Law N°1 of 1984 was at the time of its enactment one of the most innovative laws for wealth planning in Latin America. Prior to Law 1, Panama had already enacted in 1925 the first trust Law in Latin America.
Law N°1 has been recently amended by means of Law 21 of 2017.
The purpose of the new Law 21 is to introduce several changes to Law 1 in terms of its practice or substantive application and also to introduce regulatory changes.
The following are some of the most relevant changes to Law 1 in terms of trust supervision or regulation:
- Only natural persons or corporate entities who have applied for a trust license may acts as trustees exclusively; the Regulator may inspect and sanction companies or individuals that exercise the activity without proper licenses and authorizations, cases in which the sanction may be up to US$1,000,000.00;
- It grants the Banking Super Intendency the rights to act as Regulator of the Trust Business in Panama , including the granting of licenses and its whole operational supervision;
- It establishes licensing fees for up keeping licenses and costs of supervision;
- Trusts business licenses may be granted to:
- commercial entities duly authorized by the Regulator
State owned financial institutions, state owned companies, pension management funds and any other entities authorized by especial legislation are exempted from applying for trust licenses.
- It introduces new requirements to apply for a trust business license , as well as the causes for cancellation of such licenses;
- It specifies the authorized activities that a trust business may engage, which are:
- constitution and administration of trusts
- administration of bank accounts and escrow account services
- financial consulting
- to represent and vote in stockholders meeting or represent bond holders or other type of securities instruments
- participate in the constitution and or management of diverse entities
- to act as custodian of stock , documents and securities
- to exercise any activity relevant o complementary to the fiduciary business as authorized by the regulator
- Trust businesses can only issue nominative stock to their UBOS, in proportion to their declared capital. The minimum paid in capital authorized is US$150.000.00, and performance bond of $250.000.00 must be maintained at all times through the existence of the company.
- Accounting is required to be separate for each trust administered;
- Accounting records must be kept available for the Regulator at all times.
The Regulator may carry out inspections at discretion.
- All trusts must be maintained by the licensee on a numbered registry system and in due sequence;
- It introduces specific duties to the licensee such as: financial obligations, separation of assets from those of the licensee, proper training of personnel, accounting standards, due diligence and know your client protocols, conflicts of interests of managers and stockholders, confidentiality of the business towards their clients.
In regards to financial obligations and the operation of the business there are special sections for the liquidation of a trust business and the protection of assets managed in trust by the licensee. This becoming that bankruptcy will be inadmissible under the new management standards introduced by Law 21.
- Economic sanctions can be imposed by the Regulator for lack of compliance of the regulatory obligations of the licensee;
Amendments to Law 1 of 1984
Law 1 continues to be the applicable law that will regulate all matters related to the creation and substance of a Panama trust. However, there are articles of Law 1 that have been modified or re-drafted by Law 21 of 2017.
Law 21 reintroduces the application of Section 1 of Art 709 of Panama Fiscal Code, which establishes that once the taxable income on which the income tax is to be paid, natural persons will have the right to deduct annually the interest that is paid by reason of trusts on real estate that are constituted with the purpose of guaranteeing the repayment of a loan for the acquisition, construction, building or improvements of the principal housing of own use of the natural person taxpayer, provided that the taxpayer is the joint debtor of the guaranteed obligation and the annual
amount to be deducted does not exceed fifteen thousand dollars. In these cases the financial creditor will issue the respective certification.
With regard to Art 752 of Panama Fiscal Code, it adds a new subsection, number 15, which states that false statements will be sanctioned with a fine ten times the amount certified, to both the beneficiary who makes use of said certification and the financial creditor that issues it.
Dr. Juan José Espino Sagel