Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

Pursuant to Panamanian law, all types of property and property rights, including tenancy, may be subjected to a security interest. Chattels, real estate, vessels, titles, receivables, rights, shares, quotas, bank accounts, negotiable instruments, usufruct, proceeds, antichresis and contractual obligations can be used as collateral. Additionally, the entire assets of a project company or sponsor may be secured through a general pledge of assets. Certain licences and concessions granted by the government may be assigned or pledged depending on the type of licence, permit or concession; as long as the licensing authority consents to the assignment or pledge. The assignment of licences and concessions requires the assignee to meet the same criteria as the assignor. However, some concessions and licences, such as water use concessions, may not be assigned under any circumstances.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

Requirements and formalities necessary to perfect a security interest depend on the type of collateral. Pursuant to Panamanian law a pledge is perfected once the secured property or title is delivered to the lender, to an agent appointed by the debtor and the project lender. The date of the pledge shall be evidenced in a public deed or notarised document. Similarly, a pledge must meet the same formalities met by the main loan agreement.

A description of the requirements and formalities applicable to various forms of collateral follows below.

Collateral over real estate and vessels

Collateral over real estate and vessels must take the form of a notarised public deed signed by the parties involved. The mortgage is perfected once the public deed is registered at the Public Registry. Applicable Public Registry fees for mortgages over real estate are US$3 for each US$1,000 worth of the value of the loan; and for the vessels the fees are calculated based on the tonnage and the insured amount.

Collateral over chattels

Collateral over chattels with a value of more than US$20,000 must take the form of a notarised public deed signed by the parties involved. The public deed must then be registered at the Public Registry. Applicable Public Registry fees are US$1 for each US$1,000 for assets with a value lower than US$20,000. For assets with a value above US$20,000, the applicable fees are US$42 for the first US$20,000 of the value of the pledged assets and US$30 for every US$10,000, or fraction thereof, of the total value of the pledged assets. Collateral over chattels worth less than US$20,000 must follow the requirements and formalities of the pledge, discussed below, and must comply with the same formalities as that of the main agreement.

Collateral over securities and titles

A pledge of securities and titles requires the endorsement and delivery of the title to the project lender, to an agent appointed by the debtor and the project lender, or to a trustee appointed to hold title on behalf of the project lender. With respect to shares or quotas issued by a company, in addition to the delivery of the share certificate the pledge should be recorded in the register of members.

Assignment of receivables

The assignment of receivables must take the form of an assignment agreement, and must be perfected by notifying the debtors of the assignment of such receivables.

A lender will rank senior in right of payment to the extent of the collateral and up to the value of such collateral. In cases with more than one creditor, the oldest pledge will have priority over the remaining pledges and will exclude the remaining pledges in the case of execution.

In addition to the registration fees listed above and payable to the Public Registry for the registration of a pledge over certain assets, there are no other charges or taxes imposed on, or by virtue of, the execution or delivery of the collateral in Panama. However, a stamp tax at the rate of US$0.10 for each US$100 of the face value of the corresponding obligations may be levied if that a loan or security agreement is submitted before any court or administrative authority in Panama.

A corporate entity or trust may hold collateral on behalf of the project lenders as the secured party. Trustee companies must be licensed by the Panamanian Bank Superintendency. Corporate entities may also hold collateral and in such capacity become responsible for the proper conservation of the pledged assets. Trustees are required to maintain their own assets separate from assets transferred to them in trust. If a trustee is declared bankrupt, all assets assigned in trust will be excluded from the bankruptcy.

A parallel debt clause that requires the debtor to make equal and concurrent payments to the lender and to a security trustee, creating a direct claim of the security trustee against the debtor, would be recognised under Panamanian law.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

In the case of real estate, chattels or any property title that is filed with the Public Registry or any other registry office, the absence of prior liens may be confirmed through a search or through a certificate issued by the Public Registry or the correspondent registry office.

Shares or quotas may be checked by reviewing the register of members, or by requesting the secretary of the company to certify that the shares are not under any type of lien.

