Free Trade Zones (FTZ) like Panama’s, have been said to be part of a unified and uncomplicated system that promote the establishment and operation of companies.
The said companies contribute to a country’s economical growth, the inclusion into the global economy of goods and services via the promotion of investment opportunities, and the economic, scientific, technological, cultural, educational and social growth.
But again, “What are free trade zones? Why are they a necessity for national economic growth? What are the requirements (rules) for engagement? etc.
This read will address all these inquiries, specifically using the Panama Free Trade Zone as a case study.
What are free trade zones?
I simply explain a free zone as an area in which goods can be obtained and stored without payment of duty.
Free Trade Zones are part of a special, comprehensive and simplified regime for the establishment and operation of companies that contribute to national development and the generation of employment and foreign exchange, incorporated into the global economy of goods and services, promoting investment and promote economic, scientific, technological, cultural, educational and social development.
What is Colon Free Zone?
The Colón Free Trade Zone is a free port in Panama dedicated to the re-export to Latin America and the Caribbean of a broad range of merchandise.
According to Business Panama Group, the Colon Free Zone is known as the World’s second-largest Free Trade Zones and considered as Panama’s duty-free heaven. With over 3000 companies either represented or operating on its complex of more than 1065 acres, and a massive turnover of US$19 billion per year of imports and exports move in and out.
Everything from the newest electronics from Japan, silks from Italy, designer perfumes from France, clothing, jewellery, computers, appliances and every other thing that can be produced from around the world, all at bargain-basementn prices, you can find it at the CFZ straight from the factory, could it get any better?
It has been noted that LatAm and Caribbean buyers prefer to buy at the CFZ instead of travelling to Asia. In the CFZ, buyers can get containers filled with a variety of items. In some Asian countries, they would likely have to buy containers filled with one product. For this and a plethora of other reasons, the CFZ is considered a shopping heaven for buyers and wholesalers across the Americas.
How do free zones work?
Free zone optimize the movement of goods between individual countries in the zone and provides an opportunity for imports from third countries to be secured or disallowed.
The most important kinds of free trade zones are; Free zones, Freeport zones and export processing zones.
Why Panama’s Free Trade Zone?
Panama’s strategic location makes it the best destination in America to export and import products. It is situated between North and South America, bordered by the Caribbean Sea and the Pacific Ocean. A majority of Panama’s trade transactions are carried out in the Colón Free Trade Zone, which is one of the biggest free trade zones in the world.
The Panamanian Government has granted a total of 16 licenses to operate Free Trade Zones, between the cities of Panama and Colon. 12 (Twelve) of these Free Zones in the operative, however, 2 (two) are most prominent;
- Colon Free Zone and
- Panama Pacifico Area
While the Colon free zone offers investors several benefits including; 100% exemption from all national and provincial taxes and the option of using the leaseback system. The key tax exemptions being on import and export duties, as well as on corporate taxes;
Panama Pacifico Area offers varied benefits which range from; exemption from all indirect taxes, increase in the maximum number of foreign employees to 15% of the workforce and availability of 5-year investor visas, rather than the usual 2 years available elsewhere
Panama Free Zones
Let’s take a look at some of the active free zones of Panama;
1. Colon Free Zone (CFZ)
Created in June 1948, the Colon Free Zone has served for more than 69 years as the major trading center for Latin America and the Caribbean. Its operations began in a segregated area of 35 hectares originally in Colon Downtown and with 10 companies.
However, the said free trade zone is currently divided into 9 different sectors totaling 1,064 hectares for exhibition with more than 1,800 companies.
The Colon Free Trade Zone is the premier free trade zone in the western hemisphere and was created in 1948. Located a few kilometres from the Panama Canal in the Caribbean sector in the Colon Province, CFZ is the 2nd largest in the world behind Hong Kong’s.
