Property Investing in Panama

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SUMMARY : Panama City is one of the world's least expensive first-world cities. It is also among the most modern and prosperous cities in Latin America with over 3 million people. The city's array of tall skyscrapers is reminiscent of Miami. It boasts incredible shopping where almost any product from the U.S. may be easily found. During the past several years Panama has been consistently rated in the top ten for the best retirement locations worldwide. A welcoming community, safe environment, low crime statistics, excellent incentives for retirees, together with the natural beauty and ethnic diversity that is Panama, all appeal to the increasing number of baby boomers from North America and Europe who are looking for a different option for retirement.

Currency:   (USD) Dollar

US Dollar: A global benchmark currency. Little or no exchange rate parity fluctuation against Middle East currencies. The cost of living is significantly lower than that of Western Europe.

Economic climate: The trend towards an open economy and possible trade pacts with such nations as the U.S. and Mexico are conducive to investment in Panama. There are also no government expropriation or interference as in many Latin American countries. A business-oriented government encourages foreign investment. A government that realizes the value of private business to a developing country backs all investment. In 1946 Panama's business-oriented mentality led to the creation of the Colon Duty Free Zone, considered to be the second largest free trade center in the world, after Hong Kong. In addition, the Panamanian government offers foreigners who invest in Panama many attractive incentives such as legal residency and tax privileges.

Capital Gains tax: Since the enactment of Law 8 of 1956, successive legislation has been passed offering tax benefits to developers. It has been widely accepted that, as a result of these incentives purchasers of real property have also benefitted. This tax is applicable if there is a capital gain. This tax is also regulated by Article 701 and applied at a flat 10% rate, whether a corporation or an individual is acting as a seller, on the gain resulting from the price of the sale minus the price of the acquisition by seller, as well as registration, notary and real estate agent expenses. If there is no capital gain on the transfer of a property, the 2% transfer tax, is also paid in advance for the sale, levied on the difference between the price of the sale or an appraised value increased at a 5% yearly rate (whichever is higher) and the price of acquisition by the seller.

Popular investment areas: Panama City has become a cosmopolitan modern metropolis - there are many raise buildings overlooking the ocean and the Bay of Panama. Exclusive residential areas like Marbella, Paitilla, Coco del Mar, Punta Pacifica and San Francisco offer a good range of apartments and condominiums for sale. Suburban residential areas in the former Canal Zone like Amador Heights, Balboa, Albrook and Clayton offer large and attractive single-family homes and condominiums. Casco Viejo -- the oldest city on the Pacific Coast of the Americas -- has become a desirable place for real estate investment, encouraged by the Panamanian government Casco Viejo investment incentives for the restoration of the historic Casco Viejo district. Outside Panama City, there are beautiful real estate properties located in popular destinations including, Chiriqui, El Valle, and Altos de Maria. Known mostly for their cooler climates, incredible flora and quiet peaceful atmosphere, real estate in the highlands of Panama are ideal for those interested in retiring abroad. Bocas del Toro is another popular destination for Panama real estate. Most known for its crystal clear waters, rich Antillean culture, unique over-the-water architecture and laidback tropical atmosphere. In recent times, Bocas del Toro has become a booming center for European and American Expats, as well as an impressive number of tourists. Several of these destinations are also considered Tourism Development Zones, where additional tax benefits are granted to investors in hotel projects. Real Estate Values in Panama and primarily in these Pacific Coast Beach areas has been appreciating very steadily, and as interest and growth increases so to do the real estate values.

Price ranges: The Panamanian government incentives for the restoration of the historic Casco Viejo district encourage investment here, this area reminiscent of New Orleans or SoHo years ago abounds with shells of graceful buildings that are crying out for renovation. Outside of Panama City excellent real estate properties are available for developers and individuals. The more remote the location the more reasonable the cost but be aware that you may be far from utilities or roads. The real estate in Bocas del Toro offers beautiful Caribbean beach property. Here palm-fringed golden sands surround the islands and turquoise waters where the rain forest meets the ocean. Here families shop by boat, enjoy water sports and the natural beauty of this wonderful location - better yet it is still affordable.

Budgetary guide: Prices  per square meter in Panama vary according to the location (city, mountain, beach).  In the city, you may find prices starting 1000$ per square meter in a new condominium.  In the mountain, the price may drop down to 20$...yes this is not typo however in those cases you might want to research the access possibilities to this property.  Many areas in the mountains have no road of access and local transportation might not be available.  In the beach, prices depend on the zone.  An hour away from the capital prices start at 600$ per square meter depending on the quality of the beach and neighborhood.