Other types of assets should be checked by including proper representations in the agreements to be subscribed.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

Depending on the types of assets and guarantees, secured lenders may enforce their rights within or without the court system. Judicial enforcement to claim real estate mortgaged collateral requires the lender to file a foreclosure action, usually in civil court. The same course of action is applicable in the case that the lender holds a general pledge of assets, which will normally encompass personal and real estate property. Non-judicial enforcement is also available in certain circumstances. Collateral secured through a pledge or mortgage of chattel may be foreclosed without the need to access the court system. However, so the lender may privately foreclose, the security agreement must establish the method of fairly appraising the value of the assets in US dollars. If the agreement does not include a valuation method, the parties to the agreement must appoint three experts who will have to agree on the value of the pledged assets. The lenders are not restricted from taking part in foreclosure sales and acquiring the pledged assets.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

The ability of a project lender to enforce its rights as a secured party is not affected in a bankruptcy proceeding because Panamanian bankruptcy law recognises and upholds the priority a secured lender has over the collateral. If a project company becomes insolvent and is driven to bankruptcy by its creditors, secured lenders will still collect with priority over any bankruptcy creditor from collateral mortgaged or pledged to the lender by the project company.

If the secured assets are not enough to repay the obligation those assets were meant to secure, then the unsecured portion of the claim will be ranked with all other unsecured bankruptcy creditors. Bankruptcy provisions rank unsecured creditors at the end of the collection line, after tax liabilities; legal expenses of the bankruptcy; and employees’ claims. However, a bankruptcy judge has the authority to review any debtor transactions and transfers taking place up to four years prior to the declaration of bankruptcy. Should the bankruptcy judge consider that the debtor was in a state of bankruptcy during any portion of the preceding four years, the bankruptcy judge may void any transactions or transfers of property occurring within those four years.

Governmental institutions are excluded from bankruptcy regulation and proceedings.

As a general rule, individuals and companies are subject to the bankruptcy and reorganisation general regulations. However, Panama has enacted legislation providing for special administrative intervention, reorganisation and liquidation proceedings for the following business sectors.

Banks and trustees

Liquidations of these entities are governed by sector-specific legislation, and are overseen by the Superintendent of Banks.

Insurance, reinsurance and captive companies

Liquidations of these entities are governed respectively and separately by insurance, reinsurance and captive insurance legislation, and are supervised by the Superintendent of Insurance and Reinsurance.

Savings and loans and co-ops

Liquidations of these entities are governed by sector-specific legislation and are overseen by the Panama Co-op Institute.

Brokers, investment companies, investment management companies and stock exchanges

Bankruptcy proceedings for these entities are governed by special legislation, and overseen by the Superintendency of the Securities Market.

All requests to seize the assets of a company must be filed before a civil court with competent jurisdiction. Government assets and property are not subject to attachment.

Foreign and local creditors, in general, have the same rights in a bankruptcy proceeding. However, if so decided by the bankruptcy judge, foreign creditors may be granted an additional term to file and verify their credits.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

There are no restrictions, controls, fees, or taxes in connection to foreign currency exchange. However, the value paid in foreign currency must be equal to the fair appraisal value of the asset discussed in the preceding section. The US dollar has been the currency of legal tender in Panama since 1904.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

Restrictions and controls

There are no restrictions or controls on remittances of investment returns or loan payments to parties in other jurisdictions. However, certain taxes may apply. The Panamanian tax system is based on a territoriality principle. Consequently, income tax is levied on net income derived from operations taking place within the territorial boundaries of Panama. Income received from foreign sources is not subject to taxes in Panama.

Fees and taxes

The Panamanian tax code provides that interests, commissions, other charges over foreign loans and any other type of financing arrangement are subject to withholding at the corporate income tax rate of 25 per cent over 50 per cent of the total payment of interest, commissions or other charges, namely, 12.5 per cent of the total payment to the foreign creditor, provided that the local borrowing entity includes such payments as deductible expenses in its income tax statement. However, if the local borrowing entity reports a loss in its income tax statement, it will be subject to withholding on all payments to foreign creditors. The 12.5 per cent rate must be withheld by the local borrowing entity, regardless of the type of financing arrangement in place with the foreign creditor. Hence, the foreign creditor is not liable for any further income or any other tax payment or tax return with respect to said interest payments.

