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Property law in Panama interview
With the recent implementation of the new Panama residency program, in which a person can apply to permanent residency by purchasing a real estate property, new opportunities open to international investors.
Now, those countries that don´t qualify to the friendly nations visa like China, Venezuela or Russia can also have access to a quick permanent residency in Panama opening the path to a legal tax residency status as well.
However, buying property is a delicate process as it involves legal procedures and an important amount of money invested. What risks can face international investors when acquiring property in Panama? How safe is the title? How does financing processes work in Panama and are they safe?
When I heard this news, I immediately got in touch with our lawyer expert in real estate law in Panama to help us clear out these doubts and to explain the details of the real estate law. This interview will be of interest to all foreign investors interested in Panama as a business and residency center.
Here is what Maria, our lawyer, told us.
For more information about Panama business opportunities, residency programs, financial licenses, banking and real estate projects, please visit our country focus.
Can you tell us about your background?
Yes, for the last six years I have been working as a legal adviser on Panama´s biggest developer and construction company. My experience with them includes revising contracts, property transactions and being involved in the process of putting a property title to the buyer´s name.
How is title to property registered in Panama?
The title is registered by a public deed duly inscribed in the Public Registry office of Panama. The process begins when both parties have signed the sales contract and are ready to fulfill all terms and conditions. The buyer is obligated to pay for the property and usually the seller is in charge of putting the property in the buyer´s name and paying taxes, utilities and such in order to duly register the property title. It is important to note that when it comes to expenses involving notary services and revenue stamps, the buyer must pay legal expenses pertaining these fees. All the expenses regarding the title process are divided between the buyer and seller. Being the seller’s sole responsibility to cover the 2% of transfer tax and 3% of capital gain tax.
How safe is the title?
Panamanian law protects the buyer in good faith. Therefore, if there’s any pending matter on behalf of the seller involving the property and another party, they shall not affect the buyer´s title and the problem has to be solved between the other parties involved.
What risks should foreigners be aware of when buying property?
From an investment point of view, there’s always going to be a risk like in any financial transaction. The risk involves different factors like the type of market they are investing in and the type of property or area they are interested in buying. From a legal standpoint the risk can be minimized by always performing a previous investigation on the property and verifying that the tittle in the public registry office is in line with what the seller is offering. For example, it´s important to check that the plot number is the same, the property owner is the same as the seller or investigate if the seller is part of the company who owns the property (if that were the case). Also, it’s always good to verify if there are no active liens over the property and if the area registered is the same as the one in the property description.
What is capital gains tax on property?
The capital gains tax in Panama is the 3% over the registered value of the property or the sales price, whichever is higher.
What is the transfer tax on property?
It´s 2% over the sales value of the property.
Can you describe how property transaction proceeds in stages and times?
Ok, let’s say we have an investor interested in a project that is yet to be built. Usually the process starts with the promise of sale contract (not sales contract because that comes in the form of the deed when the project is ALREADY built and ready for delivery). In these cases, the terms usually estate that there is an annual payment of about 10% (depending on what the parties negotiate) for about 3 to 4 years depending on how long it takes for it to be built. In the standard contracts, there is a clause that mentions the approximate time of construction of a project.
Once the project is ready for delivery, the client is informed, and the client has to pay the remaining balance. If said balance is to be paid via a promise of payment letter from a local bank (which means the client has signed a mortgage contract with the bank) the developer sends all the documents to the bank who will be the one in charge of formalizing the deed.
How do vendor finance deals proceed and what are the best ways to do these?
Ok, this is a complex subject. We can identify 2 main ways to go about financing a property investment in Panama. Even though there are developers that offer “internal financing”, this isn’t quite the name for it. In Panama, the financial operations are regulated by the ministry of commerce and financial loans are only given by financing entities. However, the Panamanian Real Estate developer market, foreseeing the need to implement a program that would allow foreigners and investors to acquire a property without the need of a mortgage, came up with an internal “financing” program. This program works - to put it simply - as a lease with the promise of buying the property. This is usually done under the terms of the developer for a period of 3 to 5 years and at an interest rate usually higher than the ones offered by the banks. The good thing about this type of program is that the buyer can have access to the property (if ready for delivery) as soon as they sign the contract and will pay the lease fee monthly. They can make payments towards the sale price every year, or many times a year depending on what’s stipulated in the contract. It is always important to note that in this type of contracts, the monthly payment doesn’t go towards the sales price (unless is explicitly stipulated in the contract).
The other way to finance a real estate transaction involves a financing entity or a bank.
The local banking system is notoriously regulated when it comes to giving out loans.
For this reason, there are many ways to go about getting a mortgage as a foreigner. The main one is being able to guarantee the bank the repayment of the property whether it is by proving a local income source or by bringing substantial amount of money from abroad and depositing it in a local bank to guarantee the repayment of the property.
Once the client has complied with all the requirements from the bank and is pre-approved, they have to take into consideration the price per square meter since banks usually have a cap on the percentage of the price they are allowed to cover. Usually they will cover around 60% to 80% of the property price and the client must cover the remaining balance. These requirements will vary with each bank.
What does a lawyer charge to support a property deal legally and can lawyers hold funds in escrow pending the conveyance?
The fees usually depend on either the value of the property or the sales price, whichever is higher. It is customary to charge around 1% and 2%, and the fees do not include expenses.
Not so long ago, it was common practice for lawyers to offer escrow services to clients, however, in 2017 Law 21 was created, which "establishes the rules for the regulation and supervision of trustees and the trust business" in Panama.
Meaning that any individual, whether it’s a company, a real estate broker, or a lawyer that receives funds as part of an escrow service must have a trust license provided by the Superintendency of Banks of Panama.
All things considered, there are companies in Panama that offer escrow services to hold funds or assets until the other parties fulfill certain duties and obligations. Once certain terms have been fulfilled, the escrow agent releases the funds.
Additionally, other options are available such as having the bank provide a guarantee letter for the seller which works by providing both parties the reassurance that a) the money is in the bank´s custody and b) the funds will be released by the bank to the seller once the terms and conditions of the sales contract have been fulfilled.
Please see a video version of this interview here.
Don´t miss this fantastic opportunity to buy real estate in Panama and acquire permanent residency in only one month.
Contact our experts now for more information.
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