The global oil industry has changed dramatically in the last 10 years, and in what relates to this part of the world, important factors in Panama also changed, forcing the restructuring of the industry and thus requiring a revised legislation.
Cabinet Decree No.36 of September 17 th , 2003 was enacted to fulfill those industry changes, develop the ground rules for a national petroleum policy and drive the development of the petroleum free zones into the next stage.
The free zone concept is inherent to Panama 's historical condition as an international commercial, maritime and trade centre due to its strategic geographical position. The free zone is mainly an area within which all transactions are tax free. As a consequence, Panama developed the Colon Free Trade Zone, the second biggest in the world after Hong Kong , and now is pursuing the Petroleum Free Zones.
2.1. Scope of Operations
Within any Petroleum Free Zone, individuals or corporations, national or foreign, may perform multiple operations under a special tax regime, as follows:
a) Introduce, storage, refine, transform, manufacture, mix, purify, bottle, market, transport, transfer, pump, sell for the domestic market, export, reexport, and, in general, manage and supply crude oil, semi processed or any of its by-products;
Petroleum Free Zone Users Type B are only permitted to introduce, storage, dry, mix, export and reexport crude petroleum, semi processed or any of its by-products in or from a Petroleum Free Zone.
b) Build, install and operate petroleum refineries and other transformation or processing means of crude oil or semi-processed, storage tanks, oil pipelines, gas pipelines and poly-pipelines, pumping installations and pipes, buildings for offices, warehouses, or workshops and any other installations; introduce machinery, equipment, spare parts, containers, bottles, vehicles, furniture, equipment for fire or spill prevention, construct buildings for offices, warehouses, workshops for the use of the beneficiaries of the contracts to operate in the Petroleum Free Zones in any of the activities mentioned in subsection (a) hereinbefore;
c) Lease, acquire or in any other manner use lands, easements, right of way and other real or personal rights in regard to bona mobilia located in the areas designated as Petroleum Free Zones;
d) Establish water services, electrical power, gas, energy, heat, refrigeration or any other kind of services, upon previous coordination and approval with the respective public entities;
e) Build ports, piers, dry docks, shipping and unloading places for ship and airplanes, railroad stations for loading and unloading on land or granting contracts for the construction and exploitation of such works; and
f) In general, all kinds of operations or activities proper or incidental to the establishment and operation of the Petroleum Free Zones for the introduction, storage, pumping, transference, distribution, marketing and/or crude refining and petroleum by products.
2.2 Market Destination
Furthermore, crude oil and products derived from petroleum which are introduced into the areas of the Petroleum Free Zones, may come out tax-free of said areas for the following purposes:
a) For exportation and re-exportation.
b) For its sale or delivery to the Contractor or other users that operate legally in the Petroleum Free Zone or in another Petroleum Free Zone.
c) For its importation to be used or consumed within the customs territory of the Republic of Panama.
d) To be sold to ships that pass through the Panama Canal with destination to foreign ports or that ship between any qualified port of the Republic and foreign ports;
e) To be sold to airplanes that use the national and international airports that operate in the Republic, as long as the quality requirements are met, according to the international standards of the Joint Operation System;
f) To be sold to official entities of the foreign governments or international entities that have the right to import into the customs territory of the Republic goods which are exempted from the payment of an importation tax.
g) To be sold to companies of generation of electricity for public utility, authorized by the Regulating Entity for Public Utilities.
2.3. Investment and Related Requirements
Corporations interested in investing or operating within a Petroleum Free Zone to perform any of the activities detailed in section 2.1. hereinbefore must qualify and fulfill the requirements for one or more of the different categories available, as follows:
• Petroleum Free Zone Contractor (“Contratista de Zona Libre de Petróleo”)
• Petroleum Free Zone User Type A Permit.
• Petroleum Free Zone User Type B Permit.
• Permit to Provide Products derived from Petroleum by means of Barges.
• Permit as Importer-Distributer of petroleum derived products for sale in the domestic market.
• Permit as Importer-Distributer of petroleum derived products for electric generation.
• Permit as Sub-Distributer of petroleum derived products in wholesale distribution in the domestic market.
• Permit as Importer-Distributer of Liquid Petroleum Gas (L.P.G.) for the Domestic Market.
• Permit to Recycle or Permit for Lubricant Plants (Oils and/or Greases).
• Permit for Importers of Lubricants (Oils and/or Greases).
• Permits for Analysis Laboratory.
• Permit for Independent Inspector.
• Contractor to Refine Hydrocarbons.
The contractor of a Petroleum Free Zone is solidarily responsible with the permitted persons that operate in said Petroleum Free Zone for the losses and damages done to the State. In the event of any accident and/or contamination within the Petroleum Free Zone caused by the activities of the Contractor, the companies established in the Petroleum Free Zone and their suppliers, the Contractor must make the corresponding works of decontamination, clean-up and repair, without prejudice of any other responsibility of the Contractor, of the companies established in the Petroleum Free Zones and their suppliers that may come with third parties or the competent authorities, without prejudice of the right of the Contractor to repeat against the originator of the accident and/or contamination.
2.4 Tax Considerations
In accordance with the Tax Code, crude oil and petroleum by-products shall enter into the Petroleum Free Zones without having to pay taxes, fees, levies and other duties related to their importation, exportation or re-exportation, and may be transferred without having to pay taxes, fees levies and other taxes provided that the sale is done for the cases mentioned in subsections a), b), d), e), f) and g) of point 2.2. hereinbefore.
All income arising from transactions within PFZs or others specifically determined by law shall be exempted from income tax.