Financing arrangements with Panama-based creditors are not subject to withholding. Payments to local creditors are considered and must be treated as local source income by local creditors, and are subject to the full income tax rate of 25 per cent. Local creditors must report all interest and commission income for the calendar year, with their income tax return that is due before 31 March of the following year.

Remittances on investment returns are taxed with a 10 per cent dividend withholding. Said withholding is applicable to any shareholders of Panamanian companies that have obtained a business licence or operation permit in Panama, and that have issued registered shares. The dividend withholding tax rate for foreign or exempt income is 5 per cent. If there are no distributions or if distributions are less than 40 per cent of net earnings on a fiscal year, then retained earnings will be subject to a complementary tax of 10 per cent over the difference between the amount distributed and the total net earnings. If the applicable dividend tax rate is 5 per cent, any distribution lower than 20 per cent of net earnings will trigger the 10 per cent complementary tax.

Panamanian companies are exempted from paying dividend taxes, over any income deriving from a dividend payment, provided that the company declaring such dividends has already withheld and paid the applicable dividend withholding.

Since 2009, Panama has subscribed to and ratified double tax treaties with Barbados, the Czech Republic, France, Ireland, Israel, Italy, Luxembourg, Mexico, the Netherlands, Portugal, Qatar, South Korea, Singapore, Spain, the United Arab Emirates, the United Kingdom and Vietnam. Dividend tax withholding and withholding tax related to interest, commissions and other charges over foreign loans in those double tax treaties are as described below.

Dividend tax

Dividend tax is as follows:

  • Barbados and Mexico: 5 per cent when the shareholder owns a minimum of 25 per cent of the capital of the company paying dividends or 7.5 per cent of the regular applicable dividend withholding tax rate in the remaining ownership scenarios;
  • Spain: 5 per cent when the shareholder owns a minimum of 40 per cent of the capital of the Panamanian or Spanish company (the company); and 10 per cent in the remaining ownership scenarios. However, a special rule in said treaty establishes that a zero per cent dividend tax will apply when the shareholder is a corporation that owns 80 per cent of the capital of the company and the shares of said corporation are offered in a public stock exchange; 50 per cent of the corporation’s shareholders are residents of Spain and Panama; less than 25 per cent of the corporation’s shareholders are residents of a country other than Panama or Spain; or more than 25 per cent of the corporation’s shareholders are residents of countries, other than Panama or Spain, and said counties have subscribed to double tax treaties with the company’s country of incorporation;
  • Ireland: 5 per cent;
  • Qatar: 6 per cent;
  • France and Luxembourg: 5 per cent when the shareholder owns a minimum of 10 per cent of the capital of the company paying dividends or 15 per cent of the regular applicable dividend withholding tax rate in the remaining ownership scenarios;
  • The Netherlands: Up to 15 per cent. However, no dividend tax will apply when the shareholder is a corporation that owns at least 15 per cent of the capital of the company and the shares of said corporation are offered in a public stock exchange;
  • Singapore: 4 per cent when the shareholder owns a minimum of 10 per cent of the capital of the company paying dividends or 5 per cent of the regular applicable dividend withholding tax rate in the remaining ownership scenarios;
  • South Korea: 5 per cent when the shareholder owns a minimum of 25 per cent of the capital of the company paying dividends or 15 per cent of the regular applicable dividend withholding tax rate in the remaining ownership scenarios;
  • Portugal: 10 per cent when the shareholder owns a minimum of 10 per cent of the capital of the company paying dividends or 15 per cent of the regular applicable dividend withholding tax rate in the remaining ownership scenarios;
  • the Czech Republic: 10 per cent;
  • Italy: 5 per cent if the beneficial owner of the dividend is a company (excluding partnerships) that owns a minimum of 25 per cent of the capital of the company paying dividends and 10 per cent for all other remaining ownership scenarios;
  • Israel: 5 per cent if the beneficial owner is a pension scheme, 20 per cent whenever the company paying the dividends is a real estate investment company, and 15 per cent in all remaining scenarios;
  • the United Arab Emirates: 5 per cent;
  • the United Kingdom: 15 per cent. However, no dividend withholding tax shall apply whenever the beneficial owner is either a company listed in a recognised stock exchange and owns a minimum of 15 per cent of the capital of the company paying the dividends, a pension scheme, or a government entity or subdivision; and
  • Vietnam: 5 per cent if the beneficial owner owns a minimum of 50 per cent of the capital of the company paying the dividends, 7 per cent whenever a beneficial owner owns a minimum of 25 per cent but less than 50 per cent of the capital of the company paying the dividends, or 12.5 per cent for all other ownership scenarios.

