Article published in the Tax Column of the newspaper La Prensa (October 1, 2017)
It is necessary for our country to legislate about alternative means of conflict resolution in tax matters. Mediation, conciliation and arbitration in tax matters would help to resolve to a large extent the existing fiscal conflict in our country in the area of tax litigation.
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Article published in the Tax Column of the newspaper La Prensa (September 17, 2017)
Efficient collection policies also go hand in hand with a reduction in unnecessary public spending, eliminate bad investments by the State, the correct use of public funds and zero tolerance for corruption. Without these elements, the balance of Public Finance is not achieved and will surely erase the smile and joy that we all must have when paying our taxes and that of the deceased.
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Jazmina Rovi and Francisco Linares, partners of Morgan & Morgan, contributed to the Panama chapter of the first edition of Getting the Deal Through: Market Intelligence-Shipping, a publication that invites leading professionals in their jurisdictions to conduct a thorough analysis of the evolution and the regulatory scenario of the maritime industry globally.
Mrs. Rovi has over 20 years of experience representing ship owners, charterers and leading financial institutions on all types of registration schemes under Panama flag and ship finance structures including ship mortgages and pledge of shares of Panama ship owning companies. She is listed as a leading lawyer in the Shipping chapters of Chambers & Partners and Latin Lawyer 250.
Mr. Linares’ career includes over 20 years of experience in all aspects of maritime dispute resolution and claims at the Maritime Courts of Panama, dealing with collisions, cargo claims, oil spills and pollution, charter party disputes, personal injury, maritime liens, marine insurance claims, ship mortgage executions, among others. Currently, he is the President of the Maritime Law Association of Panama (2017-2018 period).
To read the Panama article, click on the following link: https://gettingthedealthrough.com/intelligence/155/article/5703/shipping-panama
Article published in the Tax Column of the newspaper La Prensa (September 3, 2017)
The reforms and novelties within the tax system must be based on seeking a fair balance in public finances, without belittling the tax capacity of the taxpayers and seeking peace, which does not exist if there is no justice.
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Article published in the Tax Column of the newspaper La Prensa (August 20, 2017)
The IBI is gaining popularity again and the draft Act 509 (PL) seeks to amend it. After consideration, the conclusion has been reached that it does have a great significance and importance, especially in regard to the reduction of the rate.
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Article published in the Tax Column of the newspaper La Prensa (July 30, 2017)
Our tax system recognizes the figure of marriage and establishes certain situations of tax exemptions, while in other cases it requires the need to review this condition for the application of aspects and obligations of tax compliance.
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Article published in the Tax Column of the newspaper La Prensa (July 16, 2017)
The success of the administrative procedures in tax matters is not measured by whether it is carried by a lawyer or an authorized public accountant, but by the field of study, expertise and also good mastery of the subject.
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by Aristides Anguizola, International Associate, Morgan & Morgan
To date, under Panama law (and ever since 1917), any person that ceases to timely meet a payment obligation deriving from an act of commerce, can be subject to a liquidation process, whereby said person’s assets are liquidated by means of a judicial process in order to pay creditors of said overdue payment obligation. This, however, is not applicable to banks, whom are subject to special laws and procedures in terms of their liquidation. Therefore, banks aside, persons and / or companies engaging in commercial activity in Panama are only offered such liquidation process in case of becoming insolvent, and therefore not capable of meeting payment obligations. Starting on January 2, 2017, this will change. The recently approved Law 12 of May 19, 2016 “Which establishes the Regulation for insolvency reorganization processes and other dispositions” (the “Insolvency Reorganization or Liquidation Process Law”), provides that after said date, merchants (be they are natural persons or companies) will have the possibility under Panamanian law to reorganize, when undergoing insolvency situations.
In this article, we purport to provide a brief summary of what we consider the important features, of the new reorganization process possibility under the new Insolvency Reorganization or Liquidation Process Law.
