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 email@example.com 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.
Panama’s Labor Code, in effect since April 1972, with some changes in the last years, regulates the relationship between capital and labor, based on the principles of social justice established in the Political Constitution of the Republic and it creates a special State protection as a benefit of the employees. The State will intervene to promote employment, create the necessary conditions which ensure that all employees have a decorous existence and to ensure that the capital has an equitable return for its investment, within a scheme that fosters harmonious labor relations that permit permanent growth of productivity.
The provisions of the Labor Code are of public order and they bind all persons, natural or legal, enterprises, undertakings and establishments that are at present established or that may be established within the national territory.
Public servants will be governed by the rules of the civil service, except in those cases in which this Code specifically determines the application of some provisions to them.
Cases not provided for, either in the Code or supplementary legal provisions, shall be decided in accordance with the general principles of the labor law provisions of the Code which govern similar cases or matters, equity and custom.
To legally work in Panama, as general rule, foreigners are required to obtain a Visa and a Work Permit, in separate processes, before the Immigration authorities and in the Ministry of Labor. Some foreigners are exempted to obtain a Work Permit, such as companies that have a multinational headquarters license (SEM Companies), issued by the Ministry of Commerce.
Under Panamanian law there are limits to the hiring of foreign employees. The general rule is that 10% of the workforce can be foreigners and up to 15% if the expatriates are technical or trusted employees. However, there are certain types of visas and work permits which do not apply to these limits.
All employees are required to sign a written employment contract, that must be sealed before the Ministry of Labor. In the absence of a written contract, facts and circumstances alleged by the employee, will be presumed to be true.
The general rule is that work contracts must be for an indefinite period, except for temporary positions, such as, vacations, sick leave replacement, or specific time for a task.
The parties can agree in the contract a probationary period up to the term of three months. During this period, the employer can terminate the contract without any cause, and without paying a severance.
Wages in Panama can be fixed by unit of time (month, fortnight, week, day or hour), or by specific job. Any additional payment, such as gratuities, bonus, premiums, commissions, profit sharing, salaries in kind, and any other benefit, due to the employment relationship, are considered as part of the salary.
Wages must be paid to the employees at least twice a month.
A collective Agreement has the purpose of establishing labor and employment conditions, by an employer and by a union.
All the employers who have employees’ members of a union, must negotiate a collective agreement when the union present a request, either directly to the employer, or through a conciliatory procedure proposed in the Ministry of Labor.
Clauses of the collective labor agreement will apply to all categories of employees, unless the agreement expressly indicates the contrary.
The collective agreement cannot be established under conditions less favorable for the employees than those established by law, the contracts, rules or common practices in effect in the respective company.
All collective agreements bind the parties and the persons in whose name they are made or to whom they apply. It also applies to the future members of the employer.
The provisions of individual labor contracts contrary to or incompatible with the collective agreement, shall be ineffective and automatically substituted by the provisions of the collective agreement. The provisions which are more favorable to the employees shall not be considered contrary to the collective agreement.
The duration of the collective agreement shall not be less than two years, not more than four years.
Once the date fixed has expires, it will continue to be in force until a new one replacing has been concluded, without prejudice to the right of the employees to propose a new negotiation.
In any case in which, due to delay or omission of the employer, the Caja de Seguro Social is not obliged to recognized the benefits to which such special legislation refers, such benefits shall be paid in full by the employer.
The compensation to which employees are entitled under are as follows:
- In case of temporary disability for the performance of his usual occupation, the employee shall be entitled to daily compensation equal to his wages during the first two months of disability; and equivalent to fifty percent of the same during the following ten months if the injured person shall continue to be disabled all that time, in accordance with a medical opinion rendered for that purpose. Said compensation shall be paid by the employer on the same days and conditions in which the wages shall be paid, and it shall be fixed at not less than 1 balboa per day; however, when the wage are less than that sum, they shall be paid in full. If after the lapse of one year the temporary disability of the employee has not ceased, compensation shall be governed by the provision related permanent disabilities.
- In case of partial permanent disability, the employee shall be entitled to a pension for three years computed in the basis of his monthly salary, according to the percentage of disability in accordance with the rules established.
- In case of total permanent disability, the employee shall be entitled to be paid a pension during three years, once it is established, computed on the basis of 60% of his annual wage; during the following two years to a pension equal to 40% of his annual wage; and two more years at thirty percent.
