Panamanian Legal Entity Structures for Web3
Panama Regulatory Overview
Panama has a number of characteristics that attract foreign investment, its legal entities are used for local and offshore purposes which are consistent with international standards. Panama has demonstrated a commitment to work alongside the FATF and GAFILAT to strengthen the effectiveness of its AML/CFT regime.
One of the advantages Panama offers is its territorial taxation system; only operations that occur inside its border — Panama-sourced income — are taxed for both residents and non-residents. Also, if a Panamanian legal entity has no local operations, it is not subject to Panamanian regulations.
Panama’s legal tender is the U.S. dollar, which facilitates international transactions. It also has a democratic and stable government and has generally pro-crypto legislation.
On April 28, 2022, Panama’s National Assembly approved the Bill “Law to regulate the commercialization and use of crypto assets, emission of digital value, tokenization of precious metals and other assets, payment systems and which dictates other dispositions.” After that, the President, Laurentino Cortizo partially vetoed the proposed legislation, so that it could fully comply with global anti-money laundering standards. It was revised by the Government and the Commerce Commissions.
On October 28, 2022, the law project was approved, after the veto, in the third debate by the National Assembly, with amendments that Gabriel Silva, the congressman that initially proposed it, mentioned might be harmful and lack technical understanding in the matter. The final bill is yet to be published, plus it could be vetted again by the president.
The intention of this bill is to give more legal certainty to crypto users and entrepreneurs and would permit the optional use of crypto assets to pay for any legal civil or commercial operation. Thanks to the borderless nature of the internet, crypto assets would be treated as foreign-source income, which means no taxes on capital gains.
At the moment, there are no blockchain- or cryptocurrency-specific regulations in Panama. The Superintendent of Banks (SBP) and Superintendent of the Securities Market (SMV) have made pronouncements on the subject but these are not binding. There are no judicial precedents that grant any sort of recognition to cryptocurrencies as monetary instruments, securities, currencies, or digital assets.
Panamanian Legal Structures and Their Usage for Web3
The two types of legal entities mostly used for crypto in Panama are corporations and private interest foundations, which both provide for limited liability. As of September 2022, 2,245 foundations and 9,729 corporations have been registered. A key point for Panamanian legal entities is that their members are not required to be Panamanian nationals, and there is no need for them to go to Panama to file the documentation.
The Private Interest Foundation, approved by the National Assembly in 1995, was inspired by the Liechtenstein Foundation. It has no shareholders or partners and cannot be used to engage directly in the business or profit-yielding activities. The type of vehicle that most resembles a Panamanian foundation would be a Trust. The property of the foundation is completely independent of its members.
The creator of a foundation is the founder, and its Charter is registered in the Panama Public Registry with a Foundation Council of at least 3 people who are entrusted to pursue the objectives of the foundation and its management. Additionally, a Protector can be designated and has the right to remove the Foundation Council.
The beneficiaries are the people who benefit from the Foundation. They do not need to be set out in the charter; a separate document known as the Regulations of the Foundation lists them along with other confidential information. The founders and foundation council are typically nominated by the Resident Agent for more privacy.
These foundations are used for specific purposes outlined in the Charter, such as owning property, opening bank accounts, and exercising a range of rights; also, typically, the founder is a shareholder of another entity to give an extra layer of protection.
As for the use of a foundation for crypto, the private Regulations document could be used to set out a governance model for a DAO, which could also be the shareholder of a Company that engages in for-profit crypto-related activities. It could hold DAO assets and could be compliant with a bank’s KYC requirements.
In addition, there is the internationally known Panamanian corporation, or Sociedad Anónima in Spanish, which has been around since 1927 and is a legal structure that can engage in for-profit activities.
A corporation is created by registering the Articles of Incorporation in the Panamanian Public Registry. It must have a minimum of two people as subscribers, and a Board of Directors of three people. It must also include other details such as the object of the corporation and information regarding the shares. A corporation can establish governance mechanisms and create and issue one or more classes of shares, with designations and preferences that determine privileges, voting powers, restrictions or requirements, and other rights.
The corporation’s shares are issued through private documents, the shareholders may remain private, and their identity is not registered at the Panama Public Registry. However, this information must be maintained by the Resident Agent in the law firm’s private files.
Crypto projects could benefit from “wrapping” around corporations because they provide flexibility and protection. Many initial coin offerings were registered under Panamanian corporations, but that isn’t their only utility.
On October 26, 2022, Sushi DAO, approved the proposal to constitute two Panamanian Legal Entities as wrappers for SushiSwap.
A Private Interest Foundation to “administer the existing Sushi protocol (including smart contracts related to the AMM/orderbook, Kashi and staking)”, they mention in the proposal that the Panamanian Foundation will enter into a services agreement with service providers to assist with developing the protocol, and a Panamanian Corporation “to operate the GUI layer (front-end) of the protocol”. Regarding the Corporation they also mention that “it will be a wholly-owned subsidiary of the Panamanian Foundation, will enter into a services agreement with service providers to assist with developing and maintaining the GUI layer of the protocol.”
It is useful to have a broad understanding of how different jurisdictions could be applied to our legal crypto questions, but we have to keep in mind that crypto projects should never be used as a way to engage in fraudulent conduct or cause harm to others.
[The article has already been published on BanklessDAO’s Decentralized Law newsletter]
Teresa has a background in litigation but now focuses on corporate preventive law. She is fascinated by lawyering in web3 and is licensed to practice law in Panama and Mexico. For more information visit her website.
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