How to purchase Real Estate in Panama ?
For over 13 years, Panama has become one of the most attractive destinations for Real Estate investors and entrepreneurs from all over the world. Its strategic location, its friendly people, stable government, convenient tax laws, strong economy, its widespread use of English and the U.S. dollar, along with being the safest country in Latin America and the home of over 130 Multinational Companies, among several other factors, have made Panama the perfect destination for international entrepreneurs and investors looking for a safe, profitable investment abroad, in a strong currency.
Although being a modern country, with an updated legislation based on a Civil Law system, there are several matters and peculiarities within the process of acquiring a property in Panama that will certainly make it stand apart from any other process of its kind in the region. Our positive law establishes flexible enough guidelines to allow common practices to self-regulate the purchase process, referring mainly to how title registration should take place and what elements must be included and detailed. Parties complete names and identifiable particulars, as well as all specific property related data should be stated, the agreed selling price and the seller’s obligation to guarantee the transfer of the title and right of possession, together with both parties expressed will or acceptance of the deal must be included in order for a purchase process to be concluded successfully. However, these all refer to the actual closing deed or final step of a sales and purchase agreement in Panama, it all starts with more complex steps and stages.
Once both parties have express their intentions of both, selling and buying a property, along with its agreed selling price, it is customary to prepare an initial agreement, which will regulate all steps, obligations and foreseeable scenarios for the next weeks or even months of the transaction; this document is commonly known as the “Promise of Purchase and Sales Agreement”.
In this initial contract, parties are referred to as “the Promissory Seller and the Promissory Buyer”, where the former promises to sell and the latter promises to buy. If a party is a legal or fictional person, registry details, along with all general data of its legal representative or authorized attorney-in-fact should be included, as well.
These types of contracts often start with a declaration of title of the Promissory Seller, describing all legal/registry information of the property object of the transaction, as well as its location, size and limitations, however, these last details are already part of the property registered data, making it easier to simply refer all of these to the “described recorded information at the Public Registry”.
The mention of the selling price is usually expressed in letters and numbers, to avoid confusions, and it’s often split in two or more down payments, starting with a lower one (10% - 20% is expected). This common practice has more than one purpose, first it allows the Promissory Seller to take care of certain obligations, such as paying all property transfer-related taxes (around 5% of the selling price) and bring the property up to date with any existing debts, such as property taxes or homeowner association late fees.
But beyond handling funds to the promissory seller, it also represents a token of commitment for both parties to comply with each other’s obligations, since this deposit will become the penalty to bear in mind when one of the parties defaults: on the one hand the Promissory Buyer will lose this initial deposit if he/she can’t finalize the deal successfully for any reason, and on the other, it is the Promissory Seller the one that defaults, he/she will not only have to reimburse this initial down payment, but add an identical amount as penalty. Even though this is not only a common legal practice but is also stated in our Civil Code (art. 1224), parties may agree something else, such as committing to lose only a percentage of this first down payment or even none at all.
The method and date of each payment should be detailed, stating for example that an initial down payment will be done on the date of the agreement’s execution, by means of a cashier check, a second down payment 30 days later (or conditioned to a particular event), ending on establishing a deadline for closing to take place and how the final payment will be executed. This final payment may be done in several ways, nevertheless to provide security to both parties, there are two payment methods of common use in Panama: (i) an irrevocable letter of payment issued by a local bank, or (ii) a cashier check held in custody by a notary.
To secure the last payment, the promissory buyer can opt to buy an Irrevocable Letter of Payment from any local bank, where funds will be frozen from the promissory buyer’s account and the bank will act as guarantor of payment to the benefit of the promissory seller once certain conditions have been met, among those, the official transfer of title of the property to the promissory buyer or whomever he or she assigns. This instrument guarantees execution of payment on behalf of the promissory seller and safeguards the promissory buyer’s funds until transfer has been confirmed. This method is also commonly used by banks when disbursing lent funds product of a mortgage to a seller. It may also be used to pay off other debts or obligations of the seller, such as existing mortgages.
As an alternative, the parties may opt for handling disbursement of the last part of the selling price by means of a cashier check held in custody by a local notary, where the notary will commit in written to handle such check to the promissory seller if and only when he or she can prove that the transfer of title the property object of the transaction on behalf of the promissory buyer has taken place. This method also provides security to both parties that funds will only exchange hands once closing has taken place, and not before.
The correct use of any of these two methods avoids the need of a title insurance or similar indemnity insurance instrument.
A Promise of Purchase and Sales Agreement must also include the parties’ obligations, where the promissory buyer will have to comply with the established payment schedule and bear with all closing fees and costs, and the promissory seller should provide in due time all documents and information required to draft and register the closing deed. Among these documents, the promissory seller should be ready to provide before closing, the following ones:
- A Bill of Sale, drafted in accordance with Panamanian regulations, and countersigned by an Attorney.
- Good standing certificates from both, local tax authorities and the water utility public offices.
- If the property is subject to the horizontal property regime, a good standing certificate from the building’s Home Owner Association fees should be included, as well.