The pensions established in paragraphs 2 and 3 shall not ne cumulative and the time lapsed under one permanent disability shall be credited to the other in case that a partial permanent disability may change to a total permanent disability.
Injuries which, without producing disability, result in serious mutilation of disfigurement of the victim, shall be considered, for purposes of the corresponding indemnity (compensation) the same as partial permanent disability.
Whenever professional risk causes the death of the employee, the persons who are hereinafter said for shall be entitled to a pension under the following conditions:
- A pension of 20% percent of the annual wage of the victim during six years for the spouse or surviving member of the marriage or the woman who lived with the employee as a marital partner, or who was divorced, or separated physically due to causes attributable to him, provided the union or marriage had taken place prior to the death on which the professional risk occurred. Whenever the pension corresponds to the husband, the letter shall only be entitled to it if he proves that he is unable to the work. The woman who marries again or who has marital relations with another man, shall loose this right. Said pension shall be increased to 30% of the annual wage if the workman did not have any beneficiaries among those included in paragraph 2 of this article.
- A pension for minor under 18 years of age and up to that age who were living totally or partially on the expenses of the deceased employee, provided this fact is duly established. Said prove shall not be require when the minors are children of the deceased. In the case other descendants of the deceased employee, including those who may be clearly in possession of such civil status, and of the collaterals up to the third degree inclusive, and are presumed to have lived at the expense of the workman if they lived and were fed and clothed in the same dwelling with him. The afore mentioned pension shall be computed on the annual wage of the deceased workman and shall be:
- 15% if there is only one minor;
- 25% if there are 2;
- 35% if there are 3;
- 40% if there are four or more
If there is no beneficiary entitled to the pension which is established in the preceding paragraph, the pension of the children shall be raised to 20% when there is not more than one; to 15% for each of them if there are two or more, with the limitation established in article 313.
- A pension of 20% of the annual wage, during ten years, for the mother of the deceased workman which shall be raised to 30% of the said wage if there is no beneficiary of those included in clause 2 above.
- A pension of 10% of the annual wage of the deceased workman, doing ten years, for the sexagenary or incapacity father.
- A pension of 10% of the annual wage of the deceased workman, during six years, for each one of the ascendants or collaterals, who lived at the expense of the victim, but the total of these incomes cannot exceed 30% of the annual wage of the worker. It is presumed that such persons lived at the expense of the workman if they dwelt in the same dwelling as the latter and if they lacked, partly or completely resources for their support.
In case of professional risk, the employer is required to provide free of charge to the charge to the employee, until he dies, or until he is fully recovered, or until he is declared by medical opinion to be permanently disabled, the following services:
- Medical and surgical assistance, and medicines, supplies and other pharmaceutical articles.
- The auxiliary aids of the medical treatment prescribed which serve to ensure its success or to reduce the consequences of the injury or disease.
- The normal provision, repair and replacement of prosthetic and orthopedic supplies, the use if which is considered necessary in view of the injury suffered.
- The necessary expenses of transportation, board and lodging of the victim, whenever he must be treated and he must live in a place different from his habitual residence or place of work.
If there should be disagreement between employers and employees with respect to the determination of the sum corresponding to expense of board and lodging, the labor courts shall fix it at the request of any parties, without any other proceeding and without any appeal whatever against such determination.
From the moment an employee begins working, the employer must deduct the amount of 9.75% from his monthly salary, and the employer will contribute with an additional 12.25%, that will be paid to the Social Security, to provide for health care and retirement, once the minimum requirements are obtained.
In order to receive the benefit of a retirement pension, employees has had to contribute with at least 240 monthly payments to the Social Security, and if is a woman, must have reach 57 years old, and men 62 years old.
Prior to the imposition of a disciplinary sanction by the employer, the employee is entitled to be heard and to be accompanied by an adviser, appointed by the trade union thereof.
In all work centers, establishments and businesses with twenty or more employees, a Company Committee shall function, being a joint committee made up of two employer’s representatives and two union representatives, designated on an annual basis by the respective labor union. Where there is no labor union, the employees will elect a representative.
The Company committee, at the request of the party concerned, shall have the right of conciliation in the controversies that arise due to noncompliance with obligations by the employee or the employer.
