Real estate investment vehicles


When purchasing real estate, one would expect to end up holding title over the chosen

property, having his or her name register as property owner at some government entity.

Nonetheless, 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 provides 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 imply 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.


By: Emilio Cornejo Vernaza LL.M.

Founding Partner of PGS Attorneys and PGS Realty

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