Panama Investor Blog

Clarification of the property tax exemption

I get many questions regarding the property tax issue and this article by "My Panama Attorney" does a great job of explaining the current status of this somewhat misunderstood benefit. Promoters and agents usually tell prospective buyers that they get a 20 years tax exemption, but there are a lot of "buts" which they rarely disclose and probably don't understand.

If you have a further questions you might address it to the author of the article. Although the article is from January 2008, I don;t believe any changes have been made since then.

Property tax exemption for 20 years, BUT ...

According to analyst Osvaldo Lau http://mensual.prensa.com/mensual/contenido/2007/12/23/hoy/negocios/1214905.html a new law has been approved by the Legislature to extend the number of projects with a 20-year property tax exemption.

To qualify for this exemption:
a) the BUILDING permit has been issued before July 1, 2009, AND
b) the REGISTRATION of improvements in the Public Registry is completed BEFORE December 31, 2011.

Since registration can take around 1 week, in practice the Occupation Permit would be from 1 week before, in order to comply with the deadline for registration.

There is no actual extension for new projects. The projects already allowed to be built before September 1, 2006, are given extra time to reach the Occupation Permit stage and enjoy the 20-year benefit. The law will only enter into force when signed by the President and published in the Official Gazette http://www.gacetaoficial.gob.pa As of now, Bill 386 "Whereby article 81 of Law 6 of 2005, article 27 of Law Decree 9 of 1987 and section G of article 2 of Law 63 of 1993 are reformed" has not been enacted.

The text of the bill can be downloaded in PDF files (Yahoo registration required):

http://groups.yahoo.com/group/Live_in_Panama/files/ProyectosdeLey/Bill386PropertyTax.pdf

Property tax exemption for 20 years, BUT ... (reloaded)

One of our reliable attorney friends, Alvaro Aguilar, has put out a blog post updating the latest information regarding the 20 year tax exoneration. It is an important read because there are some technicalities in the law that if implemented by the government, could cost you. There also appears to be a lot of typical confusion in the way the law is written. Clearly they are trying to separate those willing and able to pay the tax from those who can't or won't.

A little history is in order.
It is important to understand that we in the interior of Panama have never seen a property tax assessor. In the past when you bought a piece of property you would pay a transfer fee based upon an agreed  amount between the parties, and it was always below the $30k property tax threshold, no matter what was really paid for the land. In many cases the land was in a Panamanian corporation  and buy and sell agreements of shares are a private matter protected by the state, both here and especially abroad. No one really knew what people paid and up until we gringos arrived and a new canal expansion was approved nobody cared.   The seller did not want to pay a higher transfer tax at 2% of the price stated  and the buyer did not want the value to be over the $30k to avoid property tax on the land in the future. It was in everyones interest to keep those values low and there was no tax assessor to say otherwise. I was always amazed at how it was common practice to just arrive at a price and that is what would be used by the public registry, no questions asked.

Understand that up until a developer came to town and created a demand for the land by people from another world, the values of land in the interior were pennies a meter. The value was what an agricultural produce would justify. The best coffee land was about $12k a hectare and cattle land was maybe $2000 a hectare just 3-4 year ago.

Now that some land values have increased the government sees a new revenue source and wants to cash in. But it will be extremely difficult because most of the property in the interior is still worth only the value of cattle grazing, coffee or vegetables. Just because there is a Valle Escondido in the neighborhood, does not mean that all of the property in the neighborhood is worth what people are willing to pay there.

If we extrapolate land values based on one project in the area then all the land would be worth hundreds of times what it shows in the public registry. What happens when an assessor sends a tax bill to some of the local folk who have never had to pay taxes before? I see street demonstrations the likes of which have never before been witnessed in Panama. It is just totally impractical to try and apply property taxes in an arbitrary fashion and if you do so across the board, chaos will ensue. So what the heck are these guys up to?

You only have to look to the North to see that all tax collection is based on creating fear in order to get people  to comply. Foreigners are used to playing by the rules  and are fearful of the state and will  comply because they have a lot to lose, including their right to be in Panama. Panamanians will not comply because they can't lose their right to be here and they know that any assessor who comes to town will be tared and feathered and run out on a rail. So what should you do?

My advice, when in Rome, do as the Romans.

Here is Alvaro's blog post.