Establishing an investment fund in Panama

Panama offers an advantageous environment for setting up and officially registering an investment fund to facilitate asset management and capital raising activities. Registering a Panama-domiciled fund provides multiple benefits, including favourable legal and tax frameworks, extensive international investment prospects, and business confidentiality assurances.

As a major financial hub with flexible regulations and a stable banking system, Panama appeals to a wide range of asset managers and investors looking to establish various fund structures and investment strategies. This article provides an overview of the process for establishing a Panama-domiciled investment fund, specifically examining the registration formalities, legal and tax considerations, as well as assessing the potential risks and rewards of opting for Panama as a fund jurisdiction.

The registration procedure entails submitting the required documents to the Superintendency of the Securities Market, the government authority overseeing Panama's securities industry. Key documents include the fund's offering memorandum, its investment policy statement, and identity verification for directors and authorised signatories.

From a legal and tax perspective, Panama-domiciled funds benefit from Panama's territorial tax system, various double taxation treaties, and no local taxes on foreign-sourced income. However, risks such as blacklisting and reputation damage from the OECD must be considered.

Panama offers an efficient, confidential and tax-optimised base for establishing investment funds. However, funds must be structured carefully to avoid problematic classifications. With proper set-up, a Panama-based fund can be an appealing option for international asset managers and investors.

Now let's look at each of these aspects in more detail.

Definition of fund terminology

In investment activities and financial management, a fund constitutes a form of pooled investment vehicle which aggregates capital from multiple investors for the collective purpose of investing across a range of assets. The range of eligible asset classes spans securities, real estate, precious metals and stones, and other alternative assets, as designated by the fund's prescribed investment objectives and strategic asset allocation.

• Collective investment scheme By pooling capital into a fund structure, investors gain exposure to a more extensively diversified and higher-value portfolio of investments than available through self-directed investing.
• Professional fund management Funds appoint professional fund managers to execute decisions around asset selection, portfolio weighting, timing of buys/sells, and other strategic initiatives aimed at achieving the fund's stipulated performance benchmarks in accordance with its investment policy.
• Risk diversification Investing through funds allows capital recipients to diversify asset exposure across multiple geographies, sectors, and asset classes to minimise concentration risk and volatility.
• Investment liquidityMany funds permit investors to freely buy or sell fund shares to provide liquidity, subject to the dealing frequency and redemption terms stated in the fund prospectus.
• Distribution policyDepending on the fund structure and strategy, periodic distribution of investment gains may be made to investors in the form of dividends, interest payments or other eligible forms as per the fund mandate.

Panama as a jurisdiction for funds

Situated on the isthmus connecting North and South America, Panama has firmly established itself as a favoured jurisdiction for investment fund registration due to its economic and political stability, business-friendly legislation, and advantageous tax regime.

Overview of Panama’s fund governance framework

Panama’s fund governance regime has undergone progressive enhancements to align with international anti-money laundering and counter-terrorist financing standards. This review summarizes core legislation applicable to Panama-registered investment funds and the powers of the national regulatory authority.

Overview of the typical structure for an investment fund in Panama

In summary, Panamanian funds involve an assembly of legal, administrative and oversight components allowing specialized asset management within CNV policy guidelines. The optimal structure selection depends on the fund's strategy, target investors, and the manager's desired level of operational autonomy.

Criteria for Panama fund promoters and investment managers

Panama legislation stipulates various investor safeguard prerequisites concerning fund sponsor identity verification, capital origins, operational transparency and manager expertise/conduct.

1. Managers requirements
   • Identity & background checks. Fund promoters undergo thorough verification, corroborating personal documentation, criminal history certificates and capital provenance records.
   • Authorisation documents. The fund’s formation mandates necessitates submitting a suite of authorisation documents encompassing its constitutional statutes, investment memorandum, risk management outlines and supplemental policies.
2. Investment manager qualifications
   • Competence & credentials. Panama requires fund managers to showcase substantive prior experience directing investment portfolios or other qualified asset pools, along with satisfactory awareness of contemporary investment risk practices.
   • Licencing. All fund managers must secure operating permits issued by the Securities Commission. Licences are contingent on manager capabilities, fund strategies and proposed activities.
   • Governance accountability. Managers shoulder extensive statutory duties concerning legal/regulatory compliance, investor fair treatment and adherence to internal fund governance requirements.
   • Conflicts of interest. Additionally, managers must establish thorough processes to detect and mitigate any potential undue influence from related party transactions or personal conflicts of interest.
   • Duration of activity. Unlike common law trusts, Panama funds can exist indefinitely without prescribed termination dates, thereby accommodating long-term capital preservation programmes.

In summary, Panama’s qualitative and disclosure prerequisites aim to uphold investor interests, market integrity and international best practices.

Structured comparison of the private vs. public fund registration features in Panama

The table below, provides a clear breakdown of the registration features for each type of fund, highlighting the differences in structure, offering, registration, governance flexibility, investment threshold, qualified investors, and compliance duties.

Panama registers qualified vehicles on both sides of its private/public fund divide in alignment with sponsor preferences concerning investor scope, oversight stringency and confidentiality. In summary, private funds offer confidential closely-held investment vehicles while public funds furnish regulated structures openly raising public capital.

Panama’s fund registration process: the basics

Establishing an investment fund in Panama requires methodical planning and execution across multiple phases. Below summarizes key milestones for fund promoters to incorporate compliant onshore vehicles.

