Real estate investment vehicles

When an investor purchases a property, they would typically expect to receive the title to the property and have their name registered as the property owner with a government entity.

However, in some cases, investors may find themselves in a different situation where different rules may apply, namely when the property is owned by a company or trust and ownership or control over that entity is transferred rather than the property title itself.

The legal entities most commonly used for this purpose in Panama are private interest foundations and companies, which are the local equivalent of a trust. Companies have shareholders, recognized as such through share certificates that can be transferred along with the assets belonging to the company. Private interest foundations have managers and beneficiaries, and these roles are transferable to third parties, with all assets of the foundation also automatically transferred to new beneficiaries. Savvy investors typically choose to purchase real estate through one of these entities, not only for asset protection and estate planning purposes, but also to achieve strategic tax advantages and ensure a smoother transfer process.

Transferring shares in a Panamanian company requires less time and effort than transferring physical property itself. A standard real estate transaction can take an average of 60-90 days to complete, whereas a share sale transaction can be easily done within 15-30 days (assuming the buyer does not require financing).

In a standard property transfer scenario, the seller is required to pay a property transfer tax of 2% and a prepaid capital gains tax of 3%, for a combined total tax of 5%. In the case of the sale of company shares, there are share transfer taxes involved (also 5% of the sale price), which the buyer deducts from the agreed sale price and pays directly to the Panamanian government within 30 days of closing. Although the seller still receives 95% of the sale price, the buyer may receive a considerable tax benefit by purchasing shares. Whenever a property is transferred directly in Panama, its taxable value is updated to reflect the registered sale price. When a property is acquired by purchasing shares of the company owning such property, the property is not actually changing hands (since it still belongs to the same company) and therefore its taxable value remains the same (without updates to the registered value in the tax authority). This allows the buyer to maintain the same property tax rate that the previous owner was paying, which can be a significant benefit when purchasing older properties that have much lower original registered values.

In the case of private interest foundations, properties can be transferred similarly to the sale of corporate shares, but there are enough variables to justify a more detailed explanation. Before delving into this, it is important to clarify the definition of a private interest foundation: comparable to a trust, foundations are legal entities that manage assets and estates on behalf of third parties (known as “beneficiaries”).

The main difference is that the managers of a private interest foundation are appointed by the founder, and the founder can be both the manager and beneficiary of their own foundation. Foundations do not issue share certificates, so a foundation is not technically “owned”. In addition to real estate, foundations can own shares, bank and investment accounts, and any other type of tangible or intangible asset.

While transferring control (management) and benefit of a foundation provides similar benefits to purchasing shares in a Panamanian company (smooth transfer process, maintenance of low taxable value), there is an additional benefit: since there are no transfer taxes to be considered at all in the sale of a foundation, this represents a substantial saving for the seller (i.e., 5% of the agreed sale price).

In any case, the fact that the property belongs to any of these legal entities does not imply that transferring the entity is always more convenient than the property itself. A complete legal due diligence is recommended to ensure that the foundation or company has not incurred any liabilities (which would be automatically transferred to the buyer), along with an analysis of the current taxable value of the property to determine if purchasing the legal entity leads to considerable long-term tax savings.

Our advice when it comes to real estate investments is to always hire legal representation from day one, ensuring a smooth and uncomplicated transaction.

By: Emilio Cornejo Vernaza LL.M.

Founding Partner of PGS Attorneys and PGS Realty

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