At all times, both parties may look for expeditious solutions before the administrative or judicial labor authorities.
Working days are divided into the following shifts or periods: day work, from 6:00 am. to 6:00 pm.; night work, from 6:00 pm. to 6:00 am.; mixed shift, is comprising of working hours in both periods, provided that the period of night shift shall be less than three hours.
The maximum day work is eight hours, and the corresponding week, forty-eight hours.
The maximum night work is seven hours, and the corresponding week, forty-two hours.
The maximum mixed work is seven hours and thirty minutes, and the corresponding week forty-five hours.
The work for seven-night hours and seven and a half for mixed shift, will be paid as eight hours of day shift work.
Working hours shall mean the time which the workman may not use freely because he is subject to the orders of the employer.
Work time, exceeding the limits set forth above, or of lower contractual or legally prescribed limits, constitutes overtime and will be paid as follows:
- 25% increase in wages when work is performed during the daytime.
- 50% increase in wages when work is performed during the night period or when the mixed shifts started in the daytime are prolonged.
- 75% increase in wages when the overtime work shift is an extension of the night shift or the mixed shift, started during the night period.
No more than three hours of overtime per shift are allowed. Working in excess of this limitation, will be paid with an additional increase of 75%, apart from the penalties that may be applied to the employer.
The following are holidays or national days of mourning imposed by law as obligatory days of rest:
- January 1st and 9th
- Tuesday of carnival
- Good Friday
- May 1st.
- November 3rd
- November 10th and 28th
- December 8th and 25th
- The day the President elect of the Republic is sworn into office (July 1st, every 5 years)
Work on a legal holiday or day of national mourning shall be paid with an increase of one hundred and fifty percent over the ordinary work day, without prejudice to the right of the workman to be given, as compensation any other rest day during the week. The increase of one hundred and fifty percent includes payment for the rest day.
When the employee provides services on Sundays, in his weekly rest day, or in the day which he would have had free because he had worked on holiday or on a day of national mourning, he will be paid an increase of fifty percent on the ordinary work day.
A 50% increase will be paid for all work performed during the workman’s free days in the case of work weeks of less than six days if the work is carried out during the day working hours and a 75% increase for mixed hours or night hours.
Employees with indefinite labor contracts who are dismissed can request that the Conciliation Board or the Labor Courts where the board does not function, to be reinstated to the position he held or that the severance be paid in accordance to what is established in the Labor Code. If during the corresponding process the employer does not prove just cause for dismissal or the prior resolution that authorized the same, the sentencing will recognize the rights requested by the employee, the payment of back salaries, which will be calculated as follows;
- For up to three months as of the date of dismissal, for those employees who began working after August 1995.
- For up to five months, for those employees who were employed before August 1995.
- The labor proceedings in process at the courts before August 1995 which involve payment of services rendered, back salary or compensation will be governed by the norms in effect at the time this law went into effect. Up to one-year salaries.
The sentencing should state that the payment of compensation will be taken from the pension fund quoted by the employer or, in its defect, by the employer directly, who will also have to pay to cost of the process.
In cases were reinstatement is ordered, the employer can terminate the labor relationship, paying the corresponding compensations plus an additional charge which will be calculated as follows:
- Fifty percent (50%) over the corresponding compensation for those employees who are working in the company after August 1995.
- Twenty five percent (25%) over the corresponding compensation for those employees who began working before August 1995.
When reinstatement has been ordered, the employee who has been dismissed without sufficient reason must be reinstated in his position immediately, or within the second working day following the execution of the respective resolution within the same conditions existing before the dismissal.
In case of reluctance on the part of the employer, with or without request of the interested party, the Judge shall order physical arrest, as guilty of contempt of court.
The right of the employee to place a claim for unfair dismissal prescribes in sixty working days as of the date of dismissal, plus payment, in both cases, of back salary. When the claim is only for the compensation due to unfair dismissal and other compensations derived from the termination of the labor relationship, the same prescribes one year after the date of the dismissal.
The employer cannot terminate the labor relation for an indefinite period, unless there is a justified cause provided for by the law, and according to the formalities of the latter.
