Panama and International Insurance
Contributed by Cititrust International
18 August, 2011
Panama is quickly emerging as the key gateway into and out of South America. Panama is a nexus of trade for South America and is hence going to be and already is an ideal jurisdiction for international trading businesses in services and goods. It competes for this title with Miami.
Panama tax reform has recently been completed. Among other reforms there has been the introduction of, Transfer pricing, Information exchange and taxation of certain foreign source income. Panama already has headquarters legislation and is negotiating tax treaties. Panama however is blacklisted by most countries in South America and many in EU and is subject to the CFC legislation of most other high tax countries. Panama has however recently negotiated some thirteen tax treaties and no doubt will successfully negotiate more in the coming months.
With a treaty network, tax free trading zones, good legal and physical infrastructure and nexus to South America it is an ideal location for an international trading company. The Panama canal simply reinforces this fact.
This article will consider why HNWIs should establish international trading companies in Panama. There are two perspectives, HNWI resident in high tax countries like US, UK and Canada and also those HNWIs resident in South America. The HNWI whether resident in Brazil, Colombia, Argentina, Mexico or UK, US or Canada who is addressing international markets will need to consider both his operations and his wealth management structure.
HNWIs wherever they are resident typically face the same issues if they are business owners. Their business and their wealth structure are closely related and are usually subject to the heaviest tax legislation burden. Once trading income becomes passive income it is the target of aggressive tax rukes.
The HNWI resident in South America
Countries across the world are increasingly implementing anti avoidance legislation and transfer pricing as is happening in Panama. The tax authorities are targeting wealth accumulation structures like trusts, insurance companies and foundations. The substance of both base companies and wealth structures is increasingly important to make international tax structures work.
National blacklists have once again come into existence and countries in Latin and South America especially are operating these lists even where they have signed treaties with countries. The HNWIs from South America therefore face a fundamental problem in structuring their international operations or wealth management through Panama. HNWIs in South and Latin America also are impacted by forced heirship rules and thus have to structure their wealth in international jurisdictions in order for their wealth to be administered as they prefer.
The solution is for the South American, Brazilian or Venezuelan business man to use an onshore offshore structure. This could be for example a Canadian or UK trust to circumvent the blacklist problem. That onshore trust can own the shares in a Panama international trading company. The taxation of trusts in Canada and UK is very different when the settlor is not resident in the country and there are there no beneficiaries resident there either. The onshore trust may then also own a related company that is an insurance company, resident in a jurisdiction like Barbados. Barbados has a double tax treaty with Panama. Premiums can be paid from Panama to the Barbados insurance company. This simple framework describes the condensed and robust planning that is required now that intermediary companies are being targeted by most nations.
If the wealth is generated in the country of residence, then settling an English or Canadian trust may not contravene the blacklist and aggressive local tax rules.
Panama is negotiating enough treaties that within a year it will be a very tax efficient place to trade from and international trading companies are going to proliferate. Panama may well become the Hong Kong of South America
The HNWI resident in UK, US or Canada.
The HNWI resident in UK, US or Canada does not face the problem of blacklists in domestic tax legislation but the problem of detailed and near exhaustive anti avoidance domestic legislation. The HNWI resident in UK, US or Canada will in the future have to consider establishing an international trading company as a substantial base of operation, as a low tax jurisdiction within proximity to key markets.
Residents of the US, providing they establish substantial operations in Panama, can accumulate earnings in their Panama trading company that are not attributed back to the US parent company taxation on an arising basis. This is a function of US domestic tax law and is the case even though there is no US Panama treaty. These companies will be able to use Panamas new and growing treaty network for tax efficient international trading.
What the US owners of these Panama trading companies need is a viable long term wealth management solution. A Barbados insurance subsidiary that has access to both the US and Panama double tax treaties could be a good position for accumulating wealth. Premiums paid from the Panama international trading company to the Barbados insurance subsidiary. US and Canadian resident HNWIs will find it possible to own Barbados resident international insurance companys that attain benefits under the US Barbados double tax treaty. HNWI residents of the UK will not without further complex tax structures to hold the insurance company shares.
The advent of increasing information exchange, crack down by tax authorities and developments like the OECD definition of Beneficial owner project. Due to the latter developments the use of intermediary companies with no substance is no longer a feature of robust international tax planning. The HNWI has to establish his tax efficient base company in a jurisdiction close to his key markets. Singapore, Hong kong, Panama and Barbados are jurisdictions where if there is substantial presence there are a significant number of tax planning opportunities that will stand up to scrutiny. The international wealth structure has also to be robust and in some cases based in onshore jurisdictions.
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