Panama: ownership, taxes, foreign restrictions, financing

The most questions I get about property in Panama revolve around the issue of rights of possession (ROP). Despite what some realtors will tell you, ROP is not the same as freehold title. The untitled land in Panama belongs to the Government. When certain requirements are met, it may choose to convert untitled property to freehold title. However, this only applies on the mainland. Due to Panamanian legislation, untitled land in islands can no longer be titled. Those who own title on island property, may transfer it at will.The biggest place of interest where land is mostly untitled is the islands of Bocas del Toro. If you really have your heart set on a piece of property that is ROP, speak with a Panamanian attorney before you put any money down.

Otherwise, title in Panama is pretty straightforward and there are some other benefits for people buying property like the exemption from property tax on new construction. These rules were recently changed and the changes are being phased in. You need to act quickly to be able to receive the current full 20-year exemption.

1. OWNERSHIP

Ownership can be conveyed in one of two ways: Title or Rights of Possession. Titled property is handled much the same as in the United States, with deeds recorded in the Public Registry (Registro Público). Rights of Possession are handled and recorded by the Agricultural Department. This system was originally set up in the land reform of 1971 to encourage homesteading of unclaimed, untitled land.

For titled property, you are usually required to sign a Promise to Purchase and Sale Agreement and make a down payment to the seller as evidence of your commitment. This payment is normally relinquished to the seller, if you decide not to proceed with the purchase.

Most property in Panama is titled, and the country has a sophisticated, computerised land registry through which you can easily trace the ownership of property. Nevertheless, I recommend that you take out title insurance for any property purchase in Panama. This can be arranged through First American Title Insurance in Florida; tel. toll free: (US and Canada) (877)641-6767 or tel. (954)839-2900; e-mail: tmurdock@firstam.com.

2. TRANSACTION COSTS & TAXES

Realtor commissions typically range from 3.5 to 5% of the selling price, and are paid by the seller. The buyer must pay the expenses regarding Title at the Public Registry. The amount to be paid is estimated according to article 314 of the Fiscal Code. This scale is rather cumbersome, but as a general guide, closing costs typically amount to around 1% to 2% (including notary fees).

Transfer taxes are paid by the seller, and are 2% of either the updated registered value of the property or the sale price - whichever is higher. The updated value is calculated at the registered value plus 5% per annum of ownership. If the property is bought by a corporation, it is customary for the shares of the company to be sold (instead of the property), thus eliminating the need to pay transfer tax.

Capital gains on the sale of a property should be declared in your tax return, and are treated as part of your normal income. If you receive rental return on your property, you will be liable for Income Tax, up to a maximum of 30% (on returns greater than $200,000). However, if you invest in one of the special Tourism Zones, you may be exempt from Income Tax for 15 years. You will find more details on Tourism Laws and Zones, on the website of Pardini & Associates (an international law firm based in Panama): http://www.padela.com/practice/tourism.asp.

3. PROPERTY TAXES

Properties with a registered value of $20,000 or lower do not pay property tax. For properties of a higher value they pay as follows: 1.75% from $20,000 to $50,000; 1.95% from $50,000 to $75,000; and 2.10% over any property value above $75,000.

This is a combined scale. A property valued at $100,000 would pay the following annual tax:

From $20,000 to $50,000: $ 525.00

From $50,000 to $75,000: $ 487.50

From $75,000 to $100,000: $ 525.00

TOTAL $ 1,537.50

If you buy or build a residential property in Panama, you may be exempt from property tax for up to 20 years. However, this provision is being phased out gradually. The 20-year exemption applies to cases where the construction permit is issued before 1^st January 2004 and the completed construction registered before 31^st December 2004. Houses or apartments where construction permit is issued after 1^st January 2004, will have the following exemption on property tax:

Value up to $100,000 15 years exemption

Value from $100,000 to $250,000 10 years exemption

Value over $250,000 5 years exemption

The exemption is transferable during the exemption period to any new buyer. The land itself is not exempted and would continue to pay property tax if its value is above $20,000. The exemption is included in the deed recorded at the public registry, at an additional cost of $500.

4. FOREIGN OWNERSHIP RESTRICTIONS

Regarding ownership of Panamanian land, the following restrictions apply:

-- Under Article 286 of the Constitution, foreign ownership of property within 10km of an international border is forbidden.

-- Untitled land must be owned by a citizen of Panama for a minimum of 2 years before it can be sold on to a foreign buyer. (After the two-year period, the land can be titled and re-sold without restriction).

-- There are restrictions on foreign ownership of waterfront and island property. Such restrictions may be avoided if you are investing in one of the Tourism Zones. By law, all beachfront properties must provide a public right of way starting from the highest tide to the property line. (This distance may vary). Permits to build over the water require a concession from the maritime authority and the Ministry of Finance.

Such restrictions are best discussed with a Panamanian law firm. I recommend the practice of Rainelda Mata-Kelly - with whom we consult on our own transactions in Panama; tel: +507 263-4305, e-mail: rmk@mata-kelly.com, website: www.mata-kelly.com

5. FINANCING

It is easier to get a mortgage in Panama than anywhere else in Latin America. Local financing is widely available for foreign residents - that is, residents holding an approved visa, even if they do not spend all year in Panama. Banco General offers fixed-rate mortgages on residential property for up to 90% of the selling price, over a maximum of 30 years. For raw land purchases, you can borrow up to 70%, repaying the loan over a maximum of 10 years. For more details, visit their website (English version): http://www.banco-general.com/bgingles/frame.html.

Up until recently, local financing for non-residents was very much restricted to certain development projects that offer their own financing. HSBC Bank in Panama is now offering non-resident mortgages for up to on 50% of the purchase price. For more details, contact their Personal Banking division: HSBC Bank USA, HSBC Plaza, 9th floor, Aquilino de la Guardia St., Marbella; email: juan.parma@pa.hsbc.com.