The Insolvency Reorganization or Liquidation Process Law, be it reorganization or liquidation under the same, is applicable to merchant persons or companies, regardless if the same are registered into Panama’s Public Registry, which have their commercial domicile, branch, agency or establishment in the Republic of Panama. According to Article 28 of the Code of Commerce, a merchant person, under Panama law, is that one which, with legal capacity, carries out as its profession and under its own name acts of commerce. Merchant persons are required to register on a Mercantile Registry among other things. Moreover, in Title VII of Book I of the Code of Commerce the various types of merchant companies in Panama are identified.
This is a key difference between the current bankruptcy liquidation process under Panama’s Code of Commerce, and the Insolvency Reorganization or Liquidation Process Law. Currently, under Title III of Book II of Panama’s Code of Commerce, a liquidation process or bankruptcy proceeding applies to any person or company, irrespectively if they are merchants or not, as long as the default on the payment obligation derives from an act of commerce, as defined by Article 2 of the Code of Commerce. Thus if a non-merchant engages in an act of commerce, said non-merchant would be subject to such liquidation process.
Another difference, in terms of applicability, between the current bankruptcy law and the Insolvency Reorganization or Liquidation Process Law, is that under the latter, reorganization can apply to merchant persons or companies who default on one or more obligations documented as executive titles (however, for reorganization purposes, other than such default, a state of imminent insolvency or a foreseeable lack of liquidity, qualify as objective criteria to determine if a reorganization can in fact be requested from the court). The current bankruptcy process applies to a default on an obligation (that, as explained, derives from an act of commerce) regardless of whether said obligation was documented in the form of an executive title. It is important to note, however, that the Insolvency Reorganization or Liquidation Process Law, in terms of a liquidation process, although it requires that the defaulted obligation de documented as an executive title, it also requires, that said defaulted obligation derives from an act of commerce (which, is not expressly required in the same law for a reorganization process).
The Insolvency Reorganization or Liquidation Process Law expressly provides that the same is not applicable to public entities (e.g. municipalities, autonomous entities, companies in which the State has an ownership interest of at least 51%, amongst others); banks (which, as mentioned, have their own bankruptcy reorganization applicable law); entities regulated by the Superintendence of the Securities Market; utilities provides whilst intervened by their respective regulator; and, all other entities which by law are subject to their own special regulations for recuperation, liquidation, or intervention.
- The Reorganization Process:
A merchant person, meeting any of the aforementioned criteria (i.e. default of an obligation that is documented in the form of an executive title; imminent insolvency; or, foreseeable lack of liquidity) may file at the respective Insolvency Court a request for reorganization under the Insolvency Reorganization or Liquidation Law (of course, starting on January 2, 2017 when said law comes into effect). Said debtor will have to present a series of required documents along with the reorganization request, including, a reorganization project or plan. The judge then proceeds to evaluate the reorganization request and, if in order, the judge shall admit the same (with no possibility of appeal), and if not, the judge shall deny it (in which case there is a recourse of appeal from the debtor or representative of the person requesting the reorganization).
Once filed and admitted, the reorganization process begins with, among others, a series of publications of the process’ commencement at the headquarters and establishments of the merchant person or company object of the reorganization, and also publication in written media (by the reorganization’s administrator) so that the public is put on notice of the process. Beginning with the date on which the judge decrees that the reorganization process has commenced, no modifications to the debtor’s Articles of Incorporation or its Bylaws may be enacted. Moreover, unless a part of the debtor’s ordinary course of business, the constitution or execution of guarantees over the debtor’s property, including mercantile trusts with that object; the settlement of judicial processes or of any due obligations; and, the transfer of its property or operations (even if it is by a trustee under a trust arrangement), except if the debtor has the insolvency process judge’s authorization. Any such acts carried out without the judge’s authorization may be declared to be null and void by the judge, and there shall be liability those responsible of said unauthorized acts.
