Private Panamanian Funds – An Overview

Panama, one of the world's fastest growing economies (recording its second consecutive year of double-digit growth in 2012), is undoubtedly the banking and financial services hub of Latin America. The resulting new wealth and growing middle class has created an ever increasing demand for new investment products and vehicles.

Not unexpectedly, professionals are asking about the viability of Panamanian Private Funds (PPFs). As is the case in the banking sector, many Latin American professionals and investors generally feel more comfortable utilising Panamanian entities rather than traditional offshore entities. This can be for a variety of reasons, ranging from legislative and language familiarity to specific regulatory issues in their home country.

From a practicality and viability standpoint, the processes are not too dissimilar to the set-up of a Fund in, for example, the BVI. Firstly, the requisite due diligence on the client must be collected, then, together, with a specialist law firm, the various necessary documents must be drafted, including the Memorandum and Articles of Association (M&A), Offering Memorandum (PPM) and the Subscription Document, as part of a formal application to the Superintendent (of the Securities Market of Panama) for permission to incorporate and proceed with the establishment of the Fund.

Depending on whether the Fund will have any offerings within Panama or whether it is managed in Panama, this process can take between 30 to 60 days. The more involvement the Fund has in Panama (such as local Investors, a local Manager, a local Administrator or a local Custodian), the more heavily scrutinised the Fund will be.

The Fund can only be offered in a private capacity (up to 50 persons) and cannot be a public offering. Furthermore, the persons who are offered the Fund and eventually invest into the Fund can only be sophisticated investors (USD100,000 minimum investment with a net worth of USD1 million or more). However, there are no restriction on the type of investment the Fund can make.

The Fund is required to appoint three Directors (who do not need to be based in Panama), the same number as required to form a basic Panamanian company. A suitably qualified Administrator and Auditor must also be appointed, as well as a Custodian to hold the assets.

From a practical standpoint, PPF set-ups are not particularly onerous. A couple of points to note are that the M&A and PPM need to be filed in Spanish. Also, operationally, bank and broker/custodial accounts need to be established for the Fund with institutions who are comfortable with Panamanian entities and with Funds.

From a cost perspective, the set-up and ongoing operational fees are not too dissimilar to other jurisdictions. There will be legal fees, time and incorporation costs to consider in the set-up. Thereafter, ongoing costs relate to administration, audit, corporate, bank, broker/custodial fees and regulatory fees.

As far as taxes are concerned, all Panama companies (including PPFs) are exempt from tax on income received from overseas and are widely used for doing business and holding assets outside Panama. The other key benefit is the fact that the registration and supervision fees are extremely low (USD250 registration and 0.001% of average net assets for a year with a minimum of USD500 and a maximum of USD5,000). These factors alone make Panama an attractive new option as a Fund jurisdiction.

With its already excellent reputation as a banking and international financial services centre and the combination of a strong economy, growing infrastructure and its geographical location, Panama should firmly position itself as a viable and attractive Fund jurisdiction in the future.

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