International Living

An offshore investment hideaway better than Liechtenstein or Switzerland—at a fraction of the cost… and much closer to home

Date: 12/31/2005

By Joel Nagel and Marcell Felipe

When looking for a second home or overseas retirement spot, most people search for a country with a mix of incentives (tax breaks, for example) and a decent infrastructure. The problem is, however, most countries with good infrastructures don’t have favorable tax laws. So you often have to choose one or the other.

But there’s one country that offers the best of both worlds: Panama.

Panama is one of the best places in the world to stash your money… start a business… or retire. It has First World amenities like fine restaurants, world-class shows, banking and financial services, top hotels, and an excellent telecommunications infrastructure. If, on the other hand, you drive a short distance outside Panama City, you’ll find yourself immersed in a wonderland of nature--totally removed from civilization. Furthermore, Panama is a leading offshore banking center.

The country has been used as an "offshore" jurisdiction since 1916, when it enacted a territorial system of taxation. This means that any income derived from sources outside of Panama may be received in Panama free of any taxes. So interest or dividends you earn from sources outside of Panama are not taxable here.

And Panama has long been recognized for its privacy laws, some of the strictest in the world. It’s one of a handful of countries to still allow for the use of numbered accounts—so you can open an account without your name on it.

How to grow (and hide) your money

Although there is also some trust legislation in place, I don’t recommended that you use common-law countries (such as Panama) as trust sites, since there is no guarantee that the IRS will recognize a civil-law trust as valid.

Many of the people I’ve worked with use a combination of a Panamanian corporation and a Belizean (or other common-law jurisdiction) trust. That way, you get the best of both civil-law and common-law tax havens.

Another good possibility in Panama is the use of offshore foundations, combining certain aspects of both corporations and trusts. Only Liechtenstein offers a similar legal animal—but at many times the cost.

An offshore family foundation works much like a U.S. 501(c)(3). The foundation has a board of directors and certain objectives, but, unlike the case with a 501(c)(3), not all of the goals and objectives have to be for charity. Another great reason to look at Panama: the tax-free environment of the Colon Free-Trade Zone (the second-largest of its kind in the world),which allows companies to generate export income from a business in Panama and still be subject to very low tax rates (2 _% to 8 _%).

If you employ a certain number of Panamanians, the rates are even lower. (Minimum wages, by the way, start at 84 cents an hour.) Companies operating in the Colon free-trade zone (FTZ) are exempt from all import duties on machinery, materials, and equipment.

If your company operates in the FTZ, you’re also exempt from sales tax, capital-gains tax (on assets held for at least two years) and local taxes. It gets even better: This aspect of Panama's tax system is complemented by Panama’s designation as a beneficiary under the U.S. Caribbean Basin Initiative, which allows Panamanian exports to enter the United States without any import duties. And the FTZ’s great location between North America and South America and the Panama Canal makes it an ideal international trading center.

Make money in the woods

Panama also has added a slew of new tax incentives to promote foreign investment in tourism, reforestation, insurance, manufacturing, mining, construction, and agriculture.

The tourism incentives include a 20-year tax exemption on any property tax or property-transfer tax, a 15-year exemption on any income tax, and a 20-year exemption on any import taxes on all construction materials and equipment used in a tourist project. To qualify for these exemptions, you need only a minimum investment of $300,000 in metropolitan areas and $50,000 in other parts of the country. You can also couple these investments with Panama's citizenship and permanent-residence programs, which would give you a second passport.

The reforestation incentives are even better. You can receive a tax exemption on property-transfer taxes, income taxes, and import taxes on machinery and equipment used in a reforestation project. And you’ll get preferential interest rates on loans to finance these projects. If you have any other income in Panama, you can offset capital investment in a tree project from your other income.

In fact, we recently represented a group of International Living readers (see sidebar) who used this law. The group, Hardwoods Unlimited, has already begun operation of a teak plantation in the Darien region of Panama. It has plans to expand the plantation in the next 12 months.

If you’re thinking about going overseas for a haven or an investment, take a hard look at Panama. It’s one of the few places in the world with developed infrastructures and great tax incentives—plus it’s a great place to live.