Also, after the judge has authorized the reorganization process, and until approval of the reorganization project or plan by the General Assembly of Creditors, the debtor shall have a period of financial protection (the “Period of Financial Protection”). During said Period of Financial Protection, the debtor shall be protected against: any executive process, or executions of any kind (and to this effect all statutes of limitations shall be suspended from running their course); the unilateral termination of the debtor’s contracts, or the execution of any guarantees of said contracts against the debtor (interest payment obligations, both legal and contractual, shall be suspended, except for those credit facilities guaranteed with real property); any restriction to contract with the government (i.e. the debtor cannot be incapacitated to contract with government entities); and, from any processes for execution of real property guarantees against the debtor (that have not reached the auction stage). The aforementioned protections are held in place throughout the Period of Financial Protection.
After the last publication date of the reorganization process’s publication, all creditors have twenty days to undergo a process for verification of credits against the debtor. Each creditor, at the time it presents its credits for verification, can also manifest its agreement with the reorganization project or plan, as, also, any observations or recommendations to the same. Two days after said twenty day period, the reorganization process administrator shall present a report to the judge of the verified credits, and thereafter the debtor and the creditors will have two days to present any objections. If there are no objections presented, the presented credits shall be considered to have been recognized and within the next five days the judge shall fix the date, place and time for the first meeting of the General Creditors Assembly. However, if there are objections, the administrator shall have five days to present the judge with a list of the recognized (i.e. non-objected) credits, and a list of the objected credits alongside a report on the same addressed to the General Creditors Assembly (and the judge will have to set said first meeting of the General Creditors Assembly, to debate the reorganization project or plan, within the next five days from the date that the administrator presented such lists). The objected credits might be recognized by the General Creditors Assembly, but in the case they are not, respective creditors may have thirty days to file a recourse before the judge. In any case, at its discretion, the administrator may present a report to the judge concerning the objected credits expressing that in the creditor’s opinion the objected credits will prove to be an obstacle to the proposed reorganization. If the judge considers the administrator’s opinion to be duly justified, then the judge may declare the reorganization process as terminated.
The General Creditors Assembly’s quorum is determined by 51% of the creditors of those credits that have been recognized and, at their first meeting they will discuss the reorganization project or plan, the reorganization process administrator will present a report on the debtor’s financial situation, and, they will determine the reorganization process administrator’s fees. Moreover, if at said first meeting of the General Creditors Assembly the reorganization process or plan is not approved, a negotiation period of ten days will commence during which the creditors, with the debtor and the administrator, will try to reach agreement on a reorganization plan (which can only be approved within the next ten days after the end of the negotiation period). The reorganization plan must be approved by no less than a simple majority of those creditors that represent no less than 66% of the total amount owed by the debtor.
If approved, and within the next five (5) days confirmed by the judge, the reorganization plan or agreement has to be executed, under the supervision of a designated supervisor, and the judge. At any time, however, with a simple majority vote and if the cause of the reorganization was imminent insolvency or foreseeable lack of liquidity, the creditors may terminate the reorganization process. If the cause of the reorganization was a default on a payment obligation documented as executive title then the creditors can request the judge to commence a liquidation process. If the reorganization plan is not approved, the same applies in terms of the creditors’ options. Moreover, if the reorganization process derived from a liquidation process, then the process can be reverted to liquidation. If the debtor, opposes the reorganization plan, and it has defaulted on a payment obligation documented on executive title, liquidation shall proceed. In any of these scenarios, the financial protection shall terminate. Nonetheless, if the approved reorganization plan is duly executed, as so reported to the judge by the reorganization’s supervisor, then the judge can declare the reorganization process as completed and finalized.
- Implementation benefits and challenges:
We consider that the introduction of reorganization processes into our legislation is positive, and perhaps, even, overdue. For 100 year, Panama has been limited to liquidation processes that have not resulted in a process by which creditors recuperate their money, or a significant part of it, in due time. Current liquidation processes in Panama are generally too lengthy and costly. Also positive, is that the Law intends to create specialized courts and judges for insolvency process, as the limited resources of current courts is in part the reason why the current bankruptcy process is one that takes so much time and is, it could be said, inefficient. The distinction between related creditors to the debtor, and those that are not related to the debtor, is another positive feature of the new law, as under the current system, said related creditors benefit from the process as if they had no relation to the insolvent debtor. We can also hope that the short negotiation periods given to the creditors and debtors to reach agreement on a reorganization plan, does result in accelerating the process’s results.