Withholding tax on payment of interest over foreign loans is as follows:

  • the Czech Republic, Italy and Mexico: 5 per cent if payment is made to a bank, and 10 per cent in all other cases;
  • Barbados: 5 per cent if payment is made to a bank, and 7.5 per cent in all other cases;
  • Qatar: 6 per cent;
  • France, Ireland, Luxembourg, The Netherlands, Singapore, Spain, thr United Arab Emirates, the United Kingdom and South Korea: 5 per cent;
  • Portugal and Vietnam: 10 per cent; and
  • Israel: 15 per cent. However, no interest withholding tax shall apply whenever interests are derived from corporate bonds traded on a stock exchange in the country where the payment originates and issued by a company resident in that country, as well as interests paid to pension schemes, governmental institutions or paid by governmental institutions.
Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

Project companies are not forced to repatriate foreign earnings and there are no restrictions on the use of foreign earnings.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Project companies may indeed maintain foreign currency accounts in other jurisdictions. The law does not impose restrictions on foreign currency bank accounts; rather, it depends on the policies of each individual bank. Certain local banks allow their clients to maintain local bank accounts in euros.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

There are no special restrictions, fees or taxes on foreign investment in, or ownership of, a project company or its related companies. The Panamanian Constitution provides for the equal treatment of foreign and local investors. However, the Constitution also creates two exceptions. Pursuant to these exceptions foreign investors may not own property located within 10 kilometres of the country’s borders; in islands considered strategic areas that are reserved for governmental programmes; or in islands that are not declared areas of special development and regulated by special laws; or participate in retail business activities. There are no bilateral investment treaties in force exempting the application of those restrictions on a particular nationality. Hence, no special registration requirements apply to foreign investors.

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

Under Panamanian law, all local risks must be insured by insurance companies licensed by the Insurance and Reinsurance Superintendency of Panama. However, insurance companies licensed elsewhere may issue policies to cover local or Panamanian risks, provided that licensed Panamanian insurance companies do not provide coverage for such risks, and that such policy or coverage is previously authorised by the Insurance and Reinsurance Superintendency of Panama. Cut-through clauses are not effective under Panamanian law. Panamanian law does not have limitations for local insurance policies to be payable to a foreign secured creditor.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Foreign workers must obtain an immigration visa from the National Immigration Department and a work permit that is issued by the Ministry of Labour. Labour law allows the foreign workforce and payroll of a local or foreign company doing business in Panama to consist of up to 10 per cent of the local or Panamanian workforce and payroll. In the case of trusted and skilled workers or technicians, the foreign worker allowance is increased to 15 per cent of the local or Panamanian workforce and payroll.

However, Panama has enacted legislation that affords unlimited temporary visas and work permits to the foreign workforce and payroll of companies licensed or established pursuant to special legislation designed to promote foreign investment in Panama. The Multinational Corporate Seat Law (MCS Law) allows companies that are licensed under the statute to obtain immigrant visas and work permits free of thresholds or quotas. The MCS Law also creates a simplified process to obtain such visas and permits. Likewise, the Panama-Pacific Special Economic Area Law creates a simplified process for obtaining visas and work permits. Project companies located in special economic and trading areas, such as the Colón Free Trade Zone or export processing zones, can also hire foreign workers under special immigration and labour regulations.

Equipment restrictions

What restrictions exist on the importation of project equipment?

