Author: Klaus Happ

OECD takes Panama off tax haven list

The OECD (Organisation for Economic Cooperation and Development) officially removed Panama from its international list of tax havens at the end of June 2017. The OECD explained this as being part of the good development and cooperation of Panama with regard to tax transparency and international relations. The country itself has signed numerous agreements with various nations over the last months (eg with Germany in June 2017) in terms of exchanging tax information. The OECD has furthermore given Panama its second-best rating status, that of “highly respectable”.

Investment Incentives in Panama`s UNESCO Old Town

Panama`s parliament has approved a new tax relief law on investments in the beautiful old town which will come into effect immediately and last for ten years. This, of course, is extremely good news for our UNESCO old town project in which a building will be restored in order to generate a lasting rental income. In all, it means (according to our liability, we offer no tax advice):

  • 30 years no property tax on buildings and grounds
  • 10 years no income tax on rental yields
  • 5 years no sales tax

Such an investment is very sustainable since the number of buildings on the peninsula is limited to about 850 and is not extendable. In cooperation with a German developer who has a great deal of experience in old town restoration work, we plan to reconstruct a unique building with a view of both the ocean and skyline. We would similarly like to rent out the resulting shop premises and apartments, thus achieving a long-term rental income in addition to the increased value of the property.

This video gives you a small impression of the UNESCO old town: Casco-Video
Investors and the government have been reconstructing the historic colonial buildings for some years now. Although there is still much to be done, restoration has led to desirable hotels, bars and restaurants being situated close to the presidential palace, museums and galleries. The trendy district of Panama has thus arisen. The old town (originally formed in 1673) is now the second most popular tourist destination after the Canal. At the same time, many expats from international companies and young people from the upper-middle class are looking for rental accommodation here, in order to experience Latinamerican flair at first hand.

Panama`s currency is the US dollar

One of Panama`s advantages as an investment location is the US dollar.

The dollar has been Panama`s official currency since 1904, meaning that the nation cannot simply switch on a money printing machine like most other countries. Soaring inflation cannot affect Panama as it has done in so many other places in the past. Even the International Monetary Fund has praised Panama for the stability of its banking system. The country`s markets were spared from the 2008 financial crisis. Panama does not possess a national bank in itself, as the banks are all self-responsible and an “emergency central bank” is not required.

Following the rise of the dollar in the last years, I am often asked why real estate investments in Panama are not that expensive. In principle, the development of a currency does of course have an important influence on the profitability of an investment. In terms of real estate in Panama, one should bear in mind that a powerful dollar simultaneously brings cheaper properties. This is because investors are always somewhat more reserved when purchasing dollar-based real estate if the currency is strong. A weaker dollar, on the other hand, brings about a greater demand for property and rising prices as a result. The connection is similar to acquiring gold in US dollars. Ultimately, no one can predict the future development of currencies. The dollar, however, certainly makes for a broader diversification to your portfolio and contributes to a reduction in risk.

Highest GDP per head in Latin America

Panama`s economy has been growing at an average rate of 8.5% per annum since 2002. The International Monetary Fund predicts an average annual growth of 6% over the next four years. Due to its sustainable and strong economic development, Panama will show the highest GDP per head (economic performance per inhabitant) in Middle and South America come 2018. It will displace Chile as the leading nation.
(Source: La Tercera/IMF).

Chinese Investors have arrived in Panama

Panama`s economy has always been hallmarked by foreign investors. This began with the US construction of the Panama Canal in 1903 and continued over the years through infrastructure funding, capital deposits and real estate investments from the USA, Canada and South America. Europeans have only recently begun to arrive, and that in small numbers. In the past, investors from China and the Arab world were hardly represented at all. That is presently changing as China has now discovered Panama. Investments in their billions and Chinese companies and investors alike are now on the way. Here you can read more about the ongoing changes that Chinese interest brings.