Nonetheless, as a new concept, it is to be seen how, in practice, the new reorganization process will be implemented in Panama. A concern is that debtors may intend to abuse the financial protection provided by the reorganization process during the Period of Financial Protection. Also, the allowance for foreign insolvency processes representatives to file a reorganization request intends to accommodate to a globalized world (also, a positive in our opinion), but in practice, it can be a challenge for local courts to acknowledge foreign judicial resolutions concerning said foreign processes. We find that the definition of certain key terms in the Insolvency Processes Reorganization or Liquidation Law lack clarity (specially, the definition for the term “debtor”). Finally, as a matter of due process, we also consider that the notification to creditors concerning the filing for reorganization by a debtor should be personal (in addition to the publication in written media).
Without a doubt, however, it is recommendable for all merchants with business interests in Panama to familiarize themselves with the Insolvency Processes Reorganization or Liquidation Law, prior to its coming into effect, on January 2, 2017. Already, the drafting of any real guarantee contracts (such as mortgages) or guarantee trusts, and, in general, any other commercial contracts under Panamanian law, must take into account the new Law’s provisions in anticipation to it coming into effect and any of such contract obligations’ transition into the new insolvency system. Merchants must consider how said transition, also, affects the nature of their relationship with their counterparties as potential debtors. The new insolvency system, we hope, could provide a more welcoming business environment in Panama, as it is an incentive for companies to stay in business and therefore continue to provide jobs and economic activity. Surpassing the coming implementation and execution challenges will be necessary to reach said effectiveness. The fact that, in practice, local merchants and business people in general, usually prefer to reach settlement agreements to solve the default of payment obligations (e.g. refinancing) rather than undergoing the current liquidation procedure is indicative that our market and country wishes to indeed transition into an efficient and rapid reorganization process alternative. We do hope, such to be the case.
 Law 2 of August 22, 2016 approved Panama’s Code of Commerce, which came into legal effect on 1917, and, in its Book III, regulates bankruptcy in Panama – which only allows for liquidation of the bankrupt person.
 Article 30 of the Code of Commerce provides that those that execute acts of commerce accidentally, are not to be considered to be merchant persons but are subject to the mercantile laws with regards to any controversies that may derive from such accidental acts of commerce.
 Article 2 of Panama’s Code of Commerce establishes that all acts referring to the mercantile traffic or trade are acts of commerce, and provides a non-exhaustive list of certain specific acts of commerce.
 For example, if said non-merchant contracts with a bank for a loan in order to purchase a house, and said non-merchant defaults on said loan payment, then said person or the bank, can request that a liquidation process be commenced in connection with the person’s assets, so that the bank can recover, partially or totally, the owed amounts under the loan; given that said non-merchant person’s dealing with the bank (a merchant), then said dealing is considered and act of commerce.
 The Judicial Code lists executive titles under Panamanian law, which, in general, are obligations documented in a certain form that allows for a creditor to request payment under an executive process, which is more expedite than a common or regular judicial process.
 The Insolvency Reorganization or Liquidation Law establishes that Insolvency Courts will be created especially in connection to the same and its reorganization and liquidations processes.
 Article 31 of the Insolvency Reorganization or Liquidation Law requires that along with the reorganization request the debtor files a copy of the Shareholders (or applicable corporate body’s) Resolution authorizing the reorganization request; an explanation of its motives for filing for reorganization; audited financial statements corresponding to the last fiscal year, issued by a CPA; interim financial statements corresponding to the last trimester immediately prior to the date of reorganization request; an inventory of assets and liabilities up to that same date, certified by a CPA; a list of its property (goods), their location and their encumbrances, if any; a list of its employees or payroll, corresponding to the month prior to the date of reorganization request; and, as mentioned above, the reorganization project or plan.
