The changes to the Free Trade Zone in Colon are welcome news for taxpayers doing business in that zone. The new law exempts certain taxpayers from national and local income taxes, as well as the value added tax.

On April 6, 2016, through publication in Official Gazette No. 28,004-C, Panama reorganized the Free Trade Zone special regime in Colon (the Colon Free Trade Zone or CFTZ) by enacting Law 8 of April 4, 2016 (the Colon Free Zone Law or CFZ law). The CFZ Law repeals Decree-Law 18 of 1948.

The CFZ Law modernizes the legal framework of the CFTZ by: (1) incorporating concepts from the Public Procurement Law; (2) incorporating a favorable immigration regime for foreign investors who establish a business within the CFTZ and foreign workers hired to work within the CFTZ; (3) adjusting the activities that businesses may carry out within the CFTZ; and (4) including provisions on anti-money laundering.

Additionally, the CFZ Law exempts from national and local taxes the entry and storage of goods and other items or securities in the CFTZ. Consular fees and any other similar fees also are exempt from national and local taxes. Mandatory payments for the rental of premises or warehousing services, custody, stowage, hauling or other services carried out within the CFTZ, however, are not exempt from those taxes.

Finally, the CFZ Law will now allow companies operating under a multinational company headquarters (SEM for its Spanish acronym) license or the City of Knowledge special regime or call centers to operate within the CFTZ, provided they consolidate their activities.

I. Reform of Fiscal Code provisions

The CFZ Law reforms certain articles of the Fiscal Code (hereinafter, FC). The most important provisions are:

— When a legal entity ceases its operations (dissolution), it must file a tax return and report its final balance, as well as present evidence that it paid the income tax on the distribution of dividends upon liquidation of the retained profits. (Article 717 of the FC)

— The CFZ Law reduces the rate on the annual operations notice tax from 1% to an equivalent of 0.5% on capital (with a threshold of USD 100.00 and a maximum of USD 50,000.00) exclusively for companies operating in the CFTZ, free trade zones or in any other zone or special economic area that does not require an operation notice. (Article 1004 of the FC)

— The CFZ Law reestablishes the value added tax (VAT) exemption on the provision of services to the master developer (i.e., the individual or entity responsible for the development of the property) in the Panama-Pacific Economic Area or to the promoters in free trade zones. (Article 1057-V(8)(b)(7) of the FC)

— Services provided to companies operating within the Panama-Pacific Economic Area are subject to VAT, provided the service provider is not established within the aforementioned area. (Article 1057-V(27) of the FC)

— A VAT exemption applies to the leasing or subleasing of housing and apartments when the agreement period is for over six months. (Article 1057-V(8)(2) of the FC)

— The tax authority may give notice of collection of payment and all its actions via email, phone of any kind, SMS (i.e., text message), social networks and any other reliable means ensuring contact with taxpayers. (Article 1230(2)of the FC)

II. Reform of the Panama Pacific Law provisions

Under d) of Article 733 of the FC, dividends from companies that are established in the Panama-Pacific Economic Area are exempt from tax, when they carry out any of the listed activities referred to in Article 60 of Law 41 of 2004.

According to the CFZ Law, companies that are registered in the Register of Companies of the Panama-Pacific Economic Area as of January 1, 2017 are subject to the payment of participation interest or dividends tax, and if not applicable, complementary tax. Companies registered before January 1, 2017 shall not be subject to these taxes.

Moreover, companies shall be subject to the payment of the operations notice tax, when they engage in the activities of importation, exportation, re-exportation and logistics and transportation services, and are registered in the Panama-Pacific Economic Area as of January 1, 2017.

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