- Insolvency or bankruptcy of the employer;
- The closing of the business or definite reduction of work due to a noticeable and evident lack or profitability in the exploitation or depletion of the raw material object of the extraction activity; and
- Definite suspension of inherent work in the employee’s contract or an obvious reduction in the employee’s activities, due to a serious economic crisis, partial failure to cover costs of operations, due to reduction in production or innovations in the processes and manufacturing equipment, or revocation or expiration of the administrative concession, cancellation of order or purchase orders or sales, or any other similar reason, properly established by the competent authority.
In these cases of dismissal due to economic crisis, the following rules will apply:
- The first employees will be those with the least amount of time within the respective categories;
- Once the preceding rule has been applied, in deciding which employees are to be kept on the staff, preference shall be given to the Panamanian employees over foreigners, labor union employees over those who are not, and the most efficient in respect to the less efficient.
- Pregnant women, even if they are not preferentially covered by the previous rules, shall be dismissed last and only if necessary and after all the legal formalities have been fulfilled.
- In equal circumstances, after having applied the previous rules, employees protected by the labor union privilege shall have preference over other in remaining on the job.
When the cause of dismissal is one of those mentioned above, the employer must give evidence of the cause before the administrative authorities of labor.
In these cases, the dismissal that does not comply with the requirements mentioned in the above subparagraph, will be deemed unfair.
However, if at the time of expiration of the term of sixty calendar days, the administrative authorities have not resolved the request, the employer can proceed with the dismissal, which will be deemed completely justified and will be obligated to pay the severance established in the Labor Code.
Any alteration in the judicial or economic structure of the business, or the substitution of the employer, shall be governed by the following rules:
- The alteration or substitution will not affect the existing labor relationships to the detriment of the employees;
- Without prejudice to the legal responsibility between both, in accordance with common law, and in the event of a change of employer, the outgoing employer shall be jointly and severally liable with the new employer, in all the obligations derived from the contracts or the law, arising before the date of substitution and up to the term of one year, as of the date of the notice referred to in the next paragraph. Upon expiration of this term, liability will rest solely with the new employer.
- The respective employees and labor unions shall be notified of the substitution in writing no later than 15 days following the date of the substitution.
- Failure to give notification shall maintain the joint responsibility of the employers until said notification is given.
- In no event will the rights or actions of the employees be affected, nor will it alter the unity of the employer, the economic fractionating of the company where they render services, nor the contracts, agreements or commercial combinations which tend to decrease or distribute the responsibilities of the employer.
- If the patrimony of the business has been transferred to a third party by an arbitrary, judicial or any other kind of act, which later is declared illegal or unconstitutional, it will neither affect the continuity of the company, nor substitutions of the employer, and the beneficiary of said act will be solely responsible for the judicial consequences derived from the acts, contracts or the law which took place between the date on which patrimony was transferred and the date on which the same was returned to its legitimate owner, except in the cases of simulation and fraud for the benefit of the person who transferred said patrimony.
The beneficiary of the arbitrary act will respond to the satisfaction of the debts incurred during the corresponding time period the patrimony was held or produced after the start of the transactions with the shareholders and directors, if any.
Individually, every employee has the right to present a claim to the Ministry of Labor authorities, claim that will produce a conciliatory procedure trying to resolve the dispute with an agreement.
Same right have the unions to present claims on behalf of the employees, either to produce a conciliatory procedure, or to propose a petition list accusing the employer for not complying to with the labor law or to the collective labor agreement.
Employees that considers their dismissal were produced without a justified cause, as established in the Labor Code, have the right to propose a suit in the Conciliatory and Decision Board, where the hearing will take place. Both parties have the right to present an appeal to the Board decision, to the Superior Labor Court, which will produce the final and definitive resolution.
Claims for payments of accrued rights that are higher of $2,000.00 are proposed in the regular labor courts. Any appeal will be heard in the Superior Labor Court, and the final and definitive decision can go all the way to the Supreme Court.
All employees are entitled to an annual pay rest (vacation).
The right to vacations exists even though the contract does not require that the workman work all the hours of the ordinary work day or on every day of the week.
The duration of the remuneration for vacation shall be governed by the following rules:
- Thirty days for every eleven continuous months of work, at rate of one day for every eleven days in the service of his employer.
- Payment of one month’s wages when the remuneration is agreed on by the month, and four weeks and one third, when agreed on per week. In these cases, if the wages include bonuses, commissions or other variable sums, or of the workman has received an increase in wages, the average ordinary and overtime wages accrued during the last eleven months, or the last basic wage, will be paid, whichever is more favorable to the workman.
