Panama Introduces New Financial Leasing Law

Since 1983, several draft bills of laws were proposed to regulate leasing business in Panama, but failed to call the attention of Panama Legislative Assembly during previous governments, and thus, leasing operations were carried on an unregulated environment and faced different problems and contradictions. The government of the Republic of Panama, understanding the importance of these operations, enacted Law No. 7 of 10th July 1990, which regulates the leasing business in and from Panama.

Law No. 7 is divided into five (5) chapters; Chapter I is dedicated to the definition, nature, formalities and effects of the financial leasing contract; Chapter II regulates leasing operations; Chapter III contains the tax provisions applicable to the leasing contract; Chapter IV defines the responsibilities of the contracting parties, the procedures for the termination of the contract and for the recovery of the leased properties; Chapter V contains provisions related to international law and matters of transition.

I. THE CONTRACT OF LEASING

Said law restricts its application to movable property, exclusively.

Article 2 of said law has conceived leasing contracts into two categories, local and international. For a contract to be considered as an international leasing contract under Law No. 7, the performance of the contract must be executed in a different jurisdiction. Leasing contracts will be considered as local when the execution and performance of the contract is effected within Panamanian jurisdiction. In other words, when property object of the contract is economically used in Panama.

As we shall review further below, the qualification of international or local contract, according to the said Law No. 7, will imply different tax incentives and jurisdictional exceptions.

A. ELEMENTS AND REQUISITES

Article 3 of Law No. 7 provides that:

1) That the contract must be consensual. But for the contract to have effect, it must be in writing and authenticated by Notary Public and in some instances registered at Panama's Public Registry. 

2) The lessor must be a person dedicated to the leasing business, in accordance to the provisions to that regard contained by Law No. 7. 

3) The lessor must be the owner of the leased assets, or must act by means of a trust or mandate. 

4) The leased assets can only refer to movable property, such as airplanes, vessels, oil platforms, heavy machinery, equipment, vehicles, computers, etc. 

In this respect, Article 4 states that all movable properties, whose ownership must be registered at the Public Registry under Panamanian law, shall also be required to be registered when given in leasing. Panamanian law requires that ownership over the following assets which classify as movable must be registered at the Public Registry: Vessels and Airplanes.

Concerning movable properties given in leasing, which are subject to a previous lien, such as ship mortgages, the lienor will have to give his written approval of the lease. Should this prohibition be contravened, the leasing contract will be nullified.

In case the lessee desires to use the movable as collateral after a contract of lease has been executed, it will require the express consent of the lessor, or else, the lien shall be considered as non-existing and nullified.

5) The minimum period stipulated for a lease contract shall be of no less than three (3) years. 

6) One of four options in favour of the lessee must be introduced in the contract, either: 

return back to the lessor the leased assets or goods object of the contract; or 

renew the contract based on predetermined or negotiable sums; or 

acquire the movable goods for the residual value or a predetermined price. 

exercise any right compatible to the commercial uses in the local or international leasing markets. 

7) The parties to the contact may agree to convert a local leasing contract into an international contract, or an international contract into a local one. But, for this to be perfectioned, the object of the contract shall have to be, either brought into Panamanian jurisdiction in the case of an international contract converted into local, or viceversa, when local contracts are converted into international. 

B. SUBROGATION

Unless otherwise agreed in the leasing contract, under Law No. 7, the lessee may subrogate on the lessor's rights against manufacturers or distributors of the asset object of the contract. Said subrogation right includes the right to directly request compensation to the manufacturer or distributors for non-conforming goods or defects in the property.

C. GOVERNING LAW

International leasing contracts, which according to Law No. 7, will be those whose performance will be outside Panamanian jurisdiction, even when executed within Panamanian jurisdiction, may either:

submit to Panamanian law through a choice of law clause; or 

submit voluntarily to Panamanian jurisdiction and to the competence of Panamanian courts, even when there is no express choice of law clause in the contract. In these cases, Law No. 7 provides that Panamanian courts cannot deny jurisdiction. 

Should a conflict of laws issue arise from an international leasing contract dispute, Law No. 7 provides that the applicable law shall be Panamanian law.

Leasing contracts considered as local, which according to said law, are those whose execution and performance is effected within Panamanian jurisdiction, will be subject to Panamanian laws, Law No. 7 and its provisions. 

II. TAX CONSIDERATIONS FOR INTERNATIONAL AND LOCAL LEASING CONTRACTS

Panamanian tax law follows the principle of territoriality, whereby any source of income generated outside Panama is not taxable. Having this principle in mind, Law No. 7 grants the following incentives and exemptions for international leasing contracts executed in Panama:

Rent received by the lessor will not be subject to tax in Panama. This is because the movable goods object of the leasing contract are not being economically used in Panama and neither is the rent generated therefrom.

The lessor is authorized to depreciate the leased properties and the lessee may also depreciate such goods simultaneously (double dipping) if the law of the country where the movable goods are being used allows this depreciation. 

No stamp taxes 

It can then be presumed from sail law, that for tax purposes, the incentives provided by Law No. 7 will be applicable only to those international contracts wherein the lessor has as its place of business the Republic of Panama and when the execution of the contract was in effect made in Panama.

With regard to local contracts, the tax conditions are, as follows:

Rent payment shall be taxable for he lessor, if the goods object of the lease contract are economically used within Panamanian territory. As it is provided in our fiscal legislation, this law also follows the general principle of territoriality to determine what should be considered a taxable income. If the property is economically used in the Republic of Panama, the rent should be considered a taxable income, without taking into consideration the nationality or residence of the lessor. 

Rent paid by the lessee may be deducted as an expense for all tax purposes, whenever they are used for the preservation and production of income from Panamanian sources. Therefore, rents paid for the leasing of goods used to generate income from other sources or not subject to Panamanian income tax may not be deducted. 

The Lessor and the lessee may deduct, as the case may be, normal expenses incurred in the conservation and utilization of the leased goods. 

In local leasing, the lessor is authorized to totally depreciate the leased properties during the life-time of the agreement or, at his option, in a longer term, according to general rules of depreciation of goods. If the lessee decides to purchase the property, he may depreciated it for its residual value or the price agreed in the contract. 

In those cases, where the lessee has the right to import the goods object of the contract exempted from taxes, such exoneration will be applied to the property imported by the lessor for the use of the lessee. 

III. ESTABLISHMENT OF A LEASING COMPANY IN PANAMA

By means of Law No. 7, the leasing business in Panama is regulated in almost all aspects.

Any individual or company, may qualify to establish a leasing company in Panama, once three requirements are complied with, as follows:

to be commercially qualified to engage in business activities in the Republic of Panama; 

to register before the Department of Financial Business of the Ministry of Commerce; 

to establish a minimum paid-in capital of US$100,000.00 

The leasing business in Panama shall be supervised by the Department of Financial Business, and said office is empowered to request statistical or financial statements from companies or persons engaged in the leasing business in or from Panama.

This Department is, by laws in the obligation to maintain the utmost confidentiality regarding the information provided.

IV. CONCLUSION

The Financial Leasing Law No. 7, arrived formally at a time when Panama is making serious endeavors to bring the economy back to its feet. Law No. 7 comes to complement, and adhere to other well-established services such as the Banking, Offshore Companies, Insurance and Reinsurance, Shipping and other international business services settled in Panama, which have been for many years taking advantage of Panama's excellent geographic location, transport and communication facilities; which combined with the lack of exchange controls and the U. S. Dollar as legal tender can facilitate the execution of any monetary transaction or the movement of any properly from Panama to any part of the world.