There are no restrictions to import project equipment. However, Panama’s tax legislation imposes import duties and a kind of value added tax, domestically known as ITBMS, on equipment imports. Tariffs for imports into Panama are fixed by cabinet decrees issued by the executive branch. Panama is a member of the World Trade Organization (WTO), so tariffs must comply with WTO standards. In the case of equipment imports, ITBMS is assessed at the rate of 7 per cent of the cost, insurance and freight (CIF) value of the equipment, plus customs duties and charges at the applicable rates for the particular equipment imports. If the CIF value cannot be determined, the tax code provides for an import assessment of free on board value plus 15 per cent.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

According to the Panamanian Constitution the government can expropriate private property for public or social interest purposes, in exchange for proper compensation.

The Code of Civil Procedure requires the executive branch of government to commence a civil court proceeding immediately after issuing the resolution to expropriate private property. Said proceeding is designed to fix proper compensation through a valuation of the expropriated property by three experts appointed by each party and the court, and to enable creditors holding security interests in the expropriated property to pursue payment of their credits. Panama’s Civil Procedure Code also provides for swift expropriation in the case of war and serious public or social unrest, as well as for the development of projects of urgent public and social interest. In such cases, court proceedings to appraise the assets and fix proper compensation must be completed in a shorter period. There are no forms of investment protected from expropriation. However, Panamanian law does require the government to provide fair compensation.

Fiscal treatment of foreign investment

Incentives

What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

Under Panamanian law, taxes apply equally to foreign or local investors. As outlined in question 7, Panama’s tax system is based on a territoriality principle. Consequently, income tax in Panama is assessed over any income produced in Panama by any person or corporation, regardless of their citizenship, residence or domicile; in connection with any activity or operation executed within Panamanian territory, irrespective of foreign contacts.

Instead of assigning incentives on a foreign or local investment dichotomy, the benefit or incentive criteria are developed taking into account investment areas, and in some cases the amount of investment as well. Among the areas where Panama has in place special investment or tax benefits are tourism, agriculture, agroforestry, mining, hydrocarbon storage and distribution free zones, telecommunications, residential and commercial construction projects, port and railway development, and energy generation, whereby investors are guaranteed tax and legal stability from the time they register with the Ministry of Commerce for up to 10 years. In addition, there are special tax treatments for energy generation, reforestation, construction, tourist development and others.

Considering the general principles mentioned above, there are no special taxes applicable to foreign investors. However, the following are the taxes applicable to loan or security agreements.

Withholding tax

Interest, commission, and other charges over foreign loans or any other type of financing arrangement are subject to withholding at the corporate income tax rate of 25 per cent of 50 per cent of the total payment of interest, commissions or other charges, namely, 12.5 per cent of the total payment to the foreign creditor. Financing arrangements with locally based creditors are not subject to any withholding. Payments to local creditors are considered and must be treated as local source income by local creditors, and are subject to the full income tax rate. See question 7 for further details on the tax treatment of interest, commission loan payments and remittances on investment returns.

Stamp tax

Stamp tax is paid at the rate of US$0.10 for each US$100 of the face value of the corresponding obligations, and may be levied if a loan or security agreement has been submitted to any court or administrative authority in Panama.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

Project sectors are primarily regulated and supervised by central government authorities. Municipal authorities have specific regulatory and supervisory roles as well, usually connected to property use. Projects in the areas of energy, oil, gas, minerals, natural resources in general, ports, telecommunications and transport require special licences, concessions or permits to operate. Further, extant environmental legislation requires the environmental authority, or the Executive Branch in certain cases, to review and authorise virtually all types of new project activity or development.