1. Investment proposition. Sponsors first define the fund’s purpose, legal structure and target investor base. Strategic positioning also covers proposed asset classes, income payouts, and investor exit terms.
2. Name selection. The sponsor then selects a unique fund name containing acceptable descriptive terminology. Advisably, the name undergoes clearance checks beforehand to avoid overlaps with existing trademarks.
3. Oversight appointments. Fund governance relies on appointing robust oversight bodies/persons demonstrated by boards of directors, investment committees, auditors, custodians, and licensed Panamanian fund administrators assuming regulatory liaison functions.
4. Document preparation. Sponsors afterwards finalize statutes, investment policies, governance protocols, and third-party agreements codifying the rights and responsibilities of involved persons before submission to authorities.
5. Registration application. With preparatory milestones completed, sponsors can apply for formal accreditation by compiling the requisite registration paperwork for review by Panama’s commercial registry or securities regulator based on fund classification.
6. Official registration. Once furnished documents satisfy Panamanian requirements, the authorities issue a unique registration identifier and a certificate of due formation for the investment fund.
7. Licencing. Certain fund formations mandate operating permits from relevant Panamanian licencing bodies, necessitating additional clearances following initial registration.

Timeframes & costs

On average, Panama fund registration concludes within 4–6 weeks following submission of satisfactory paperwork. All-inclusive costs range between $5,000–10,000 between legal, registration, and licence fees, if applicable.

Required documents

To validly incorporate an investment fund in Panama, founders must furnish personal identity paperwork alongside supplementary evidence verifying their backgrounds, qualifications and capital provenance.

1. Identification documents: certified current passport photocopies constitute primary evidence of promoter identity, residential jurisdiction and nationality.
2. Proof of address: recent bank statements or utility bills certify each founder's residential address through dated third-party confirmations.
3. Professional resume: submission of a professional biography highlighting relevant industry credentials provides background on competencies.
4. KYC form: Executed know-your-customer questionnaires mandate declarations of other related undertakings, political exposure, adverse media, and the foundation's economic purpose.
5. App form and charter documents prepared by legal counsel.
6. Translation: where original materials are non-English, approved English translations must accompany foreign language submissions.

If unable to furnish any required record, fund sponsors can consult our team of seasoned experts regarding alternative evidence types meeting requisite due diligence standards.

Panama’s fund taxation framework

Panama furnishes a conspicuously advantageous tax regime for collective investment vehicles via territorial taxation policies and negligible compliance burdens. This fiscally efficient environment strongly appeals to international asset managers.

• Income tax exemption. Panama-registered investment funds benefit from broad exemptions on locally sourced income.
• Capital gains tax exemption. Capital gains and interest earnings remitted to Panamanian funds remain free from domestic taxation.

Unlike most onshore fund domiciles, Panamanian funds face no mandatory tax filing or financial reporting requirements, thereby easing administrative loads. However, fund vehicles must adhere to annual corporate franchise tax payments to sustain good standing.

By taxing solely Panama-sourced income, foreign investment incomes and gains avoid local tax exposure, incentivizing global asset holding.

Panama’s liberal tax environment and compliance flexibility offers a superior operating framework for international asset managers.

Dissolution procedures for Panama-domiciled funds

Panamanian legislation furnishes predefined conditions enabling the voluntary or compulsory termination of registered private investment funds. Dissolution involves statutory notices through filings and publications.

Grounds for fund termination

Fund board resolutions can mandate dissolutions after completing intended investment cycles or upon the revocation of revocable trusts.

In contrast, court adjudications may compel the winding up of insolvent funds per Panama’s bankruptcy laws or upon material breaches of internal governance.

Dissolution formalities

• Board resolution. The fund’s board or protector must first enact irrevocable decisions stating the grounds for seeking dissolution per fund deeds or legislation.
• Public registry filing. Thereafter, the fund administrator must register the dissolution resolution with Panama’s commercial registry to officially log the commencement of termination.
• Public notice. Finally, administrators must issue public notices in approved media forums notifying the fund’s impending closure and settlement of outstanding claims.

Settlement procedures

The dissolution process further involves settling remaining debts and liabilities, final account audits, and the distribution of surplus assets to investors per predefined priorities documented in the fund’s constitution.

Thus, well-defined protocols enable the orderly unwinding of a Panama-registered fund’s activities and financial estate.

Key benefits of Panama fund structures

Panama furnishes an optimal financial jurisdiction to establish investment funds, benefiting from significant investor privacy assurances and extensive cross-border commercial freedoms.

By registering a multi-layered ownership structure encompassing a fund, linked trusts, and underlying holding entities, asset benefactors can effectively shield their proprietary interests from public disclosure. Such bespoke structuring hampers third-party access to enforce against fund assets, thereby upholding investor anonymity.

Panama's stable pro-business regime enables broad flexibility for funds to deploy capital worldwide across desired industries, assets classes, and alternative investments free from overbearing domestic restrictions.

As a reputable banking and services hub at the nexus of the Americas, Panama offers a developed onshore base to cost-efficiently structure and administer outward-facing funds as well as access fast-growing regional markets.

Panama furnishes a strategically located and structurally attractive hub to establish a protective fund acting as an insulated anchor for globally diversified investments under the stewardship of its beneficial owner.