Morgan & Morgan contributed to the first edition of the Latin American corporate investigations guide
Panama, January 31, 2020. Partners Inocencio Galindo, Ricardo Aleman, Kharla Aizpurua Olmos, and associate Joy Paull Torres contributed with the first edition of the Latin American investigations guide, a frequently asked questions for conducting corporate investigations in various jurisdictions on Latin America.
This publication of the international law firm Hogan Lovells provides an overview from leading legal experts across the region.
The publication is available here.
Or a PDF version (Panama Chapter) is available to download here.
Panama, November 6, 2019. Jose Carrizo, head of the Litigation and Dispute Resolution practice of Morgan & Morgan, contributed with the Panama chapter of The Arbitration Review of the Americas 2020, providing a comprehensive analysis of the arbitration system in Panama, its legislation and every aspect that confirms the country as an international and regional center for the resolution of arbitral disputes.
The publication can be download here.
Fanny Evans, Senior Associate, Morgan & Morgan
In 2013, Virginia Ginni Rometty – CEO of IBM, said “I would like you to think of big data as the next natural resource that can be to our era what steam, electricity and oil were for the Industrial Age.”
Probably, you have read or heard: Data is the new oil! Data is the new bacon! Data is the new currency! These analogies have become very popular because data is now considered one of the most important commodities.
This is the result of the emergence of many successful Social Networks that, although they are not payment platforms, have turned the data into a source of value.
The need for a data-protection compliance program in business is becoming increasingly important after several high-profile leaks of companies’ data. Some of the biggest data breaches over the last two years include T-Mobile, Marriot, British Airways, Quora, Google, Orbitz and just recently, Capital One bank in the United States. A successful data breach may occur in less than one minute. Yet, businesses may take more than weeks to realize a breach has occurred.
When giving the first steps into complex waters like data protection, it is very common that companies get lost in the avalanche of legal requirements or in developing that product or service that might result attractive to its clients. However, for a business, changing the focus to issues that they may consider more interesting should never be an option because the results of data breaches include many types of damages: fromreputational to financial. Sometimes it can even affect an entire country as happened with, in my opinion, the wrongfully or unjustifiably called “Panama Papers”.
In the European Union, data protection is a fundamental right, and the General Data Protection Regulation (GDPR) which came into force on May 25th, 2018, is the new framework for protecting that right. Other countries are looking to the GDPR as they develop or implement their own laws to protect data.
Even if companies have an “it will not happen to me” approach to data breaches, in many countries, legislation is forcing them to rethink their reasoning. Here is where compliance plays an important role to help to plan a data-protection compliance program.
Here are five steps that can help as guidance when drafting or reviewing your data-protection compliance program:
- Understand your risks and legal and ethical obligations
One of the most important elements when building a data-protection compliance program is considering your risks and what is most important and mandatory to the business, instead of jumping into the requirements of a legislation without fully understanding your needs because not all risks or obligations are managed in the same manner or to the same extent. This program needs to set out the appropriate guidance in key areas.
Having said the above, the first step should always be to understand the business necessity to comply. This involves a careful analysis of what your obligations are, what the risk of breaching those obligations might be and what risks your company is willing to take.
- Document and review your policies
Your data-protection compliance program should be properly documented. Once the obligations and risks are understood, it is vital to document them. It is not just enough to know you are data privacy compliant. Your data-protection compliance program should be clearly verifiable and readily accessible through accurate reports and documentation for internal or external examinations.
The compliance officer shall perform a formal review on a regular basis to ensure that the data-protection compliance program is progressing as planned and that it is adjusted to meet any changes in legislation or the business.
- Allocate ownership
The responsibilities and tasks related to confidentiality and data-protection may overlap with other business policies, such as information technology security, recordkeeping, risks and audit, human resources, management of confidential information and others as it requires various skills to succeed. Therefore, the most advanced and elaborated data-protection compliance program will fail if there is no clear ownership of the tasks. Each business will structure the ownership differently, but it is vital that who is the owner of each task of the program is clearly understood and that the owners have the necessary resources, including training, so that they are competent to fulfil their role in a manner that is consistent with the business’ compliance culture.
