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Panama: Mergers & Acquisitions

Most acquisitions in Panama in the late 90’s resulted from the government's privatization program, such as the purchase of control of the electric generation companies by affiliates of Enron Corporation, El Paso/Hydro-Quebec and AES Corporation, the acquisition of the electric distribution companies by affiliates of Union Fenosa and Baltimore Gas & Electric, the acquisition of the government's telecom company by an affiliate of Cable & Wireless, and the acquisition of the government's cement company by an affiliate of Cemex. Some of these privatizations, particularly the electric and telephone utilities were for only 49% of the outstanding stock, plus long term operating agreements and periods of exclusivity.

Some deals have been driven by strong competition, strategic positioning, and cost reductions, particularly in the banking, airlines and telecom industries. While other transactions in the petroleum, ports and manufacturing sectors have been powered by globalization and the pressure to increase market share, such as the acquisition of Corporación Incem SA, one of the largest cement plants in Panama by Holderbank; the acquisition of the Chase Manhattan Bank's branches by HSBC Bank USA Inc.; the acquisition of 49% of COPA, Panama’s largest airline, by Continental Airlines; the acquisition by SSA of the remaining 50% of the Manzanillo International Container Port; the merger of the local branches and subsidiaries of Exxon and Mobil; and shortly thereafter, Chevron and Texaco; and the most recent acquisitions of Cerveceria Nacional by the Bavaria Group and Coca Cola Panama (including Cerveceria Baru) by a consortium formed by Heineken, Panamerican Beverages and others.

Some of the above transactions were structured as mergers while others as stock or asset purchases, and payment was made either in cash or securities or a combination thereof. Given the outstanding tax incentives granted by Panamanian law, most cash stock purchases have been carried out as public tender offers, primarily to take advantage of such incentives. In this article, we will focus only on those companies which conduct trade or business within Panamanian territory and are thus subject to Panamanian taxation.

The seller’s main targets are to maximize profits and minimize tax exposure. Both parties generally seek to make the transaction tax free. Since Panama follows a territorial system of taxation, only Panama-source income (ie generally income and capital gains realized in connection with a trade, business or real estate transaction within Panamanian territory) is taxable in Panama (note l). Thus, mergers or acquisitions of Panamanian companies that do not carry any trade or business or own assets within Panama are not taxable in Panama. This also is quite interesting from the perspective of foreign companies which use Panamanian companies as regional holding companies for the substantial tax advantages.

he tax treatment of a merger depends on whether the merger is a stock-for-cash or a stock-for-stock transaction. Stock-for-cash mergers are taxable transactions in Panama. Any income gained by the seller is taxable at the standard income tax rate, which is 30 per cent for corporations and other legal entities (note 2). In addition, stock-for-cash mergers may cause a 5 per cent tax on the transfer of tangible assets (note 3), such as inventory and equipment, and a 2 per cent tax on the transfer of real estate property (note 4). On the contrary, stock-for-stock mergers are fully tax-free, provided that certain accounting conditions are followed. Shareholders of the absorbed company who receive shares of the surviving company have a tax basis on the new shares equal to their average pre-merger tax basis on the surrendered shares (note 5).

Stock purchases
Ordinary income tax rates are applicable to the gains resulting from stock purchases, regardless of whether the transaction is structured as a cash or an in-kind deal (ie. payment of stock or other assets). If the purchase is structured as a cash transaction, it will be considered as gain the difference between the cash received and the cost of the stock sold. On the other hand, if the transaction is structured as an in-kind transaction, to ascertain the gain, the value of the stock or assets received as consideration would be determined either at their fair market value at the time of the transfer or at book value if their market value cannot be fairly assessed.

Asset purchases
Asset buy-outs normally are considered as taxable transactions. Gains resulting from the sale or disposition of an asset are taxable at ordinary income tax rates for the sellers. The only exception to the latter is the sale or disposition of real estate, which is subject to a special tax treatment (note 6). The transfer of tangible personal assets, such as inventory and equipment, is also subject to a 5 per cent value added tax based on the book value of the asset at the time of the transfer (note 7). Real estate purchases or transfers are subject to a 2 per cent transfer tax. Parties interested acquiring assets or ongoing businesses must be aware that they will be jointly and severally liable for the tax obligations of sellers regarding the purchased assets or business.

Publicly-held companies
Publicly-held companies benefit from an important tax exemption. Publicly-held companies can be broadly defined as companies whose shares are registered at the National Securities Commission. There also is the incentive that no gain will be recognized from the sale or disposition of the stock, as long as the same is made through a public stock exchange or if it results from the acceptance of a public tender offer, regardless of whether it is a cash or an in-kind transaction (note 8). It is important to point out that most acquisitions of large bulks of stocks are not made by through a stock exchange. Nevertheless, in recent years, acquisitions by means of tender offers have become an increasingly common method of acquiring local companies. Recent examples include the Cerveceria Nacional and Coca Cola acquisitions.

Mergers and acquisitions that create economic concentrations, which may have the effect of adversely affecting competition, or restrict market access by new competitors, within a given relevant market are prohibited (note 9). Whenever antitrust issues are involved, buyers should ensure that the closing of the transaction is conditional on prior approval of the merger or concentration by the Free Competition and Consumer Affairs Commission (CLICAC) to prevent a post-acquisition break-up order. This was the case of the breweries in late 2001, where the Bavaria Group first acquired Cerveceria Nacional and then tried to acquire the only other brewery Cerveceria Baru, but this second transaction was rejected by CLICAC.

There are other important issues such as corporate approvals, labor affairs, securities issues, environmental regulations, governmental authorizations, accounting regulations and others which will be treated in a future article.

Pardini & Associates has a complete M&As Team and we have acted as Panama legal counsel for Continental Airlines in the acquisition of 49% of COPA, Panama’s largest airline; also represented Stevedoring Services of America in the acquisition of the remaining 50% of the Manzanillo International Container Port, and acted as Panama legal counsel in the merger of the local assets and operations of Exxon and Mobil.
Dr. Juan Francisco Pardini


1 Tax Code, Art 694
2 Tax Code, Art 701 (e)
3 Tax Code, Art 1057-v
4 Law 106 of 1974, Art 1,
5 Executive Decree No 18 of 1994, Art 2
6 Law 106 of 1974; Tax Code, Art 701, (a) and (e); Executive Decree No 170 of 1993, Art 2 (e) and Arts 91-97
7 Tax Code, Art 1057-v
8 Decree-Law No 1 of 1999
9 Law No 29 of 1996, Art 19

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