According to Mossack Fonseca & Co., corporate transactions for structural modifications such as spin-offs, mergers and transformations “involve preparation, decision and execution phases that are likely to fundamentally change the composition of the assets and the legal relationship between the companies involved, their creditors and their partners/members.”

The recently enacted Law 85 of November 22, 2012, introduced long-awaited regulations concerning corporate spin-offs, mergers and transformations of commercial companies in Panama.  The new law provides the legal framework for the demerger or spin-off of companies as a form of business reorganization and also allows for the reactivation of companies whose dissolution had been voluntary.

In recent years, Panama has experienced unprecedented economic growth, making it the fastest growing economy in the region.  Although Panama has always regulated the merger and transformation of companies, corporate spin-offs had not been contemplated in its legal system.  Panama’s historic place in the commercial, corporate and financial world required the inclusion and proper regulation of these forms of corporate reorganization.

Panamanian law never prohibited spin-offs or invalidated the recording of a Panamanian corporation’s demerger.  Spin-off transactions were recorded at the Public Registry and were used for financial, legal or tax purposes.  These transactions primarily consisted of the acceptance of a demerger by the General Shareholders Assembly, the partition of the company assets, and the formation of new companies with the split assets.  These agreements and decisions aimed at "splitting up" companies were duly registered and recognized, giving them legal validity in Panama.

However, spin-offs have recently been included in the Panamanian legal framework, with the addition of a chapter consisting of six (6) articles into the Code of Commerce.  This new legislation allows any kind of company to be demerged, including Corporations, Limited Liability Companies, Limited Partnerships and any other type of company that is regulated by Panama’s Code of Commerce.

There are Two Types of Spin-Offs:

  1. A Pure or Total Spin-Off, where the company being divided is dissolved without being liquidated.  In this case, the equity divided into two or more parts is transferred in full to the beneficiary companies, thus dissolving the company being divided.  The partners in the divided company become partners in the beneficiary companies.
  2. A Partial Spin-Off, where the company being divided is not dissolved following the split.  Instead, the company continues its existence with part of its assets segregated in favor of the beneficiary companies.  The beneficiary companies must have the same partners as the company being demerged.

The newly adopted Article 505-A, Chapter IX-A of the Code of Commerce states:  "[A] commercial company of any kind or nature may be divided by splitting up all or part of its assets and transferring them to one or more already constituted companies or upon the creation of new companies named beneficiaries, which have the same partners or shareholders as the company being divided or which have the latter company as their partner or shareholder."

Article 505-B stipulates the procedure for the authorization, registration and notification of spin-offs.  "Spin-Offs will be approved by the partners or shareholders of the company being divided and the minutes approving same or a certification issued by whoever acted as secretary must be protocolized through a Public Deed and recorded at the Public Registry for same to be effective with regard to third parties."

Article 505-C sets forth the items that can be agreed to in the minutes approving the split.  "The partners or shareholders of the company being divided may resolve and record the following in the minutes whereby the spin-off is approved, namely:

  1. The total or partial transfer of assets, individually or per blocks.
  2. The limitation of liability regime of the company being divided and of the beneficiary company or companies.
  3. The transfer or not of the liabilities of the company being divided.
  4. The transfer of the relevant interests or shares to the beneficiary companies.
  5. The amount of interests or shares corresponding to each partner or shareholder of the company being divided, in proportion to their capital share therein.
  6. The approval of the Articles of Incorporation of the company or the new companies to be constituted."

Article 505-D states that the spin-off shall become effective as regards any obligations, responsibilities and rights of the beneficiary companies after such registration.

Article 505-E describes the final registration requirement as the service of notice to third parties and the publication of the Public Registry Office certification in a local newspaper for a term of 3 days.  Under this article, a liability regime is established and beneficiary companies are made severally liable in cases where the transfer of assets is damaging to their creditors.  In addition, the spin-off may be challenged up to thirty (30) days after the publication of the Public Registry Office certification.

Article 505-F states that transfers of assets resulting from corporate spin-offs are not considered a disposal for tax purposes, thereby eliminating the otherwise resulting tax.  In Panama, a general rule for the tax treatment of spin-offs has been drafted which creates effective guidelines to lend certainty to the transaction, although it will be subsequently regulated by the Department of Revenue.  The last paragraph of this article stipulates a prerequisite for the spin-off to take place, consisting of a 30-day prior notice to the Department of Revenue, which becomes a precondition for initiating a company’s spin-off process.