- Provide training and the necessary resources
Always train your staff. If you have an informed team it will reduce your risk. Raise staff awareness.
Not only does training staff reduce the risk of breaches, it also demonstrates compliance before internal and external inquiries. For example, if an organization was to experience a data breach and they had documented their staff training on data protection, this would be used as evidence to prove that they had taken the appropriate steps to prevent a data breach and were taking the legislation seriously, if any.
Training should aim to ensure that all members of the team have an understanding of the data that they will have access to and the risks entailed. Training should be provided on a regular basis, and it ought to be performed again whenever there are significant changes to positions, structures, risks or obligations, or when actual issues arise. Also, the business shall incorporate data protection training into its process for onboarding new employees.
Businesses shall embed data-protection compliance program into it culture so that protecting information becomes second nature. This aspect, training and continuing education, should always include senior management.
- Review the Financial Action Task Force (FATF) Guidance on the Risk-Based Approach
A risk-based approach to compliance involves identifying the areas of high risk within the business’s compliance universe and building and prioritizing its compliance programs around these risks.
In order to assist both public authorities and the private sector in applying a risk-based approach, the FATF has adopted a series of guidance in co-operation with relevant sectors. Businesses shall review the guidance applicable to its industry to make sure that the appropriate mitigation measures in accordance with the level of risk are taken.
Data is one of the most important assets a business has. For that reason alone, data protection compliance program should be a top priority for any business.
Panamá, October 29, 2019. Partners Jazmina Rovi and Francisco Linares contributed to the Panama chapter of Getting the Deal Through: Market Intelligence-Shipping 2019, a publication with an analysis of the evolution and the regulatory scenario of the maritime industry globally.
To complete article can be read on the following link:
Analissa Carles, Associate, Morgan & Morgan
On May 19, 2016, the concept of a “Bankruptcy,” as the legal term was defined, ceased to exist under Panamanian law. Law 12 of 2016 (the “Insolvency Law”) entered into force on that date and introduced new proceedings into our legal system. These proceedings are referred to as Reorganization and Liquidation.
The enactment of the Insolvency Law sought not only the protection of the rights of creditors, but also to achieve a differentiation between “efficient” and “non-efficient” companies, depending on the reasons and circumstances that give rise to their insolvency status.
For “efficient companies”, the law introduces the “Reorganization Proceeding,” the main purpose of which is the recovery and continuation of the company as an economic unit and employer.
A Reorganization Proceeding pursues similar objectives as the bankruptcy protection provisions established in Chapter 11 of the United States Bankruptcy Code. Thus, a Reorganization Proceeding allows the restructuring of a company’s debt obligations and can be initiated at the request of the insolvent company or by its duly organized creditors through a “Board of Creditors.” The insolvency petition must be accompanied by a series of documents that include, among others, the company’s financial statements, an inventory of its assets and liabilities, payroll obligations and the Reorganization Plan, in which the debtor must provide a financial, organizational, operational and competitiveness restructuring project with the intention of solving the causes that led to the company’s failure to make required payments, its imminent insolvency or foreseeable lack of liquidity.
This Reorganization Plan is significant in that it serves to initiate the proceeding itself. Subsequently, when the creditors formally join the proceeding to submit evidence of their credits, the Reorganization Plan must be subjected to a vote by the established Board of Creditors, who must either approved or reject said plan. The result of this vote will decide whether: a) the company will in effect be reorganized through the execution of said plan; b) the culmination of the proceeding without any agreement, in which case the bankruptcy protections would be lifted and the debtor would have to negotiate with each of its creditors separately; or, c) the Judicial Liquidation of the Company.
Judicial Liquidation Proceeding
The Judicial Liquidation Proceeding, as the name implies, focuses on liquidating “inefficient” companies in a prompt and orderly manner. This can be initiated at the request of the debtor by means of a Voluntary Liquidation or by means of a duly substantiated petition from a creditor, which in this case would be a Compulsory Liquidation.