More than 1,800 companies involved with the exporting and importing industry having warehouses, factories, and re-package various products operate within the CFZ. Also, a semi-independent governmental agency administers the Colon Free Trade Zone granting operational permits and leasing space.
The Colon Free Zone is made of port and transit systems designed for exports, re-exports, imports, manufacturing, warehouses, refining and processing goods, and other activities related to free zones.
To be located in the Colon Free Trade Zone requires companies having a minimum of 60% of the imported products to be exported annually and hiring five Panamanians.
Colon Free Zone Benefits
- No import duties
- Only a 5% dividend tax
- Zero tax on income derived from export activities, and
- Zero tariffs and quotas on imports and exports to foreign countries
2. The Panama Pacifico Special Economic Zone
The Panama Pacifico Area is one of the most important projects of the Panamanian Government that develops an international trade hub and attracts large multinational companies, logistics services, commerce and industry. The main objective of this Special Economic Area is the attraction of new direct foreign investment and the creation of jobs in Panama.
The Panama Pacifico Special Economic Zone is being constructed on a 1,390hectare site with an 8,400-foot runway jet airfield. When completed it will be a small city including bank offices, corporate offices, call centres, high tech products and manufacturing, logistics services, offshore services, aircraft maintenance and repair services, film industry, transferring goods and services to ships and aeroplanes, and exporting goods.
Qualifications for location within the Panama Pacifico require being engaged in one of these industries:
- Call centers,
- Offshore services,
- Back office services,
- Multimodal & logistics services,
- Data & digital transmission,
- Maritime services,
- Aviation services,
- High tech manufacturing & assembly.
Companies wishing to operate inside this economic area must apply with London & Regional Panama and with the government agency Panama Pacifico Agency.
Panama Pacifico Developers
London & Regional Panama (LRP) merges two companies: Latin America’s Southstone Investment Company with London & Regional Properties (L&R) and. L&R brings vast real estate knowledge on a distinguished level, as developer, manager, and owner of nearly $21 Billion USD in worldwide real properties on 5 continents. Southstone combines Latin American cultural insight, experience, and economic support.
The former U.S. Howard Air Force Base is being developed into a Special Economic Zone for multi-national corporations and high technology companies. There are over 125 multi-national companies now established there, with 50 more coming in 2012.
LRP has a Master Plan including the latest trends in green buildings, fiber-optic networks, and walk able neighborhood designs. The developer’s vision includes:
“Enter a new world that forms a bridge between tradition and innovation, country breathing space and big-city accessibility, private funding and government support. A true master-planned community that brings together people of all ages to live, work and play. A haven of residences with a vivacious mix of strolling neighbourhoods and chic homes. A global enterprise offering unprecedented business advantages. All set within a sustainable landscape linked by parks and trails.”
Panama Pacifico offers a new way of life that’s all about connectivity. Unlike any other destination in Latin America.
Once a U.S. Air Force Base, the majority of Panama Pacifico’s infrastructure was already established. Panama Pacifico benefits by being connected to Panama’s leading public works suppliers operating out of the Panama Canal. From potable water works, premier electrical connections to state-of-the-art high tech capabilities from 5 key submarine telecommunications spheres and excellent roads, Panama Pacifico’s excellent infrastructure accommodates present and future generations.
Panama Pacifico already has an onsite shuttle bus system. The new Transportation Demand Management system began in 2012, with commuter buses for onsite employees
The entire infrastructure system will be underground preserving the community’s natural views and character.
Panama Pacifico Tax Benefits
- Import duties,
- Income taxes,
- Stamp tax,
- International phone call tax,
- Remittance tax,
- Dividend taxes,
- Sales Tax (ITBMS),
- Real Estate Transfer Tax,
- Real Estate Property Tax,
- Licensing Tax, an
- Export/Re-Export Tax.
- There are also tax exemptions for transferring services and goods between the ports, to petroleum free zones, to ships and passengers, to other companies, to the London & Regional Panama Company, and government agencies located in Panama Pacifico
- Tax benefits will have a 10 year consistency.