The main authorities involved in typical project sectors are as follows:

  • the National Authority of Public Services: responsible for regulating and supervising:
    • generation, transmission and distribution of energy;
    • transmission and distribution of natural gas;
    • telecommunications;
    • radio and television;
    • water works, distribution, and services;
  • the National Environmental Ministry (NEM): responsible for approving all types of environmental impact studies; authorising the use of river waters; supervising compliance of environmental regulations; and regulating and supervising the use of all natural resources;
  • the Maritime Authority of Panama (AMP): responsible for managing and regulating the use of marine resources and coastal areas along with the NEM. The AMP also authorises, supervises and regulates port operations, development and related activities;
  • the Transit and Transportation Authority (ATT): responsible for planning, directing, supervising the operation and control of land transport. The ATT has the authority to issue concessions and permits to operate public transport;
  • the Civil Aeronautic Authority: responsible for the overall supervision of airports and air transport;
  • the Secretary of Energy: overall authority over hydrocarbons; and responsible for granting all permits and licences in connection to the operation of fuel storage and distribution free trade zones and all activities related to the storage, commercialisation and processing of hydrocarbons;
  • the Mining Resources Department, Ministry of Commerce and Industry: responsible for authorising, supervising and controlling the use of mining resources in conjunction with the NEM; and
  • the Waste Management Authority (WMA): responsible for collecting and managing waste nationwide. However, the WMA currently only controls the collecting and managing of waste in the municipality of Panama City. The WMA may grant concessions to private companies in connection with collection and management of waste

Regulation of natural resources

Titles

Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

According to Panama’s Constitution, all natural resources are the property of the government. Territorial seawaters, rivers, beaches, public lands, underground resources, underground waters, oilfields, and quarries, are owned by the government. The Constitution grants ownership over the land and natural resources located in Indian reservations that are created by law, to the respective Indian communities.

Nevertheless, the government may grant licences and concessions to local or foreign private parties to use or exploit natural resources. Special regulations apply to concessions over underground mineral resources, forests, water and soil. Generally, before the licence or concession may be awarded, Panamanian law will require the preparation of an environmental impact study. This study must be completed and approved by the NEM.

Permits and concessions to use and exploit certain natural resources are granted in connection with a specific location and are generally for a provisional term. Water concessions, however, may be permanent. The concessionaire is generally authorised to exploit and use the natural resource within the terms of the concession, provided it complies with the applicable environmental regulations and pays the applicable concession fee.

Concessions for the use of natural resources located in Indian reservations must have, in addition to the governmental authorisations, the approval of the Indian authorities of the area.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

Concession fees and royalties are fixed based on the volume or amounts of resources that are extracted. Concessions for the exploitation and transport of minerals are subject to a fee calculated per hectare and a royalty that ranges from 4 to 6 per cent depending on the type of mineral. Fees over water concessions are based on the amount of water to be used, taking into account the manner in that the water will be used (ie, industrial use, energy generation).

Concession fees for log or lumber extraction are set taking into consideration the amount and types of trees involved.

In addition to specific concession fees and charges, concessionaires are responsible for income tax and all other taxes applicable pursuant to tax regulations. Fees, royalties and taxes apply equally to local or foreign investors.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

In general, there are no restrictions, fees or taxes on the export of natural resources. However, Panama prohibits the exportation of logs, lumber or timber, unless the wood is processed and transformed into a semi-finished or finished product. Submerged logs must also comply with specific transformation proceedings. In addition, transport of logs, lumber or timber is subject to authorisation by the National Environmental Authority and to the payment of applicable fees.

Certain maritime species, such as shrimp, are also subject to fishing season restrictions and special permits for their exploitation and exportation.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

Under Panamanian law, project finance transactions generally do not need governmental approvals, except in the case of a transaction involving a governmental concession or regulated activity. Therefore, no fees or charges related to such approvals apply.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Financing documents do not need to be registered with any government authority, except for mortgages on certain assets and certain filings or governmental authorisations to perfect some types of collateral (see question 2).

However, in the event that project documents should be submitted to any administrative authority or Panamanian court, the project documents must be translated into Spanish by a licensed Panamanian translator, and if the documents have been executed outside Panama, the signatures on the documents should be authenticated by a diplomatic or consular officer of the government of Panama in the jurisdiction of execution or pursuant to the 1961 Hague Convention on the legalisation of documents (apostille).