 A reorganization request can also be filed by General Creditors Assembly or by the representative of a foreign insolvency process, in accordance to the Insolvency Reorganization or Liquidation Law.
 During the Period of Financial Protection, there are other special provisions that protect the debtor. These additional protections concern successive tract contract and restitution of leased real and moveable property (because of non-payment of rent, except if such defaults occur after the date of the commencement of the reorganization process).
 In which case, if the reorganization process derived from a liquidation process, then the process can revert back to liquidation, or if the cause of the reorganization was a default in payment obligations by the debtor then any creditor may request the judge for a liquidation process to be commenced.
 This time period can be extended for an additional twenty days by resolution of a simple majority of the creditors.
 If more than 50% of the recognized creditors are related, in accordance to the Insolvency Reorganization and Liquidation Law, to the debtor, then separate voting shall take place, for those creditors and for the non-related creditors, each voting group required to attain a simple majority of those creditors that represent no less than 66% of the total debt owed to each voting group.
 Reason for which we consider it a good measure of the Law, that after six months since the protection’s commencement, any rights of creditors to execute real property or trust guarantees, shall be reestablished without the need of any judicial resolution.
 Under Panamanian law foreign judicial resolutions, for instance, can be acknowledge by Panama courts through an exequatur process that can be lengthy in practice. The Insolvency Reorganization and Organization Process intends that the exequatur process is not to be applied, particularly to the reorganization or liquidation processes’ under the new law.
By Enrique de Alba Arango, Partner of Morgan & Morgan Law Firm
On June 27 of the present year, a historic event for the Canal and the International Merchant Marine Registry of the Republic of Panama occurs.
One day after the new locks of the Panama Canal were inaugurated with the transit of the container vessel “Cosco Shipping Panama, the first vessel registered under the Panamanian flag transits, which coincides with being the first transit of a liquid petroleum gas vessel named “Lycaste Peace” in its commercial traffic from Houston, Texas to the Port of Hitachi, Japan, owned by the Japanese shipping Line Nippon Yusen Kaisha (NYK Line) and represented in Japan by Mitsubishi Logistics Corporation. The Resident Agent of this first transit of the vessel registered in Panama is Morgan & Morgan Law Firm.
Since the inauguration of the Expanded Panama Canal, the vessel that has paid the highest toll so far and also set a new record due to the Expanded Canal was the vessel “Mol Beyond” which paid the sum of $837,203.00.
Several precedents are well marked on the Panama Canal and its International Merchant Marine Registry, whose origin is given with the enactment of Law 63 of December 15, 1917 which amends and supplements the Fiscal Code, giving the power to grant the national flag to a vessel that so requests it and which will celebrate its 100th anniversary next year 2017. It is understood according to records that the first vessel registered under the national flag was the carrier Belén Quezada.
By Law 8 of January 12, 1925, procedures for the nationalization of merchant vessels are created and this law formally establishes the Merchant Marine Registry of the Republic of Panama.
Nowadays, the Maritime Registry of Panama is proud and honored to be the world’s largest register with approximately 8,831 registered vessels to June 14 of this year representing 235,295,719.26 gross tons. The registration of vessel and other activities under the umbrella of the Panama Maritime Authority, as of December 2015 contributed to the treasury the sum of $162,089,501.00.
Among the legal instruments that have brought success to the merchant marine of the Republic of Panama, we can mention in addition to those already mentioned:
- Law 2 of January 17, 1980, which creates the Directorate General of Consular and Maritime Affairs.
- Law 14 of May 27, 1980, whereby the preliminary registration of ownership titles and mortgages through proprietary merchant marine consulates and directly with the Public Registry of the Republic of Panama is regulated.
- Decree-Law 7 of February 10, 1998 creating the Panama Maritime Authority, grouping into a single entity all activities related to the maritime sector.