Service Fees: Fees charged by the Public Notary and the Public Registry which total in the range of $200 to $300 for registering a buy/sell contract for the sale of real estate in Panama.The closing costs vary depending on the particular transaction. For example, if the property is held in the sellers personal name, and the buyer is transferring the property title to a Panamanian corporation (most recommended), then the closing costs would include; (1) the legal property transaction fee of US$1200 (includes; title search, buy/sell contract, closing, & property title transfer service), (2) public registry title transfer fees of approx. US$2.50 per every US$1,000 of the sales price and – if applicable - the mortgage amount, (3) escrow fees from 0.5% to 1% of the transaction amount (vary depending on amount of transaction), and (4) incorporation fee of US$1000 to setup the Panama corporation. However, if the property is held by a Panama corporation already, and the buyer is purchasing the shares of the corporation, then the transaction is relatively simple because there is no registration of title transfer, meaning that there is no title transfer tax, and no public registry title transfer fees. In this case, the closing costs would include; (1) the legal property transaction fee (includes; title search, review of tax liabilities, purchase of shares contract, and closing for US$800), (2) change of directors / resident agent of the corporation (approx. $350), and (3) escrow fees from 0.5% to 1% of the transaction amount (vary depending on amount of transaction).The notary and public registry costs total up to approximately $200 to $300 depending on the particular transaction. Title transfer taxes are by law paid by the seller. Escrow fees (if an escrow company is used), are normally paid by the buyer, and range from one half of one percent (0.5%) up to one percent (1%) of the transaction.

Mortgages: Between 60% - 70% of the purchase price or appraised market value, whichever is the lesser. Interest Rate from 5.5% to 6.5%, plus FECI tax of 1% per year.

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For more information go to:
www.slampanama.com
www.pensionadovisa.com
www.strategicpointconsulting.com

What foreign investors should know when buying property in the US

Property managers with foreign investor clients (what you should know).
By Mullin, Kevin J.
Publication: Journal of Property Management
Date: Wednesday, July 1 1998

Unless a tax treaty exists between the U.S. and a specific country, foreign owners, including estates, corporations, nonresident aliens, and partnerships, pay a flat 30 percent withholding tax on the rents produced by their U.S. real estate investments. This tax applies unless foreigners' investments are connected with a U.S. trade or business or the foreign owner has made an election with the Internal Revenue Service to be taxed on a net basis. (Having rental income taxed on a net basis after deductions for costs or operations, maintenance, and carrying charges usually results in a lower overall tax for the foreign owner.) On the other hand, U.S. citizens and residents, both individuals and corporations, are not subject to this withholding tax.

This 30-percent withholding tax is calculated on the gross amount of the rents generated by the property without allowable deductions for interest, depreciation, repairs, management and association fees, insurance, real estate taxes, or other expenses of owning and operating the property.

Managers as Agents

Since the IRS has no jurisdiction to collect this tax against a person residing in a foreign jurisdiction, the law generally designates the U.S. person who has the last contact with the money before it leaves the U.S. as a "withholding agent." The withholding agent is charged with the responsibility for paying over the 30-percent withholding directly to the IRS. Failure to do so can result in the withholding agent being personally liable for payment of the tax, plus interest and penalties.

For rental real estate, the withholding agent is typically the property management company that collects the rent from the tenants, pays the expenses of owning and operating the property, and remits the balance to the owner. Unfortunately, the property management company is often blissfully ignorant of the implications and potential for liability that the designation of withholding agent brings under law.

Avoiding the Withholding Tax: Foreign Owners

Because of this potential tax liability, the property manager needs to know with certainty whether its foreign client is subject to the withholding tax or whether the client is exempt from withholding. For the foreign investor, there are two ways to qualify for an exemption from the withholding tax and, instead, pay its fair share of income tax on a net basis after deductions.


Trade or Business. The first way a foreign person can achieve exemption from the withholding tax and be taxed on a net basis is to qualify its real estate operations as being "engaged in a U.S. trade or business." Unfortunately, there is no hard and fast rule for determining when a foreign investor's real estate operations rise to the level of a U.S. trade or business. Instead, the legal test is based on the nature and extent of the foreign investor's activities in the U.S., which leaves the foreign investor looking to various court cases for guidance.

Resolution of one's status as not being engaged in a U.S. trade or business (and thus, subject to withholding taxes) under these cases can be fairly determined if the foreign person's activities are very limited, such as owning one rental property leased on a triple-net basis. Moreover, it is fairly dear from the court cases that a foreign investor will be considered to be engaged in a U.S. trade or business if the foreign investor's activities are considerable, regular, and continuous with regard to his or her properties. For example, owning several properties and being involved directly (or through an agent) in lease negotiations, maintenance and repairs, collection of rents, payment of operating expenses, and performing record keeping, would almost certainly qualify a foreign owner for this classification. However, should a foreign investor's activities fall within these two extremes, it may be difficult to gauge the character of the investment, which leaves the foreign owner and the property manager to guess.

