The corporation limited by shares is the most frequently used corporate form in Panama, and is the usual choice for an offshore operation.

Corporations are formed under the Law No. 32 of 1927 and the Commercial Code (Decree-Law No. 5 of 1997, Article 5). A corporation is formed by two subscribers (or nominees in the case of absent foreign subscribers) who execute the Articles of Incorporation (Statutes) before a notary and then record them at the Public Registry Office, paying a capital tax (minimum $60.20 on the usual capital of $10,000 -

There is an annual registration fee of $150.

Following incorporation, only one shareholder is necessary.

Shares can be of various classes, can have par value or not, may be registered or bearer.

There is no minimum capital, and no paying-up rules, except that no-par-value and bearer shares must be fully-paid when issued.

There must be at least three directors, and their names must be in the Articles as filed; changes to directors must also be filed. Each corporation must have a resident Panamian agent (a lawyer), named in the Articles; there are no other filing requirements unless the Articles are changed or the corporation is merged or dissolved.

A foreign company can be registered in Panama by depositing the following documents at the Public Registry Office:

A notarised Spanish translation of the Articles of Association;

A Board minute authorising the Panamian registration;

Copies of the most recent financial statements;

A certificate from a Panamian Consul confirming that the company is organised according to the laws of its place of incorporation;

Notification of the allocation of capital to the Panamian operation.

Capital taxes on formation and annual registration fees are payable as for Panamanian corporations (see above).

A foreign company can transfer its 'seat' (meaning roughly speaking the place from where its directors control the company) to Panama, and will then be subject to Panamian laws regarding public policy, while remaining under its originating law in other respects.

A foreign company operating in Panama but not registered there may be sued in the courts of Panama but does not have the right to sue.

Limited partnerships (sociedad de responsibilidad limitada) are governed by the Commercial Code and Law No 24 of 1966. Such a partnership may have between two and twenty partners.

There is no restriction on the nationality of the partners or their domicile. Capital must be between $2,000 and $500,000. The names of the partners must be registered in the Public Registry Office along with details of the amount of capital committed and paid in (in cash or kind) by each of them. The liability of each partner for the debts of the partnership is limited to the amount subscribed to but unpaid.

The partners can appoint an independent administrator for the partnership whose name must also be registered.

A limited partnership with up to 5 members is not obliged to hold meetings. Otherwise, the partners must meet at least once each year. There is no requirement for annual returns or the filing of accounts.

An Individual Limited Proprietorship (empresa individual de responsibilidad limitada) is set up in the same way as a limited partnership with the exception that there is only one member.

Details must be recorded at the Public Registry.

The sole proprietor transfers assets to the business for the purpose of trading.

The business liability of the proprietor is then limited to the amount of the assets committed.

The Commercial Code and Law No 24 of 1966 also govern the Civil Partnership (sociedad civil), which has legal personality, although the liability of the partners is unlimited.

This type of partnership is often selected by professionals such as lawyers and accountants.

The Commercial Code and Law No 24 of 1966 also govern the Commandite Company (sociedad en commandita) which is a hybrid partnership and corporation.

At least one partner must have unlimited liability, while the liability of the limited partners is limited to the amount of capital subscribed. In one form, the Commandite Company can have shares which are transferable; but the Commandite Company is seldom used nowadays.

The Private Foundation Law 1995 governs private foundations in Panama. Unlike the common law trust, the foundation is an autonomous legal entity with no members or shareholders.

It is generally used for the protection of assets and no business activities are permitted.

The founder establishes the foundation by depositing a notarised private foundation charter at the Public Registry; or the Charter can be executed before the Notary Public.

The Charter must specify the names of the Foundation Council (who administer the foundation on behalf of the beneficiaries), the property of the Foundation, its domicile, the name of its Panamanian agent and other details; but the names of beneficiaries and principles of operation can be contained in separate Regulations which do not need to be filed.

The minimum capital requirement is US$10,000. No accounts are necessary and an audit is not required. As with all Panamanian entities, tax is only levied on income generated within Panama. Foundations are subject to the same capital taxes (minimum $60) and annual registration fees ($150) as are Corporations.

Panamanian law specifically excludes the operation of foreign 'forced heirship' rules or judgements against foundation assets.

Panama itself has abandoned these typical civil law provisions in its own legislation.

Panamanian trust law was updated with Law No 1 of 1984.

Panamanian trusts (Fideicomiso) must be expressed in writing, so cannot be constructive. Trusts can be stated to be revocable but otherwise are irrevocable. The settlor, trustees and beneficiaries need not be Panamanian nationals or resident in Panama.

A Panamanian lawyer must act as an agent for the trust. Trusts may be settled in respect of existing or future property; additional property may be included after the settlement either by the settlor or a third party.