- Proof of payment of all real estate transfer related taxes involved in the transaction, along with its respective application forms.
- If the Promissory Seller is acting through a legal entity, a Shareholders’ Assembly Resolution approving the transaction and authorizing its attorney-in-fact should be included, as well.
Once the promissory buyer gains access to all of the above, their attorney (or the bank’s attorney, if the purchaser is financing the transaction) should start working on the closing deed, which will eventually be registered to transfer ownership. Each party’s complete contact information should be included, in order to establish the official channels of communication through which they will communicate with each other. Additional general contractual clauses are usually included, indicating the governing law, conflict resolution terms and conditions, among others.
From the date of execution of this Promise to Purchase and Sales Agreement, until the actual date of closing, a real estate transaction may take anything between 30 to 90 days, considering if there’s an existing mortgage on the property or if the promissory buyer will apply for one in order to complete the agreed selling price. If there’s an existing mortgage, the financial institution holding it should provide an updated balance due, in order to include it in the payment schedule. This balance may be paid directly by the promissory buyer out of the selling price or by the promissory seller, if and when the balance is included in the arranged down payments. In any case, an Irrevocable Letter of Payment may be used to satisfy this balance, securing disbursement against the liberation of the mortgage and title transfer to the promissory buyer.
On the other hand, if it is the promissory buyer the one requesting a loan to a financial institution to satisfy and complete the selling price, the bank’s timings must be considered in the contractual deadlines, to avoid any penalties. There might be cases where both scenarios are present, this is, there’s an existing mortgage on the property that needs to be paid off in order to successfully transfer title, and the promissory buyer will partially finance the selling price, in these cases, establishing a potential extension may come handy, since banking institutions manage their own time frames which are completely out of the scope of action of the promissory buyer and seller.
Once all steps, documents and requirements have been gathered, parties may proceed with the execution of the closing deed. This must be done either at a local Public Notary or at the promissory buyer’s bank offices (in the event of a mortgage on the side of the buyer). This closing deed should include a transcript of all of the documents provided by the Promissory Seller and should be signed by both parties, two witnesses (which are usually employees of the acting Public Notary) and the Notary himself; a signature from the attorneys-in-fact of banks involved (if any) is also required.
As soon as the deed has been executed, a copy signed, this time only by the notary should be physically filed at the Public Registry, the whole process of study, approval and registration may take one to two weeks, with the transfer of title confirmation on behalf of the Purchaser.
Now, even though all of the above describes an ordinary process of real estate purchase in Panama, I must say there are some cases where an investor can find himself in front of a different situation, where a few different rules may apply, this is in the cases where the property is owned by a legal person and titularity or control over such person is transferred, instead of transferring the title itself. The most common legal persons used for this purpose in Panama are Companies and Private Interest Foundations. Companies have Shareholders, acknowledge as such by means of Shares certificates which can be transferred, together with whichever assets belong to the company; and Private Interest Foundations have Managers and Beneficiaries, conditions that are transferable to third parties, again, with all of its assets.
There are several reasons why investors choose to purchase real estate through one of these entities, not only for asset protection and wealth management purposes, but to achieve strategic tax relieves and smoother transfer process. Transferring shares of a Panamanian company requires less time and effort than transferring real estate, there are transfer taxes involved (5.00% of the selling price) which are deducted from the selling price and paid by the Purchases to the Government. Even though the Seller is still receiving 95% of the selling price, the Purchaser may find a considerable tax benefit, given that each time that real estate is transferred in Panama, its taxable value is updated to the agreed selling price. Being that in a Shares Purchase Agreement the property is not actually exchanging hands (it still belongs to the same company), its taxable value remains the same, allowing the Purchaser to maintain the same rate of property taxes that the previous owner was paying.
With Private Interest Foundations we have a similar story, yet with enough variables to notice. Before going deeper into this, we must establish what a Private Interest Foundation is. Comparable to a trust-like entity, Foundations are fictional or legal entities that manage wealth and assets on behalf of third parties (Beneficiaries). The main difference is that the managers are appointed at the client’s requirement, where the client may be both: Managers and Beneficiaries of their foundations. Foundations do not issue Shares certificates, one does not “own” a Foundation, yet Foundations may own not only real estate, but stocks, bank and investment accounts and any other kind of tangible or intangible assets.
Although transferring the control and benefit of Foundations provide similar benefits to those one may obtain when purchasing shares of a Panamanian company (smooth process, maintain a low taxable value), there’s an additional benefit, and that is that there are no transfer taxes to be considered at all, representing a substantial advantage for the Seller. In any case, the fact that the property belongs to one of these legal entities, does not implies that it’s always more convenient to transfer the entity, instead of the property in itself, a complete due diligence reveling any sort of liabilities, together with an analysis of the property’s current taxable value will help to determine whether a direct transfer of real estate is suitable or not.
Our constant advice when it comes to these types of investments is to always hire legal representation from day ONE, guaranteeing you an uncomplicated, straightforward transaction.