For individuals, companies and institutions interested in investing in Latin America, Panama has become a promising gateway. It welcomes foreign investment and boasts a dynamic economy. For a U.S.-based investor, Panama’s use of the U.S. dollar offers the added benefit of removing currency risk from an investment. Nevertheless, a number of potential pitfalls can complicate a transaction in Panama for an investor not accustomed to doing business there. Here are some of the hazards investors may face in real estate, timberland or agricultural land transactions in Panama.
Doing Business Abroad
Transactions in Panama, like other foreign investments, may take longer and be more costly than a U.S. investor expects. As in other cross-border transactions, an investor should carefully review tax implications in Panama and in the United States. Perhaps most critically, an investor should identify competent and trustworthy local consultants and counsel. Good local team members will save time, money and heartburn by anticipating problems commonly faced by foreigners. Even so, both the U.S. investor and the local advisor may have unstated assumptions and expectations based on different customs. Experienced U.S. counsel accustomed to cross-border transactions in Panama can bridge the gap between the U.S. and foreign legal and business principles by anticipating misunderstandings.
Real estate purchase agreements in Panama differ from their U.S. counterparts in several important ways. The agreement must take the format, or at least incorporate the elements, of the customary Promise of Sale and Purchase Agreement (PSPA). The PSPA often contains fewer contingencies and covenants than a typical U.S. purchase agreement and is registered in the public records as a lien against the real property pending the sale. Most U.S. purchasers will be uncomfortable with these conventions. As a compromise, a more expansive unregistered purchase agreement can incorporate a PSPA by reference, thus allowing only the more limited instrument to be registered.
Earnest Money and Prepayment of Taxes
Real estate transactions in Panama often include an earnest money deposit of 10 percent of the purchase price. Unlike in the United States, the purchaser customarily delivers the funds to the seller upon execution of the purchase agreement. The seller must return the deposit to the purchaser if the closing doesn’t occur for reasons other than a default by the purchaser. In practice, the seller doesn’t hold these funds in a segregated account. Often, the seller uses the deposit to pay its transfer taxes and capital gains taxes, which are due before the closing. Without prepayment of these taxes, the government won’t issue a tax clearance certificate, one of the seller’s required closing deliveries.
The delivery of earnest money to the seller and the prepayment of taxes as a condition to closing may be unsettling for a U.S. investor accustomed to third-party escrow agents and payment of taxes at or after closing, and with good reason. The U.S. investor may not know the creditworthiness of the seller before entering the transaction, and the investor may face difficulty recovering its funds if closing fails to occur after the seller has prepaid the taxes. Even a sophisticated seller in Panama who has experience using escrow agents may not have sufficient cash to prepay transfer and capital gains taxes without access to at least a portion of the earnest money deposit. U.S. investors should be prepared for this request from a seller in Panama.
Purchase Price Mechanics
At closing, the earnest money (if not already with the seller) is released to the seller, and the parties pay their respective expenses. However, a purchaser (or escrow agent) typically doesn’t release the balance of the purchase price to a seller until receipt of the duly registered deed, which may occur up to several weeks after closing. As title insurance is less common in Panama than in the United States, parties rely on registered title, which must be approved by a government notary, to confirm ownership of real property. Until a purchaser receives the registered deed, it can’t claim ownership.
Document execution and closing formalities also differ in Panama. Unlike in the United States, where escrow closings and attachment of separate signature pages have become routine, parties customarily sign the same physical documents and initial each page (either in each other’s presence or by signing and delivering them serially). For documents that will be publicly registered, such as deeds (which the grantor and grantee sign), the party executing the document must speak Spanish or must have a certified translator present when signing. As execution of registered documents must take place before a government notary, principals of foreign investors must give a power of attorney to someone local if they can’t sign the instruments personally in Panama.
For U.S. investors, title insurance has become a risk management tool used in nearly every transaction. Title insurance in Panama is less common and significantly more expensive. Moreover, the documentary requirements of title insurers may exceed what attorneys in Panama typically receive from registrars’ offices. Obtaining all required documents and opinions of local counsel may result in delays unless sufficient time is built into the due diligence process. In contrast to the United States, where a marked title commitment binds the title insurer at closing, a marked commitment in Panama doesn’t insure good title until the purchaser receives the duly registered deed days or weeks after closing. This risk is partially offset because the purchaser retains the balance of the purchase price until receipt of the registered deed.