The free zone regime in Panama has been designed as a strategic tool to attract foreign investment, generate jobs and promote the country’s economic development. Through a combination of tax, operational, migratory, and labor benefits, free zones offer a highly competitive environment for companies in various industries.
What is the Free Trade Zone Regime in Panama?
It is a legal system that allows national and foreign companies to establish themselves in designated areas of Panamanian territory – the so-called free zones – to benefit from tax, migratory and labor incentives. These zones are mainly oriented to export, manufacturing, logistics, and technology activities, among others.
What law regulates the establishment of free zones?
The current legal framework is based on Law No. 32 of April 5, 2011, mainly regulated by Executive Decree No. 62 of April 11, 2017.
Currently, there are 16 operational free zones and 7 in the process of development. These are distributed in different provinces of the country, including Panama, Colón, Herrera and Chiriquí. In addition, 146 user companies operating within these areas have been registered.
The legislation provides for three types of licenses:
- Free Trade Zone Promoter License: for those who create and develop a new free zone. Requires a minimum investment of USD 250,000.00
- Free Trade Zone Operator License: for those who manage an already established free zone.
- User Company License: for companies that are established within an existing free zone and carry out activities permitted by law.
What activities are allowed under this regime?
The law currently recognizes 13 types of economic activities . Some of the most relevant are:
- Manufacture of finished and semi-finished products
- Logistics Services
- High-tech and assembly companies
- Business Services
- Higher education institutions
- Environmental Services
- Aviation and airport-related services
- Rental of real estate to companies under the regime
Important: The import of finished products for re-export without any local processing or added value is not permitted. For this type of activity, there is the Colon Free Zone which is regulated by another Law.
Main tax benefits
Companies operating under the free zone regime can benefit from tax incentives, among the main ones are:
- Income Tax Exemption (ISR): for income generated from abroad.
- Exemption from import taxes and tariffs: on raw materials, equipment, machinery, among others.
- Exemption from ITBMS (VAT): on purchases and sales within the free zone or abroad.
- Exemption from property tax, 30 years for developers and 10 years for user companies.
Important considerations
When goods produced in free zones or those introduced into them are imported into the national territory, they shall pay the corresponding taxes for reasons of their importation and shall incur income tax.
When goods produced in a free zone with foreign inputs are introduced into the national territory, they will pay customs duties and taxes only on the value of raw materials and foreign inputs introduced into the product, based on the tariff of the final product.
Additionally, although they enjoy extensive exemptions, these companies must comply with certain tax obligations:
- Dividend Tax: 5% on dividends distributed, regardless of the source of income.
- Complementary Tax: 2% in case dividends are not distributed.
- Annual tax of 1%: on the paid-in capital of the company.
Immigration and work incentives
In addition to the tax benefits, this regime contemplates migratory facilities for investors, executives and foreign workers who move to work in a free zone. Flexibilities are also granted in labor matters that favor the hiring and mobility of personnel.
Conclusion
The free zone regime in Panama represents a great opportunity for companies seeking to establish themselves in a favorable, competitive and foreign trade-oriented environment. Its fiscal, operational, and migratory advantages make it a powerful tool to attract investment and promote the country’s economic growth.