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Panamanian courts recognise contractual provisions binding parties to international arbitration and enforce international arbitration awards. However, international arbitration awards must meet certain requirements to be enforceable in Panama. An international arbitration award will not be enforceable if:

  • the parties did not have legal capacity when the agreement subject to international arbitration was made;
  • the agreement subject to international arbitration is void under Panamanian law;
  • the losing party, or its agent, were not properly served in connection with the appointment of the arbitrator or the arbitration proceedings, or were unable, for any reason, to participate in the arbitration proceedings;
  • the award includes the resolution of an issue or dispute not covered by the agreement submitted to international arbitration. A Panamanian court will only enforce award resolutions related to matters covered by the agreement made by the parties;
  • rules for the appointment of arbitrators and arbitration procedures agreed by the parties were not followed;
  • the award has been suspended or annulled by the corresponding state authority in the jurisdiction issuing the award;
  • the recognition of the award is against Panamanian public policy; or
  • the dispute submitted to arbitration deals with matters that cannot be resolved through arbitration pursuant to Panamanian law, such as consumer, criminal, or domestic law disputes.

Panama is a member of the ICSID Convention and the New York Convention of 1958.

There are no disputes under Panamanian law that would be subject to automatic domestic arbitration.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

Under Panamanian law, and as a general rule, parties are free to select the law of their choice in all commercial transactions, as long as such selection is not made with the intention to avoid the application of another law.

Foreign financial agreements involving Panamanian projects are frequently governed by the laws of New York State or other jurisdictions commonly used and favoured for international financial transactions. Whenever assets that are mortgaged, pledged or held as security are located in Panama, Panamanian law should govern.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Submission to a foreign jurisdiction and a waiver of immunity are indeed generally effective and enforceable under Panamanian law. A Panamanian court would recognise a judgment issued in a foreign jurisdiction, without reconsideration of the merits, provided that:

  • such foreign court grants reciprocity to the enforcement of judgments of Panamanian courts;
  • such court has jurisdiction over the matter;
  • the party against whom the judgment was rendered, or its agent, was personally served in such action;
  • the judgment arises out of a personal action against the defendant and it is a final decision;
  • the foreign judgment is properly authenticated by a Panamanian consul or pursuant to the 1961 Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents;
  • the obligation in respect of which the judgment was rendered is lawful in Panama and does not contradict the public policy of Panama; and
  • a copy of the final judgment is translated into Spanish by a licensed translator.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

The following are the main regulations and institutions regulating typical project sectors:

  • fuel and hydrocarbons: Cabinet Decree No. 36 of 2003, as amended, sets the national policy for hydrocarbons; and Law No. 8 of 1987, as amended, and Law No. 39 of 2007 regulate all activities related to hydrocarbons. The National Secretary of Energy is responsible for overseeing compliance and the enforcement of these laws;
  • minerals: Mineral Resources Code, as amended. The National Department of Mineral Resources of the Ministry of Commerce and Industry is responsible for its enforcement and overseeing compliance;
  • water: Law Decree No. 35 of 1966, as amended. The National Environmental Authority and the National Authority of Public Services are responsible for its enforcement and overseeing compliance;
  • power generation: Law No. 26 of 1996, Law No. 6 of 1997 and Law No. 43 of 2011, as amended, created the regulatory and institutional framework for the electricity market and for the generation, transmission and distribution of electricity. The National Authority of Public Services and the National Secretary of Energy are responsible for ensuring compliance and enforcement; and directing the national electricity policy, respectively;
  • ports: Law No. 56 of 2008, the General Law of Ports, as amended. Oversight and compliance are the responsibility of the AMP. Port concessions are also governed by their respective enabling laws and agreements;
  • telecommunications: Law No. 26 of 1996 and Law No. 31 of 1996, as amended, are the main statutes regulating telecommunications. The National Authority of Public Services has the authority to regulate and oversee compliance within the entire sector; and
  • environmental: Law No. 41 of 1998, as amended, created the NEM and sets environmental policies, principles and guidelines for the entire country. The NEM is responsible for ensuring compliance and enforcement of environmental rules and requirements for all project sectors.

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

The principal business structures that project companies use are corporations. However, other corporate structures such as limited liability companies are also popular, particularly with foreign investors residing in countries that provide preferential tax treatment to such corporate structures.