- In the case employees are paid by the hour or by the day, the total ordinary and overtime payment that the workman has received during the last 11 months of service shall be divided by the number of ordinary working hours served, or less time served, in case of proportionate vacations, and this quotient shall be multiplied by the number of annual rest days to which he is entitled. If the basic salary accrued during the last month is more than the average, the vacations shall be paid in accordance with the former.
- For the purposes of computation of time served which entitles the employee to a vacation, the duration of the weekly legal holidays or national mourning and sick leave, as well as other interruptions expressly authorized by the employer, will be counted.
- The sum that the employee must receive will be computed and paid to him three days in advance of the date on which he may begin to enjoy his annual rest (vacation).
- If the labor relationship is terminated before the employee has the right to the complete vacation period dealt with in this article, he will be paid in cash the proportional vacation days to which he is entitled at the rate of one day for every 11 days of work, and
- When the vacation period has been completed, the employee is entitled to be reinstated in his position.
When the employee receives part of his wages in kind, the payment in kind or its equivalent in money must be added to remunerations, according to that which is established in the Labor Code.
Every employee working in Panama is entitled to a special benefit considered as a thirteen-month bonus, which represents one-month salary, to be paid in three equal parts during the months of April, August and December.
From the start of the contract, the employee will begin to establish a sick leave fund, which will be twelve hours for every twenty-six shifts worked or one hundred and forty-four hours a year, which he may use as a whole or in part while receiving full pay, in case of illness or a non-work related accident. This fund is accumulative for two years and can be used in whole or part during the third year of service.
When the employee does not have the right to Social Security benefits and the sick leave fund runs out, he will have the right to have the leave time extended by having the time deducted from his accumulated vacation time. If the Social security benefits are not recognized due to late payments or fault of the employer, the later must pay the corresponding subsidy.
Certificates of incapacity must be issued by medical professionals, be numbered, contain the registration number given to the medical professional by the General Health Office, the complete name of the doctor, address, telephone number and name of the public institution, be it the Social Security Hospital or Ministry of Health, or private clinic where the medical professional works.
The certificate of incapacity that does not comply with these requirements will not be valid, unless for reasons of the place where it was issued it was impossible to comply with any one of these items. The medical professional must maintain, in the employees’ file, a copy of each certificate with the diagnosis or motive of incapacity.
Discrimination in Panama is forbidden. According to the provisions of Panama’s Constitution, there shall not be privileges or discriminations because of race, birth, disability, social class, sex, religion or political views.
The law prohibits job advertisement requiring a certain age of the candidate.
It is unlawful to employ:
- Minors under fourteen years of age.
- Minors up to fifteen years of age who have not completed their primary school education.
Those who are under 18 cannot work in those jobs which due to their nature or the conditions under which they performed, are dangerous to the life, health or morals of the person who carry them out, especially the following:
- Work in clubs, bars and other places where alcoholic beverages are retailed.
- Transportation of passengers and goods by highways, railways, airplanes, inland water ways and work on piers and in warehouses;
- Work related to the generation, transformation and transmission of electrical power.
- Handling of explosives or inflammable substances;
- Underground work in mines, stone queries, tunnels or sewers.
- Handling of substances, devices or apparatus which exposes them to the effects of radioactivity.
What is provided in numbers 2,3,4 and 5 of this article will not be applied to the work of young persons vocational schools, provided such work is approved and supervised by the competent authorities.
In farming and cattle establishments, minors between 12 and 15 years of age may be employed only in light work and outside the hours prescribed for school education.
Likewise, those who are under 18 cannot work:
- In night work from 6 p.m. to 8 a.m.
- Overtime hours on Sundays, legal holidays or days of national mourning.
Contracts concerning the work of those who are under 18 must be entered into with the participation of the father or legal representative of same. If they have no father or legal guardian, the contracts will be executed directly by the minors in question, with the approval of the labor administrative authority.
To determine the hours of work, the school requirements of minors will be taken into consideration, and the hours of work cannot exceed:
- Six hours per day and thirty-six per week, with respect to those who are under 16; and
Seven hours per day and 42 per week, with respect to those who are under 18.
An intermediary is any person who engages, or intervenes in the engagement of, the services of other persons to perform some work in favor of the employer.