In either case, the petition must be accompanied by a series of requirements and documentation. In the case of a Voluntary Liquidation petition, provided all requirements are met, the court will issue a resolution declaring that the company is in liquidation.
For Compulsory Liquidation, provided all requirements are met, the request will be accepted and the debtor will be given an opportunity to answer the creditor’s petition. The court will then set a date for an initial hearing. If the debtor opposes the petitioner’s claim against it and the judge deems such opposition to have sufficient grounds, it shall deny the claim and the proceeding shall terminate. However, if the court deems said opposition to have insufficient grounds or if the debtor does not even submit any opposition, the debtor may: a) allocate sufficient funds for the payment of the debt; b) agree with the requesting creditor for the hearing to be suspended in order for the parties to reach an arrangement; or, c) submit to a Reorganization Proceeding. If, however, the debtor does not choose any of the aforementioned options, the judge will issue a resolution for a Liquidation Declaration, with the corresponding legal effects.
It has been interesting to see the development and execution of this relatively new law before the courts of Panama, especially since it also provides for the creation of new Insolvency Circuit Courts, as well as the Fourth Superior Court of the First Judicial District, consisting of three justices elected by the Supreme Court, in full, with exclusive jurisdiction over insolvency proceedings. However, to date, these courts have not been created and, therefore, the Civil Circuit Courts are currently in charge of hearing such proceedings. These circumstances have forced the judges ruling over these cases to become overly reliant on the technical criteria of the Bankruptcy Administrators appointed by them within the proceeding. Consequently, said Bankruptcy Administrators, who serve as an assistant of the Court, must have the legal and accounting capacity to warn of possible irregularities within the proceeding, from the initial scrutiny of the insolvency application, together with all the supporting documentation. They must also be able to determine if, indeed, they are facing an efficient company that can improve its current financial condition, and they must even make recommendations against the aforementioned Reorganization Plan, before it is submitted to the Board of Creditors for their vote. This level of expertise, although not expressly required by law, has become a necessity given the unforeseen preponderance that the expert input of these Bankruptcy Administrators has acquired.
There are many conceptual and practical elements to analyze in Law 12 of 2016. However, as is often the case, only through the practice and application of this law has allowed both lawyers and financial institutions to fully grasp the challenges ahead. Regardless of the above, the objective of the Law is positive – especially since, previously, a bankruptcy declaration was a de facto death knell for a company. It is therefore worthwhile to focus efforts on maximizing the advantages created under the law in order to obtain the desired results. These, however, will ultimately depend to a large extent on the good will and good faith dealings of both creditors and debtors.
Alvaro Tomas, partner and Vice President of Operations of the Fiduciary Unit of Morgan & Morgan
The Panamanian government has issued Law 99 of October 11, 2019, which establishes a General Tax Amnesty Law (“Amnesty”) that includes the elimination, for a limited period, of the penalties and surcharges caused by non-payment of the obligations with the National Treasury for corporations and private interest foundations. This law also includes amnesty for various types of interests and penalties resulting from non-payment of other taxes (for example: property or income tax).
Tax Amnesty Terms
The Amnesty Law will be extended until February 29, 2020 with exoneration as follows:
Full exoneration (100%) for those who pay in October and November 2019;
95% for those who pay in December 2019;
90% for those who pay in January 2020 and;
85% for those who pay on February 29, 2020.
The aforementioned Amnesty is the perfect opportunity to bring your legal vehicle into good standing without additional charges or to proceed with its dissolution instead of being struck off (which is the legally correct manner).
At Morgan & Morgan we have a range of seasoned professionals working alongside the young talent that can help you with the administration of your corporate vehicles and foundations. Please write to firstname.lastname@example.org if you are interested in more information.
