. If several vessels belonging to the same owners or the same group of companies are registered at the same time, the tonnage of the various vessels may be added together and the sliding scale of rates applied. The annual tax is $0.10 per net ton and other fixed charges are approximately $700. The fee for the registration of the bill of sale, computed on the basis of $0.20 per net ton, plus a 20% surcharge, is based on the above rates. There also is an annual service charge, in lieu of consular service charges, payable by all vessels, ranging from $750 to $2,300, and an inspection fee costing from $300 to $800, plus small certificate fees of from $5 to $80. Consular services are available in most major ports around the world. Offices are able to temporarily register ship ownership under the Panamanian Ship Registry within 24 hours, giving owners six months to present all the documents in Panama. Under this system, mortgage holders may also establish their claims on ships through worldwide Panamanian consul offices. Shipping income derived by Panamanian flagships are subject to a 6% withholding tax while representative offices must withhold 5% of expenses of public companies.

Discounts and Incentives

In an effort to lure ship owners to the Panama registry, especially from Liberia, the Panamanian Government has adopted a set of incentives of reduced fees and discounts. All ships registering in Panama may prorate the tonnage tax rather than pay the full 12-month fee at the outset. Discounts are available to ship owners registering more than one ship a special incentive are being offered on a case-by-case basis to owners of large fleets. Provisional registration is permitted for vessels of foreign registry or under construction. A two-year bareboat charter registration also is available for foreign vessels if a Consent Certificate is obtained under a reciprocity agreement now in effect with Mexico, the Philippines, Nigeria, Turkey, Kuwait, Brazil, Peru and several European countries.

In view of the Colon Free Zone's tradition as a great shipping center, the importance of another exclusion to current United States taxation under the foreign based company income rules cannot be underestimated as a boost to Panamanian shipping at one time. Under the Revenue Act of 1962, foreign based company income did not include income derived from, or in connection with, the use, hiring, or leasing for use of any vessel (or aircraft) in foreign commerce, or the performance of services directly related to the use of any such vessel or aircraft. However, this was revised under the Tax Reform Act of 1986, which eliminated the inclusion of reinvested shipping income as qualifying for exemption under Subpart F income. Previously, other shipping income had been disqualified from the exclusion.

In September 1992 the Government created a National Council for the Development of the Maritime Sector whose function is to facilitate the advancement of the industry in Panama.

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