- Labor laws regarding working hours, Sunday & holiday pay, and the right to negotiate different days of rest and vacations with employees are relaxed.
- Companies will also have more immigration visas and work permits for foreign workers.
The Panama Pacifico Special Economic Zone also provides Panama Immigration benefits including easy application and issuance of the following visas:
- One-stop shop immigration office to handle all visas and work permits;
- Family Visas, which extends to financially dependent parents and spouse;
- 3 to 5-year special visas for investors and labourers;
- Tax-free importation of personal effects up to $100,000
In addition, the Panama Pacifico Special Economic Zone offers Labor Incentives such as:
- Fixed rates for holidays (50%) and overtime (25%).
- Flexibility by allowing companies to be open on Sundays and holidays, with assigning employees holidays, and greater percentage of foreign workers.
- More flexibility to fire employees for just cause or market fluctuations.
3. City of Knowledge
The former U.S. Army Base of Fort Clayton has been converted into the Ciudad del Saber (City of Knowledge) containing high tech companies providing services to international governments, international research, educational, science research centers, universities, and business and non-government organizations. The not for profit City of Knowledge Foundation administers this complex.
The City of Knowledge (Ciudad del Saber) Special Economic Zone is a scientific, technological and entrepreneurial park. The types of businesses allowed include scientific, technological, human development, and cultural.
City of Knowledge Tax Benefits
- Import duties exemptions for all vehicles, equipment, machinery, furniture, and any company operations materials;
- Income tax exemptions;
- Exemption from sales taxes on all equipment and goods necessary for company operations;
- Property transfer tax exemption; and
- Quota exceptions for immigration visas and work permits for highly skilled foreign workers including their immediate family members’ immigration visas who relocate to Panama.
Tax Free Zone Investor Visas
The Panama Tax Free Processing Zone Investor Program allows foreign investors and their families to relocate to Panama and obtain Panama residency by renting a plot of land, office, or an entire building with at least a 10 years lease within one of Panama’s Tax-Free Zones. The purpose of the business varies for each free zone.
Panama immigration laws favour foreign investors who can generate business from Panama to the rest of the world. There are distinct tax advantages for foreigners who can operate manufacturing plants, assembly plants, call centres, software creation facilities, and other businesses which can export their products or services. These businesses also get a substantial tax break when selling a certain percentage of their products or services locally.
What are the Comparisons between f different Panama FTZs
|Free zone comparison||Colon Free Zone||Panama Pacifico Area|
|FTZs used mostly for what purpose?||Wholesale Trade||Logistics|
|Average annual Industrial space rent per 1000 sq. m.||US$15,000||US$12,000|
|How long to set the company up?||2 months||2 months|
|How long to open company bank account?||3 weeks||3 weeks|
|Quality of Utilities||Good||Good|
|Allowed to sign sales contracts with local Clients?||Yes||Yes|
|Allowed to invoice local Clients?||Yes||Yes|
|Corporate tax payable in Panama||0%||25%|
|Corporate bank account||HSBC||Citibank|
|Physical office space required||Yes||Yes|
|Allowed to import raw materials?||Yes||Yes|
|Allowed to export goods?||Yes||Yes|
|Can be wholly foreign owned||Yes||Yes|
|Can the entity hire expatriate staff in Panama?||Yes||Yes|
|Minimum number of directors||3||3|
|Minimum number of shareholders||1||1|
|Individual shareholders allowed||Yes||Yes|
|Corporate shareholders allowed||Yes||Yes|
|Corporate director(s) allowed||No||No|
|Public register of shareholders and directors||No||No|
|LLC company allowed?||Yes||Yes|
|Annual audited financial statements||Yes||Yes|
It is our hope, that the information provided here will enable you make informed decisions about which Free Trade Zones to take into consideration in your international business relations.
You should really consider Panama’s Free Trade Zones, they hold a plethora of laudable incentives.