For the past few decades, Panama has established public-private partnerships (“PPPs”) in projects as diverse as toll roads, water treatment plants, ports, telecommunications networks and the generation and distribution of electricity. These projects, however, have been created and managed under either a general (and, for current-day standards, insufficient) concessions law dating back to 1988; industry-specific (and, sometimes, project-specific) legislation enacted in the mid-to-late-90’s; or the general public procurement law enacted in 2006. In recent years, framework PPP legislation was discussed by the National Assembly, only to be voted down in 2011. It was then considered again at various points between 2014 and 2018, although never formally given any debate before the legislature. In the meantime, a 2017 study commissioned by the Inter-American Development Bank and conducted by The Economist Intelligence Unit, ranked Panama 18th (out of 19 countries listed, with only Venezuela lagging behind), in terms of PPP regulatory frameworks in the region.
In light of these circumstances, the Panamanian Government took a decisive step forward in developing an updated (and more comprehensive) PPP legislative framework, as a means to: a) provide an option for developing major infrastructure projects without compromising the Government’s indebtedness levels, b) encourage private investment and job creation, and c) strengthen Panama’s competitive position vis-à-vis other Latin American countries (many of which enacted successful PPP legislation long ago). On July 31, 2019, barely a month after taking office, the Administration of President Laurentino Cortizo submitted a framework PPP bill before the National Assembly. On September 11, 2019, the Assembly passed the bill, which is now only pending signature by the President and publication in the Official Gazette in order to be enacted into law.
The new law will provide a much-needed regulatory and institutional framework in order to allow for the development of major projects without requiring substantial short-term disbursements of public funds.
The new legislation seeks to attract capital from private investors who, at the same time, will bring forth their experience, know-how, equipment, technologies and technical and financial capabilities to the fore. These resources will be used in order to “create, develop, improve, operate and / or maintain public infrastructure for the provision of public services.” Thus, the PPP law both allows and requires the private sector to develop, finance, build, operate and maintain – for an amount of time specified in the corresponding contract – projects geared to provide public services (e.g., roads, bridges, subway lines, electric transmission lines, etc.). The law provides for a maximum contract length of 30 years (which can be extended for up to 10 additional years). Thus, the idea is for the State to enter into long-term partnerships with investors that have the requisite experience to not only build, but also operate and maintain these projects, meeting the service and quality standards established in the RFP documents as well as the PPP contract.
The institutional framework for PPPs is also an innovation of the new law since – unlike the existing public procurement and administrative concession laws – PPP contracts involve not only the contracting government entity and the PPP contractor, but also three new government entities:
- A Governing Body (the Ente Rector), comprised by the Minister of the Presidency (who will preside over it), the Minister of Public Works, the Minister of Economy and Finance, the Minister of Commerce and Industries and the Minister of Foreign Affairs. In addition, the Comptroller General of the Republic, although not granted voting rights within the Ente Rector, will nonetheless be a part of it and entitled to voice her/his opinion at meetings. Among other functions, the Ente Rector will authorize the drafting of technical reports on projects that may be subject to implementation as PPPs, the approval for projects to be designed as PPPs and of the RFP documents (including the draft PPP agreement), as well as approving any changes to the PPP contract once it is in force;
- A National PPP Secretariat, serving under the Ministry of the Presidency and whose functions include – among others – providing technical and operational support to the Ente Rector, as well as developing the criteria for selecting PPP projects, the guidelines for assigning risks and granting of guarantees, as well as the guidelines for the design of the RFP documents and model PPP contracts; and
- An Advisory Committee, made up of four members of the business sector, two members of the academic sector and two representatives of organized labor. The Advisory Committee can recommend potential PPP projects to the Ente Rector, through the National PPP Secretariat.
Prior to the PPP bidding process, preliminary studies must be carried out based on six eligibility elements established in the law (social benefits, economic cost-benefit analysis, risk allocation, service indicators, feasibility studies, as well as environmental and legal aspects). The Contracting Public Entity must then prepare a technical report, subject to the opinion and observations of the National PPP Secretariat, which must then be sent to the Ente Rector, so that it can decide whether the project will be bid out as a PPP project.