Contractors, subcontractors and other established undertakings which engage employees for the execution of jobs, for the direct benefit of third persons, with capital, equipment, management, and other elements owned by them, will not be considered as middlemen, but as employers.
Notwithstanding, the direct beneficiary of the services rendered, or jobs performed, shall be jointly and severally liable with the contractor, subcontractor and other established undertakings for the fulfillment of the pending obligations in favor of the employees, in the case of the jobs or operations inherent, related to or connected with the line of activities of the beneficiary, even if the subcontract is expressly prohibited in the juridical act entered into between beneficiaries and contractors.
In any event, the contractor shall be jointly and severally liable with all the subcontractors of the obligations that these may have pending with the workmen.
In undertakings which execute jobs that are exclusively or principally for the benefit of another undertaking, the latter and not the former shall be considered the employer of all the employees who render services for the former, but both will be jointly and severally liable for all the services and indemnities to which the workmen may be entitled.
Also, is considered to be an employee the person who periodically sells or in any way delivers articles, materials, effects, or any kinds of assets, to an individual who lacks his own organization, the latter reselling or distributing them, provided that the resale or distribution is made in accordance with certain routes, itineraries, norms or directions, or that his main means of support be derived from such activity.
With the prior authorization of the Ministry of Labor, the operations and undertakings which dedicate themselves to providing their own employees to perform services for the undertakings that require them provisionally, for periods that do not exceed two months, under their intermediate direction and in accordance with the following rules, is permitted:
- The minimum wage that must be received by the employees shall be at the highest rates specified for the respective district.
- The undertakings that use the services of the employees shall be jointly and severally liable with the employing undertaking, for the wages, benefits and indemnities corresponding to the period to which, in each case, their services are employed.
- Acts of the person or undertaking making use of the services, detrimental to the employee, shall be considered acts of the employer for all legal purposes.
The Ministry of Labor is empowered to regulate this provision and to ensure that the provisions concerning the placement of employees are not flouted by these undertakings.
Basic rights established by law, cannot be negotiated. Such rights are: minimum salary, maximum day and week shift, mandatory weekly rest day, vacations, 13th month bonus, sick leave, and any other benefit included in the respective employment contract or created by law.
Employees have the right to be included in the Social Security system, which allows them to health protection, and collect the retire fund, when age is completed.
Employees have the right to be members of a union and to negotiate a collective agreement with the employer.
Employees have the right to work and to maintain their job. They can only be dismissed if a disciplinary cause is committed, but the employer must prove in court the specific cause or causes.
Executive Decree No. 238 of June 10, 2019
REQUIREMENTS TO APPLY FOR PERMANENT RESIDENCY FOR EXECUTIVES OF MULTINATIONAL HEADQUARTERS OFFICES (“SEM” for its acronym in Spanish).
As of June 11th, 2019, the requirements to apply for the Permanent Resident Permit for Executives of SEM companies who i) continue working at a SEM company, and ii) no longer work for a SEM company.Read more
Executive Decree No. 249 of June 10, 2019
PROCEDURE AND REQUIREMENTS TO APPLY FOR PERMANENT RESIDENCY FOR FOREIGNERS WHO HAVE OBTAINED RENEWAL OF THEIR PROVISIONAL RESIDENCE PERMITS OF 10 YEARS AND 6 YEARS ARE ESTABLISHED.
As of June 13th 2019, the date on which this Executive Decree became effective, the procedure and requirements for applying to the Permanent Residency for foreigners who have obtained their 10 or 6-year Provisional Residence Permits are established.Read more
Executive Decree No. 237 of June 10, 2019
EXECUTIVE DECREE NO. 182 OF MAY 28th 2019, THROUGH WHICH THE TEMPORARY RESIDENCE PERMIT AS EMPLOYEE OF AVIATION COMPANIES WAS CREATED, IS MODIFIED.
As of June 11th 2019, the current Executive Decree for the Subcategory of Temporary Resident as Employee of Aviation Companies located in the Republic of Panama, is modified.Read more
As of May 28th, 2019, five (5) Executive Decrees were enacted to modify rules related to the granting of residence and work permits. The main changes are the following:
NATIONAL IMMIGRATION AUTHORITY.