Net Election. Having to guess how a court will decide on the question of being engaged in a U.S. trade or business can be a hazardous way to operate real estate for both the foreign owner and the property manager. By way of relief, the Internal Revenue Code does allow a foreign corporation or nonresident alien individual to make an affirmative election to be taxed as being engaged in a U.S. trade or business, which takes the uncertainty out of the process. To qualify for the election, the foreign corporation or nonresident alien individual must derive revenue from the U.S. investment. Because the foreign person will not otherwise be able to qualify for the election, investments in nonproductive properties, such as raw land, should be leased to generate some revenue, even if the use is merely interim or temporary. In the case of a nonresident alien individual, the real estate investment must be held for the production of income.

To make the election, the foreign owner merely files a statement with his or her federal tax return that identifies that an election is being made along with a schedule of all the taxpayer's U.S. real properties, their locations, and a description of the improvements on the properties. This election is effective for all qualifying U.S. properties for all subsequent years and can only be revoked with the consent of the IRS.

The foreign investor who makes such an election also needs to file a Form 4224 annually with its property manager, which notifies the property manager
that the foreign owner is exempt from withholding tax for that tax year.

Avoiding Withholding Tax: Property Managers

That the foreign investor can elect to be taxed on a net basis is fine, but how is the property management company to know whether its principal is a foreign owner and whether the foreign client has made such an election to be taxed on a net basis, thus relieving the property manager of the withholding tax obligation? Guessing incorrectly whether one is a withholding agent or whether someone is a foreign owner or relying on a false verbal representation will not relieve a withholding agent from its obligations under the law. The best ways to avoid potential liability are:

* Assume that the property manager is a withholding agent in all cases until the IRS certification forms described below are received proving differently; and,

* Use the IRS certification forms with every client as part of the application process to systematize the approach to this issue. Completion of these forms will provide a "safe harbor" for the property manager even if it should later be determined that the owner falsified the forms and that withholding taxes should have been paid.

Property managers should become familiar with the following IRS certification forms, which need to be received from the client prior to any rental income from the property being realized. The best time to obtain such forms is at the time of management contract signing and thereafter as required.

Statement and Form 1078 (U.S. citizens and residents). U.S. citizens and residents should provide a statement in duplicate to the property manager that they are not foreign persons but citizens or residents of the U.S. No particular form is necessary for this statement, but it needs to be in writing and should be signed by the person making the statement. If the client is a person who is a resident alien of the U.S., the client can complete such a statement or can use Form 1078. No withholding is necessary from clients who complete either the statement or Form 1078, but the property manager is required to transmit the duplicate copy of the statement or Form 1078 to the IRS upon receipt.

W-8 and Form 4224 (foreign persons). Nonresident aliens and other foreign persons should complete and deliver to the property manager Form W-8, which certifies that the person is a foreign person. Completion of Form W-8 will trigger a withholding obligation on the property manager unless the foreign person also delivers a completed Form 4224. Form 4224 certifies that the income received by the property manager is exempt from withholding because it will be taxed on a net basis. Form 4224 must be filed with the withholding agent for each taxable year by the owner of the income and before payment of the income to which it applies. Failure to obtain a Form 4224 from a foreign person who claims exemption from withholding may result in denial of the exemption.

New Certification. Effective January 1, 1999, a new, simpler regime for certification will be implemented. These regulations will combine several existing forms used in connection with withholding including Form 4224 into a single, expanded Form W-8. While the new regulations should make it easier for property managers and their clients to comply, the basic system of withholding on income from real property is not being changed and must still be followed.

Other Issues for Foreigners

When acquiring U.S. real estate, there are good reasons why a foreign person should not take title to U.S. property in his or her own name, but rather should consider using an offshore-U.S. corporate structure. For example, a nonresident alien who takes title to the U.S. real estate in his or her individual name is exposed to the imposition of U.S. estate taxes, which can run as high as 55 percent on the fair market value of the property (determined as of the date of death) with very limited deductions. By comparison, U.S. estate taxes can dwarf the income tax consideration.

For foreign corporations that acquire income-producing U.S. real estate directly, a surtax, the 30-percent branch-profits tax, is imposed on top of the regular U.S. corporate income taxes. Accordingly, foreign corporations and nonresident alien individuals who currently own property in their own names should carefully consider restructuring their real estate investments into an offshore-U.S. corporate structure with the U.S. subsidiary owning the real estate directly. In this way, owners can avoid not only withholding taxes, but also U.S. estate and branch-profits taxes.

In spite of these issues, foreign persons often do take title to U.S. real estate in their own names. Thus, property managers should take precautions and seek competent professional advice so that their foreign clients' problems do not become their own.

This article is for general informational purposes only and no action should be taken or withheld based on the information supplied herein. This material is presented with the understanding that the author and the publisher do not render any legal, accounting, or other professional service. In no event will they be liable for any direct, indirect or consequential damages resulting from the use of this material.

Kevin J. Mullin, J.D., C.P.A., has been practicing law for over 15 years with a focus on advising foreign investors on their U.S. real estate investments and international business and tax planning. Mr. Mullin has offices in Denver, Colo., and Washington, D.C. www.intl-taxlaw.com .    He also maintains representative offices in Latin America and the Middle East to support his professional and client relationships globally.


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