Projects with a value of less than fifteen million dollars cannot be tendered as PPP’s, except in the case of municipal projects, in which case the criteria for granting exceptions will be further developed in the regulations that will be issued after the law comes into effect. Furthermore, projects cannot be implemented as PPP’s in any of the following cases: a) if existing commitments under government contracts then in force exceed 30% of actual investments in the previous year, b) if existing commitments in the following five years – under contracts then in force – exceed 30% of the projected investment of the contracting public entity, pursuant to the Government’s Five-Year Investment Plan in the respective fiscal years, or c) the total cumulative present value of existing commitments of the Non-Financial Public Sector in PPP contracts exceeds 7% of gross domestic product.
The selection of PPP contractors will be carried out under objective criteria, since the contract will be awarded to the bidder that meets the mandatory requirements and submits the best economic offer. In addition, there are clear limits on the amounts and time periods for which PPP contracts can be modified. These provisions seek to eliminate subjective factors in awarding PPP projects, as well as avoiding overly expensive addenda to PPP contracts.
In order to facilitate financing structures – either through syndicated credit facilities or through capital markets – the law provides for the option (or, in case the project is partially funded through government subsidies or contributions, the obligation) for the assets involved in the project to be placed into a trust to be managed by a trustee that is licensed in Panama. This will further inoculate the projects and their related assets should the contractor face liabilities vis-à-vis third parties throughout the duration of the contract.
Finally, the grounds for disqualification currently included in the existing public procurement law are toughened, as these will disqualify bidders for a 10-year period, rather than the 5-year period established under the public procurement law.
It is important to bear in mind that the PPP law does exclude certain services and institutions from contracting under the PPP framework. Namely, the State-owned water company, the Panama Canal Authority, the Social Security Administration and the governmental financial entities and regulators, may not contract for any work or service under the PPP law. Furthermore, public health, education and public safety services cannot be contracted by any government entity under a PPP structure. Time will tell if – once PPPs begin to be implemented under the new law – the political climate will allow the excluded entities and/or services into the fold.
All in all, the new law is an important milestone in bringing Panama’s PPP regulatory framework in line with those of other Latin American countries, which will hopefully usher in a new era of success in major infrastructure investment.
Angélica Ortiz, Taxation Department, Morgan & Morgan
Law 37 of June 5, 2018, adds line 9 to article 709 of the Fiscal Code, which is related to the annual income tax deductions to which natural persons are entitled, regarding school expenses incurred by the taxpayer with respect to their dependents. Additionally, Executive Decree 368 of December 26, 2018 and Resolution No. 201-1635 of May 13, 2019, establish the regulations applicable to the deduction of said expenses.
From the regulations indicated above, we highlight the following aspects:
- School expenses, including tuition and school fees, supplies, uniforms and school transportation, incurred by taxpayers with respect to their minor dependents, will be deductible from the taxable income.
- School expenses related to the payment of tuition and credit hours incurred by taxpayers with respect to their dependents of legal age who are still under their tutelage, attending third-level or higher education.
- The deduction may be up to a maximum annual amount of B/.3,600.00, for each dependent; and may also be applied to taxpayers who pay for their own studies, as long as they submit their tax return declaration.
- Employees who pay Income Tax, in order to make the deduction, must: i) submit an affidavit of the fiscal period in which they incurred those expenses and ii) submit a petition requesting the deduction, duly accompanied by the detail of school expenses and supporting documentation (invoices).
- Invoices or equivalent documents supporting the school expenses to be deductible must be issued in the name of the father, mother or the person who has legal tutelage of the student. They may also be issued in the name of the dependent.
- The deduction of school expenses will be recognized only for payments made in the Panamanian territory.
- The financial obligation of parents with their children of legal age will be until they reach 25 years-old.
- Taxpayers whose dependants have a level of disability but that does not prevent them from attending an educational or university center will be entitled to the deduction of all school expenses.
- School expenses will be deductible in the tax return declaration of the year 2019, and be settled in the year 2020.
María Eugenia Brenes, associate of the Intellectual Property and Corporate Law Department of Morgan & Morgan
Formalizing a business requires several decisions of a legal nature.