The principal sources of financing for project companies are commercial loans or syndicated loans from local or international banks. Multilateral financial institutions are also a common source of financing. Although less frequently, the local and international capital markets are also used.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

The Constitution allows the government to promote the creation of PPPs to solve social, security and public interest needs. In the case of public utility PPPs, the Constitution also requires that the majority of the capital be Panamanian, except where legislation expressly provides otherwise.

Panama does not currently have comprehensive PPP legislation.

The absence of comprehensive PPP legislation has not hindered the development of PPPs. For more than a decade, the central government has developed PPPs by taking advantage of legislation governing direct equity investments or concession arrangements.

Equity-based PPPs

In 1995 and 1996, as a consequence of an effort to develop competition and private sector investment in the telecommunications sector, Panama enacted legislation to create a telecommunications PPP between the central government and a private investor.

In 1997 Panama adopted additional legislation to privatise and develop competition in the electricity sector. Another PPP was formed between the central government and private investors that were selected to invest in four generation (three hydroelectric and one thermoelectric) and three distribution companies.

The aforementioned 1997 legislation also privatised the ports of Balboa and Cristobal, located in the cities of Panama and Colón, respectively. The central government selected its private investment partner.

Private investment partners in each sector were all selected through separate competitive biddings. The state separated and contributed the respective sector assets to each of the new companies. In the case of the telecommunications PPP, the state and private investors each retained a 49 per cent equity ownership, with the private investor retaining operational control of the company. The employees retained 2 per cent of the equity ownership. The same equity arrangement prevailed with respect to the three hydroelectric generation companies. In the case of the three distribution companies, as well as the thermoelectric generation company, the central government awarded a 51 per cent equity ownership in each company to the respective private investors. A notable exception was the PPP in the ports of Balboa and Cristobal, where the central government retained a 10 per cent equity ownership. All of these PPPs continue in effect and remain operational.

Concession-based PPPs

In 1988, Panamanian legislation adopted a concession framework that enables the government to grant private companies the right to develop projects for public use such as highway and toll road infrastructure and any other type of project chosen by the Executive Branch. In addition, the government may grant concessions to private investors to use and develop government-owned land, islands and coasts in tourism projects, for up to 100 years.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

PPPs are connected to concessions that limit the scope of the operation to a specific term, geographic area or purpose. The concession framework currently in effect and discussed in question 27 is available only for highway infrastructure, port and tourism development projects.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

The most relevant PPPs involving equity ownership are as follows:

  • the main telecommunications company, Cable & Wireless of Panama, with a concession and infrastructure to operate basic, international and mobile telephony and services;
  • the four main generation hydroelectric facilities: Fortuna, Bayano, Los Valles and Esti;
  • the Bahia Las Minas thermoelectric generation project;
  • Edemet, Edechi and Elektra, the three companies providing electricity distribution services in Panama;
  • the Balboa and Cristobal port operations under a PPP called Panama Ports Company; and
  • Petroterminal de Panamá SA, a crude oil handling and storage facility, with a 131km pipeline running from the Pacific Ocean to the Atlantic Ocean.

The most relevant PPPs under a government concession arrangement are as follows:

  • the concession to Manzanillo International Terminal to operate a port facility in Coco Solo, Colón;
  • the concession to Colón Container Terminal (Evergreen) to operate a port facility in Coco Solo, Colón;
  • the concession of the Panama Canal Railway Company to build, operate, manage and refurbish the railway connecting the capital and port city of Panama in the south, and the port city of Colón in the north; and
  • the Panama-Colón toll highway.

UPDATE & TRENDS

Recent developments

In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Panama’s economy continues to be positively impacted by major infrastructure development and projects focused on the following priority areas: logistics, and port development; road expansion and construction; and financial services.

The following important infrastructure projects will continue to positively affect Panama’s economy:

  • the construction of line 3 of the metro system;
  • the expansion of the electricity transmission lines; and
  • the construction of a fourth bridge over the canal.

The newly elected presidency has announced its intention to: promote PPPs; promote and facilitate foreign investment; support Panama’s logistics, maritime and port development; and continue with the investment in road expansion, especially to connect the ports.