Subsequently, from 2008 it was decided to update all our legislation related to the maritime activity and four new legal instruments are enacted:
- Law 57 of August 8, 2008, whereby the Directorate General of Merchant Marine is created (grouping into a single law, everything related to this activity);
- Law 55 of August 8, 2008, which replace the Book II of the Commercial Code of the Republic of Panama to create the Maritime Trade Act, as amended by Law No.27 of 28 October 2014;
- Law 12 of January 23, 2009 amending Law 8 of March 30, 1982 and Law 11 of May 23, 1986, which in turn was amended by Law 58 of October 6, 2010 and Law 16 of March 21, 2013, whereby standard maritime procedures are enacted,
- And Law 56 of August 6, 2008, whereby the General Ports Act and its regulations is created.
I mention these legal instruments, because without them, the development of our merchant marine, international forum of maritime litigation and port activity would had been set aside by the competition provided by countries that develop these same type of activities associated with the maritime industry.
The momentum that our lawyers have given to the development of maritime activity in the Republic of Panama to the challenges of trade, should never stop because the success of Panama in this important industry is due to the constant renewal of its legal instruments, seeking new and better ways for the development of the maritime sector.
The foregoing leads us to mention an important bill that is planned to be submitted to the National Assembly this month of July on maritime financing. This bill creates a special legal regime for financing operations of the local and international maritime industry, where tax, labor and immigration incentives are granted to companies that carry out these operations from Panama.
The entities that could benefit from these incentives are the general license, international or representative banks duly authorized by the Superintendence of Banks, companies carrying out operations to design, structure and develop the financial conditions of maritime credit and its guarantees, regulated financial companies and maritime financing entities and joint ventures (Joint Venture) of the Panamanian State with individuals.
Among the tax incentives will be the exemption from paying income tax from such funding for the construction and purchase of vessels. In order to benefit from this tax incentive, these entities must establish a separate accounting which states the recording of the date of execution of each loan.
Those companies whose maritime financing operations are carried out in the Republic of Panama or shipyards engaged in the construction and repair of commercial vessels, yachts and others will not cause the payment of income tax.
There are also exempted from paying income tax, interest and fees earned by banks for maritime financing activities that are duly accredited for such activities, as well as income from insurance and reinsurance that secure credits from certified maritime financing institutions and/or Bankable Maritime Projects.
The bill in question establishes a low import tax on machinery and equipment needed for the development of the maritime industry, no greater than 3%.
As for immigration and special labor regime, it is aimed to create the necessary conditions to help develop the relevant maritime activities with the maximum efficiency required by a maritime center of this nature.
A Certifier and Supervisory Board of Maritime Financing Entities is created, which would consist of the following members:
- A member appointed by the Panama Maritime Authority.
- A member appointed by the Ministry of Economy and Finance.
- A member appointed by the Ministry of Commerce and Industry.
- A member appointed by the Ministry of Labor and Workforce Development.
- A member appointed by the National Immigration Service.
- A member appointed by the Council of Financial Regulations.
- A member appointed by the Panama Canal Authority.
Before I conclude and the reason for this article is partly to draw attention to a provision that has been introduced at the last minute to the maritime financing bill mentioned herein, where it is imposed a term of 20 years to the tax exemptions, incentives and other benefits that this new project aims to create in the Republic of Panama.
It is advisable to study this condition or term carefully, because such a sophisticated and specialized activity as the maritime financing activity, should not be set a peremptory period, given than this period would undermine completely the intention to create a new activity that could pay off to the economy of the Republic of Panama, which in other international financial centers produce optimal results.
Let us hope that all the good spirit that every Panamanian has had in recent days with the opening of the newly expanded locks of the Panama Canal and its role as a facilitator of international maritime trade, help to understand how important it is to maintain our competitiveness in this important industry.
It is a true and lawful translation into English of the original document written in Spanish – Michelle Williams – Authorized Public Translator – Resolution No. 5775 of November 12, 2014 – Republic of Panama.