Volume 6, Number 17, Page 3

The Legal Stability Regime: A New Instrument To Promote and Protect Investments in Panama

By Ivette Martínez de Castro

As part of an effort to consolidate its Economic Reforms Plan, which has led to the establishment of several bilateral commercial agreements to promote both domestic and foreign capital, the Government of Panama has enacted Law No. 54 of July 22, 1998, “Whereby measures are taken for the Legal Stability of Investments.”

Those allowed to benefit from the new regime include natural or private legal persons, either national or foreign, which carry out investments in Panama of at least US$2 million for up to two years, in order to develop the following activities: tourism, industry, agricultural exports, agro-forestation, mining, export processing zones, commercial and petroleum free zones, telecommunications, construction, port and railroad development, electric generation, irrigation and efficient management of hydrological resources and any other activity approved by the Cabinet Council, with the prior recommendation of the Ministry of Commerce and Industries.

Both foreign and national investors and their companies are considered equal with respect to rights and obligations; including the non-restricted transfer of resources derived from the investment; tax exempt repatriation of capitals, dividend interests and earnings and free commercialization of their production.

Industrial and intellectual property rights of foreign investors are subject to local laws.

The following benefits and guarantees are granted to investors under Law No.54 of 1998, for a term of ten (10) years:

• Legal stability: Except for public or social interest causes, any new legal provisions, which may affect the investor’s vested rights under this Law, will not be applicable.
• National tax stability: The tax regime in force upon registration of the investment before the Ministry of Commerce and Industries will be maintained.
• Municipal tax stability: The applicable municipal taxes at the time the investment was made will not be subject to modifications during the following five (5) years.
• Special customs regime stability: Except for amendments to the import tariffs fixed by the Cabinet Council, any special customs regimes in force (granted by way of tax refunds, exemptions, temporary admission of goods and the like) will remain unchanged.
• Labor contract regime stability: All provisions of Panamanian labor contracting legislation and other international agreements adopted by the Republic of Panama shall remain in force for the ten-year term.

To enjoy the benefits granted under this regime, the investor must be registered before the entity in charge of the promotion and supervision of such activity. The investor has the obligation, among others, to carry out the activity in accordance with an investment plan, which must be submitted for approval to respective supervisory entity.

The investor may opt out of the legal stability regime, to abide by the tax regime applicable to other investments or activities not included in the Law. The waiver of the benefits and guarantees by the investor is also permitted at any time, with prior notification to the competent authority.

Any disputes that may arise between the State and the investor are first subject to a conciliation procedure in Panama; and subsequently, the investor may elect to submit the controversy to the judicial authorities or to arbitration.

The conditions and benefits granted under any agreements to promote and protect investments in Panama are not affected by the legal stability regime.

Ivette Martínez de Castro is an attorney with Pardini, de la Guardia, Ballard & Partners of Panama. She may be contacted at icastro@padela.com