The first thing that should be considered is to determine whether the venture is on a personal basis or through a corporation. This decision is very important and it depends, mainly, on the following factors:
a) Economic Factor. It is more cost-effective to carry out business activities on a personal basis (natural person), since maintaining a company (legal person) involves, among others, the payment of fees to the lawyer acting as a resident agent and the flat annual franchise tax. However, the fiscal obligations per se are the same, that is, the requirements of the General Directorate of Revenues (DGI) must be met in both scenarios by presenting reports, declaring taxes and having a fiscal team, among others.
b) Risk Factor. Choosing to carry out activities through a company involves separating the personal assets, rights and obligations from those of a company; therefore, the assets of natural persons would not be affected in the event that the company has to answer for any obligation and vice versa. The foregoing means that the personal assets would not be affected in the event of any claim by third parties against the company.
In view of the above, although it is more expensive to operate a business via a company, we consider it appropriate to take that path as it allows keeping the personal assets separate from that of a company.
Type of activities to be carried out
The second consideration is to determine if the activities to be carried out are allowed or not, since there are restrictions in Panama for reasons of nationality and suitability. This applies to natural persons as well as to the directors and shareholders of a company. For example, certain activities such as retail sales, or beauty clinics, stylists or cosmetologists are activities that are reserved for Panamanians. There are many other activities that can be exercised by nationals of other countries without any restriction, for example, the wholesale sale of goods and the provision of services in general.
Domicile or business premises
Having determined the commercial activity to undertake, it is necessary to determine the address or location where it will be carried out. This is essential, since, depending on the zoning code, certain areas are not suitable for commercial activities or some type of them. For example, if the zoning of a residential area prohibits the location of food stores or beauty salons; it will not be feasible to carry out these activities on said location. The Ministry of Commerce and Industries recommends to all applicants of a Notice of Operation to have a zoning certificate of the site where the commercial activities will be carried out to demonstrate its viability.
Notice of Operation
The next step is to obtain a Notice of Operation that will constitute the ideal instrument that enables either a natural or legal person to trade in Panama. For this purpose it is necessary to enter the site www.panamaemprende.gob.pa.
When accessing, all the fields of the notice application must be filled in, including, among others, the name that is intended to be used to identify the commercial establishment. It is convenient to choose a name that shows distinction with other businesses to avoid any confusion with other businesses that may give rise to disputes over commercial denominations. The commercial name of an establishment is closely related to the use of the brand with which it is intended to identify products and/or services; thus, it is important to have the advice of a legal professional.
Once the system generates the payment slip for the corresponding rights, it is necessary to pay off the amount with a credit card or directly in Banco Nacional de Panamá. When the payment is made, the system will accept it and allow the printing of the Notice of Operation that will protect the business activities.
For certain businesses it is necessary to request and obtain prior or special permits before opting for the Notice of Operation. Such is the case, among others, of coffee shops, restaurants, bars, banks, financial companies, engineering services and construction in general.
Operating a business entails tax implications, regardless of whether they are carried out in a personal capacity or using a corporation, such as:
- Updating the Single Taxpayer Registry (RUC), and obtaining a Tax Identification Number (NIT);
- Annual payment of the Notice of Operation Tax;
- Getting of fiscal printer, depending on the business;
- Registering in the corresponding Municipality and pay monthly taxes;
- If there have workers, signing up for the CSS (Social Security System), withhold fees, and pay them monthly;
- Present monthly reports of the ITBMS (Sales Tax) to the DGI;
- Present income statements before the DGI and the Municipality of Panama.
It is worth mentioning that natural persons or companies that register with the Micro, Small and Medium Enterprise Authority (AMPYME) have the right to obtain the exemption from payment of income tax during the first two years of operation of the business. In this way, registering with the AMPYME offers advantages that also include, among others, guarantees for loans.
Generally speaking, these are the aspects that must be considered before starting a business in the Republic of Panama.
The professionals of Morgan & Morgan have the qualifications to provide optimal advice for the start of your business, foreseeing compliance with all the legal provisions that govern the matter, as well as to advise on the protection of their intellectual rights within the framework of the business.