- Stay Visa for citizens of the United States of America:
A new category of Stay Visa is created for citizens of the United States of America, for reasons of studies, investment, temporary or technical work, or labor transfer. It will be granted for a term of one (1) year, extendable annually up to five (5) more times.
- Temporary Resident as Employee of Aviation Companies:
The category of Temporary Resident is modified for Employees of Aviation Companies based in the Republic of Panama, who will be granted a residence permit for two (2) years, extendable for the same term, until completing a total period of six (6) years.
MINISTRY OF LABOR
- Work Permit for Permanent Residents:
A new category of work permit is created for permanent residents, which will be granted for a term of three (3) years, extendable for the same term.
- Work Permit for Foreigners married to a national:
It will be now granted for two (2) years the first time and the extension for three (3) years each time. Previously, it was granted for a term of one (1) year, extendable for one (1) year each time.
- Work Permit for Foreigners, within ten percent of the ordinary personnel:
It will now be granted for a term of two (2) years, extendable for the same time. Previously it was granted for a term of one (1) year, extendable for one (1) year each time.
- Work Permit for Expert or Technicians, within fifteen percent of the specialized personnel:
It will now be granted for a term of two (2) years, extendable for the same time. Previously, it was granted for a term of one (1) year, extendable for one (1) year each time until completing five years.
- Work Permit Marrakech Agreement:
The minimum number of workers that a company must have of less than ten (10) workers is established. The company must have a minimum of three (3) Panamanian workers and may only have as a foreigner the worker applying for the work permit.
- Work Permit for Professional Foreigner:
It will now be granted the term of two (2) years, the first time, and the extensions for three (3) years each time. You can apply for this work permit with a temporary ID card; that is, even by not having the resolution of approval of residence permit.
Naim Musa, Managing Director, Morgan & Morgan, Belize office
Pursuant to the International Business Companies (Intellectual Property Asset Prohibition) Regulations, 2019 and related legislation, companies incorporated under the International Business Companies Act of Belize (IBCs) shall not acquire, hold own or deal with any Intellectual Property Asset as follows:
• IBCs incorporated on or before 16 October 2017 shall not acquire, hold own or deal with any Intellectual Property Asset unless that asset is approved by the Belize International Financial Services Commission for holding IP assets up to 30 June 2021. After 30 June 2021 all Intellectual Property Assets must be disposed.
• IBCs incorporated on or after 17 October 2017 shall not acquire, hold own or deal with any Intellectual Property Asset.
Under law, “Intellectual Property Asset” means any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).
This law is currently in effect and we would encourage that clients take such necessary steps to dispose of all Intellectual Property Assets from any IBCs or, if applicable, seek necessary administrative approval for the holding of same. Failure to do so may result in penalties and fines.
You may forward any questions on this legislative amendment to our Belize office at firstname.lastname@example.org.
Fanny Evans, associate at Morgan & Morgan
The Bahamas has passed legislation requiring that certain legal entities carrying on relevant activities have to demonstrate adequate economic substance in said jurisdiction. The beneficial owners of any company or limited partnership incorporated, registered or continued in The Bahamas should be aware of this legislation and consider how they may be affected.
The Commercial Entities (Substance Requirements) Act, 2018 (“CESRA”) came into force on December 31st, 2018. It addresses the concerns of the European Union’s (“EU”) Inter-governmental Code of Conduct Group (Business Taxation) guidance for determining substance when considering whether a tax measure is harmful or ‘fair’ and the Organization for Economic Cooperation and Development’s (OECD) Base Erosion Profit Shifting (BEPS) Project.
What is the effect?
CESRA imposes economic substance requirements on all legal entities carrying on “relevant activities”.
The relevant activities are:
1) banking business
2) insurance business
3) fund management business
4) finance and leasing business
5) headquarters business
6) shipping business
7) distribution and service centre business
8) intellectual property business
9) any holding company engaged or where one or more of its subsidiaries is engaged in one of the activities listed above (1) to (8).
A company engaged in a relevant activity is, henceforth, called an “included entity”.
How can an included entity demonstrate substantial economic presence?
It must carry on core income generating activities (CIGA) in The Bahamas and the entity must be directed and managed within The Bahamas.
Firstly, it is the primary responsibility of an included entity to demonstrate that it conducts CIGA in The Bahamas proportionate to its business activities. This can be proven by having, for example, the following:
- an adequate amount of annual operating expenditure;
- an adequate level of qualified full-time employees;
- an adequate number of physical offices.