There are no registration or minimum capital requirements, or fees, and trust documents can be in English or Spanish. Unlike foundations (see above), trusts are not protected by specific provisions against foreign inheritance laws, judgements or creditors. However, purpose trusts are allowed for.

If a trust earns a taxable income in Panama, then tax is levied directly on the trust and not on the trustee.

National Banking Commission of Panama regulates the transactions of entities acting as trustees;

Banking Commission does not have the authority to investigate the terms of particular trusts or the relevant parties, except where complaints are raised by beneficiaries.

At the end of 2000, Panama enacted two laws addressing money laundering and has issued Executive Decrees to effect accompanying administrative changes. As a result of these new laws, all financial institutions in Panama will come under the scrutiny of the bank superintendency, including trusts, whereas previously only banks were legally bound to report financial transactions over US$10,000 and other suspicious activities.

Panama probably means shipping and the canal to most people, and indeed it is the world's largest shipping registry; but it is also home to nearly 150 banks, with strong North and South American connections, as might be expected. The canal, and Panama's Colon Free Zone, have established the country as a pre-eminent trading base, and an unknown but presumably high proportion of Panama's 120,000 registered companies are involved in trade.

Panama has a captive insurance sector, and through its stock exchange is attempting to encourage mutual funds; but neither sector has reached a great size.

The Panamanian banking industry has grown over the last 30 years into a regional banking centre for Latin American and the Caribbean, due to a variety of factors including the absence of exchange controls, the rapidly increasing volume of trade being conducted through the country (and through the Colon Free Zone in particular), liberal banking legislation and tight secrecy provisions. At the end of 1997 more than 100 banks were licensed in Panama, from more than 20 countries and with assets of about $23bn.

Banking in Panama is governed by the Banking Law 1970 (Cabinet Decree no 238) as amended in 1974. Under the Banking Law, the National Banking Commission grants banking licenses and fulfils some of the responsibilities of a central bank.

There are three types of banking license:

General Licences permit trading both in and outside Panama, and can be issued to Panamanian or foreign banks;

International licences allow offshore banking to be conducted from an office in Panama;

Representation Licences are issued to foreign banks and permit a local office but no local trading.

The minimum capital of a bank with a General License in Panama is $3m, and there are a number of other prudential requirements.

International License holders must maintain $500,000 in non-interest-bearing deposits or short-term Government bonds.

Only banks with General Licenses will have any tax liability, and then only in respect of Panamanian income.

More than 80 Panamanian banks have General Licenses, 30 have International Licenses, and the rest are Representative Offices.

The term 'offshore' is not used in Panama legislation; since taxation is on a 'territorial' basis, ie only Panama-sourced income is taxed, an entity which has its activities or assets outside Panama will automatically escape taxation.

There are more than 120,000 corporate entities in Panama, of which the majority are 'offshore'.

In June 2000, Panama was identified by the FATF as a non-cooperative tax haven in the global fight against money-laundering.

The result of this is that Panama was one of fifteen tax jurisdictions placed on an FATF blacklist. Each offending tax haven has a year in which to correct its regulations and legislation

The FATF released an annual report in June 2001, in which the organisation revised its list of countries and territories deemed non-cooperative.

Only four were removed from the list, including Panama (the other three being the Cayman Islands, Liechtenstein and the Bahamas).

Panama was praised by the FATF for its substantial efforts to conform to forty recommendations set out by the FATF in a code of good practice governing money laundering.

Income tax is levied only on income derived from operations within Panama. A Panama business entity can direct its offshore activities from Panama without becoming liable for tax.

The Fiscal Code (Article 694) excludes the following types of income from the tax net:

the profits of re-invoicing external goods or services;

the profits of operations that are directed from Panama but carried out externally;

the distribution of dividends derived from external income, including the above types of income.

Interest on deposits with Panamanian banks is exempt from taxation whatever the source of the cash.

An entity with both external and Panamanian business activities is taxed only on the Panama-derived income, and is subject to withholding tax only on that income

Panama business entities with only external operations are exempt from the Dividends (Withholding) Tax, the Undistributed Profits Tax, the Business Tax, and from Stamp Duty on contracts executed in Panama to be performed elsewhere.

Companies in the Colon Free Zone, or in Export Processing Zones, are treated in the same way as companies with external operations, as described above.

The employment market is quite closely regulated: the law sets maximum percentages for the employment of foreigners in a business according to its sector. However, foreign companies are allowed to fill senior and/or sensitive positions with expatriates.

Long-stay working residents are issued with Immigrant visas if their employment is permitted. Short-stay visas are issued freely.

The Tourist-Pensioner visa is given to those who can demonstrate a monthly income of not less than $750 from interest on time-deposits in a Panamanian bank; the Investor's visa is for those who invest their own capital into local business activity.