Chinese groups were already involved in some Panama infrastructure projects during the last few years. Yet new developments between both nations are of a more significant and extensive size, and will have massive effects on Panama`s economy. The Chinese telecommunications giant Huawei and the world`s largest building firm China Construction both opened head offices for Middle and South America in Panama at the end of 2015. Chinese companies have currently approved projects to the tune of 2 billion US dollars. This is immense for a small country like Panama. Chinese businesses will establish a new container port on the Canal (900 million USD), a thermoelectric power station (also 900 million) and the most state-of-the-art conference centre in Middle America (200 million).

Yet the biggest bombshell came just two weeks ago. Panama took up diplomatic relations with China and simultaneously ended them with Taiwan. China is a more significant economic partner for Panama. It represents the largest trading partner in Panama`s free trade zone (number two in the world after Hong Kong) and the country which uses the Canal the second most.

Where does Chinese interest in Panama come from?
In Latin America, China has made plans for trade deals worth 500 billion and direct investments worth 250 billion over a 5 year period (2015-2019). It would accordingly like to use Panama as a trade and logistics centre. In the meantime, China is financing more infrastructure investments in Latin America than the World Bank. So too, since Panama`s currency is the US dollar, China`s requirement for dollar investments is satisfied.

Such a development between the two countries is not only positive for Panama`s economy (GDP growth since 2002: 8.5% per annum), it will also influence real estate prices. Workers and employees will come to Panama thanks to the big companies and new projects. Furthermore, Chinese investors will be in a position to see that there are not many places in the world offering best-located apartments on the Pacific promenade for 2500 USD per square metre and a 7% rental yield per year. And all that in a democratic, emerging country with the US dollar as its currency.

What can Panama do better?

  • Panama, like so many other emerging nations, has no lasting rubbish and recycling system. There is no garbage separation and trash finds its way to unfiltered tips.
  • The education system for the population at large needs to be improved. There are of course great numbers of state schools in Panama, but the quality of these compares badly to the private, international schools which are also found here.
  • The difference between Panama City as a modern metropolis and the rest of the country is significant in terms of income, education and infrastructure
  • While corruption is being fought on a broad scale, the country hasn`t yet reached the standards of industrial nations. The Varelas government, which has been in power since 2014, is striving to improve the situation. It still has a lot of work to do however.
  • After the Panama Papers, the government signed an OECD agreement in October 2016. This allows for the future exchange of international financial data. Further steps leading to more transparency should also ensue.
  • Despite Panama City`s first metro links, there are still a lot of traffic jams on the roads. Car ownership is part of the general culture and often leads to far too many vehicles placing a burden on the transport network. This will hopefully soon improve through additional metro links, the introduction of modern buses and the construction of bus lanes.


The reasons for Panama`s huge economic growth

The Washington Times reports on the reasons for Panama`s enormous growth (8.5% per year since 2002).

You can find the report here:hierWashington Times-Bericht.

What effect will Trump have on Panama?

This question is just as difficult to answer as the one relating to the influence of his politics on the entire world...

I would, however, like to provide you with some interesting information:

  • Donald Trump has his roots in the real estate sector and opened his first hotel outside of the USA in Panama in 2011. He was present at the opening ceremony and was especially taken with Panama itself.
  • As President of the USA he is now trying to strengthen the economy at home, specifically the US oil and energy markets in the field of liquid natural gas. That means positive news for Panama, as the recently extended Panama Canal can now for the first time handle the huge tankers necessary for this business. For the US energy companies it brings a time and cost saving of over 30% on the way to their biggest customers in Asia. For Panama it brings a further source of income. On the following link you can find a very informative Bloomberg report (simply click).
  • President Trump would like to economically burden those nations with whom the US has a trade deficit. The USA has, in fact, a trading surplus with Panama, so the country is not on the radar here.
  • When it was announced that Donald Trump would be the USA`s next President, the website of the citizenship office in Canada crashed. We have noticed something similar in Panama. Institutions which help foreigners to settle in Panama have undergone a wave of demand from the US. This serves to bring affluent people to Panama who wish to live in the country and can do the economy some good.
  • Can there also be a negative influence on Panama through the new President? Yes, of course. At the moment the matter remains open, as it does all over the world.
Scroll to top Newsletter