An included entity is prohibited from outsourcing any of its core income generating activities to an entity or person outside of The Bahamas; but it may outsource such activities to a service provider within The Bahamas. The included entity shall be able to demonstrate adequate supervision of the outsourced activity.
Second, an included entity will be deemed to demonstrate management and control in The Bahamas if it satisfies the following criteria:
- an adequate number of meetings of the board of directors are conducted in The Bahamas given the level of decision making required;
- there is a quorum of the board of directors physically present within The Bahamas during the meetings of the board of directors;
- strategic decisions of the included entity made at the meetings of the board of directors must be recorded in the minutes of the meetings;
- all included entity records and minutes are be kept in The Bahamas; and
- the board of directors, as a whole, has the necessary knowledge and expertise to discharge its duties.
Here we must highlight some of the permissions granted by CESRA with respect to the directors and the employees that may be positive for an included entity. One is that despite the fact that employees must be residents in The Bahamas, there is no residency requirement for board members, who only need to be physically in The Bahamas whenever a board meeting is required. No number of board meetings that must be held in The Bahamas is prescribed in CESRA. Also, CESRA is not prescriptive in stipulating which employees should attend the board meetings, this will be at the determination of the company.
What is a non-included entity?
A non-included entity is one that is:
- a tax resident in another jurisdiction and centrally managed outside of The Bahamas, even if it conducts a relevant activity;
- not engaged in a relevant activity itself or by any of its subsidiaries;
- owned by residents and centrally managed in The Bahamas, even if it conducts a relevant activity.
What are the obligations for a non-included entity?
Companies which do not carry on a relevant activity are not subject to the economic substance requirements but are subject to annual reporting obligations and will be required to register as such. An example is a holding company that is not an included entity. This passive holding company is not required to have substantial economic presence in The Bahamas but will have to comply with the annual reporting obligations.
How an entity claims to be tax resident in another jurisdiction?
As per the Guidelines, the tax residency test may be satisfied by the entity providing the following documents to the Ministry of Finance of The Bahamas:
- tax identification number issued by a foreign jurisdiction;
- tax resident certificate issued by a foreign jurisdiction;
- official receipt or statement issued by a foreign tax authority;
- certification by the entity that the majority of meetings of the Board of Directors or controlling persons took place in a foreign jurisdiction;
- the ordinary residence of the majority of the Board of Directors or controlling persons.
This certification of foreign tax residence must be filed by the entity as part of its annual filing requirements.
What are the penalties?
An administrative penalty of $150,000 for failing to comply with the requirements of CESRA with a possible further administrative penalty of $300,000 and in certain circumstances the entity concerned being struck off of the Registrar of Companies.
What is next?
All companies will need to undertake an internal review to confirm whether they conduct a relevant activity. With our guidance, they can determine what measures, if any, they should take in order to achieve compliance. In most cases, we believe that compliance will not be a convoluted matter.
What is the time period for compliance with CESRA?
Included entities incorporated prior to the 31st December, 2018 have six (6) months from January 1st, 2019 to comply. Newly incorporated entities must comply immediately. Whilst this may be an alarmingly short period of time, we believe this period can be extended or will not be enforced immediately as many questions regarding the legislation still abound.
We will leave, in our opinion, the best news for the end because we assume that after having read the above, the most important question to answer is:
Are these efforts being welcomed by the EU?
The EU has confirmed that The Bahamas has not been included on the EU’s updated list of non-cooperative jurisdictions for tax purposes (known as the EU blacklist), which was published on 12th March, 2019.
The Bahamas presented the necessary structural changes that were required; another milestone in its tax transparency regime that sends a message to the international business community that The Bahamas is open for legitimate business. The Bahamas is a premier International Financial Centre conducting business with reputable jurisdictions and financial markets. Because they have demonstrated it consistently, it is safe to say that The Bahamas will continue doing what it takes to remain as a well-regulated compliant and competitive jurisdiction.
The information contained herein is not intended to be read, accepted or used and is not provided as legal or tax advice and should not be treated as a substitute for legal and tax consultations with a professional. It is merely a summary of the latest regulations in The Bahamas that, as well as in many other jurisdictions, are being modified regularly in agreement with the OECD and the EU.