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About the Law of Incentives for the Enhancement of Panama’s Casco Viejo

Posted by Leydi Chong on October 5, 2023

I.   Origination and Precedent of the Old Town Incentive Law

The inception of the Law of Investment Incentives in Panama City’s Old Town in 1997 marked a pivotal moment, kick-starting the revitalization of this urban district. Decree Law 9, issued on August 27, 1997, was the legislative cornerstone, offering a five-year window of opportunity for a series of incentives aimed at rejuvenating the historic center. This was an essential step as the district was grappling with severe

deterioration, demanding concrete actions to halt its decline.

Notably, the bill’s drafting involved several key contributors from Compañía Inmobiliaria San Felipe, who presented it to the then President, Ernesto Pérez Balladares. Many of the benefits established by this law persisted through subsequent legislative efforts under different government administrations. These efforts extended the timeframe for tax incentives while introducing amendments and enhancements to the original proposal from Compañía Inmobiliaria San Felipe.

Law 4, enacted on January 15, 2002, further extended the incentive period by ten years. Subsequently, Law 136, dated December 31, 2013, introduced a two-year window to capitalize on tax incentives. However, this proved insufficient to reactivate the incentives and the essential investments required. Consequently, Law 53, passed on July 4, 2017, effectively amended the 2013 decree, extending the incentive period by a decade to facilitate the necessary investments.

In light of the above, the currently enforced law is Law 136 from December 31, 2013, which provides a 10-year window, expiring in December 2023, to access tax incentives, each with its respective timeline.

With this context in mind, let us now delve into an analysis of the key facets of this law.

II. Fiscal Incentives for Financing

The law outlines provisions enabling Panamanian mortgage banks to utilize the Casco Antiguo incentive law for the provision of loans designated as “preferential mortgage loans for the enhancement of Panama City’s Casco Antiguo.”

Here are some crucial requirements these loans must adhere to as per the law:

1. The loan proceeds must be exclusively allocated to the restoration, reconstruction, or total/partial construction of a property within Casco Antiguo.

2. The loan proceeds can also be utilized for the acquisition of a property that has already been restored, reconstructed, or constructed within Casco Antiguo.

The bank offering the financing will establish the interest rate, ensuring it does not exceed a 3% reduction compared to the national mortgage reference rate. This reference rate, determined monthly by the Superintendency of Banks, will create a preferential margin—the difference between the reference rate and the actual rate charged by the bank.

Throughout the loan term, banking entities will annually receive a tax credit, applicable to their income tax payments. This credit equals the difference between the income they would have earned if they had applied the prevailing market reference rate that year and the income generated from each of the preferential mortgage loans granted.

It’s important to note that these benefits apply only for the original loan term and do not extend to refinancing or second mortgages.

In case of the transfer of a preferential mortgage loan for the enhancement of the Old Town, the tax credit specified will transfer to the new mortgage holder from the date of the transfer.

III. Incentives for Owners and Investors:

It’s important to note that various terms apply to the tax incentives in this category, and some of these benefits are no longer in effect. Conversely, certain incentives become active upon obtaining the occupancy permit for properties built or reconstructed within the Casco Antiguo during the law’s timeframe.

Here, we provide a breakdown of the currently active incentives, their terms, and details:

a. Donations for Public Improvement: Any investment in the construction, reconstruction, maintenance, or illumination of parks, walls, churches, or public use sites within the Casco Antiguo is recognized as a deductible expense for income tax purposes.

b. Income Tax Exemption: Article 18 of the law stipulates that property owners within the Casco Antiguo, who have constructed, restored, or reconstructed their buildings (either in whole or in part), are exempt from income tax for both property transfers and commercial activities conducted within the property. This exemption spans 10 years from the date of obtaining the occupancy permit for the entire property or its improved section.

c. Real Estate Tax Exemption: Article 19 of the law states that buildings constructed, reconstructed, or restored, and granted occupancy permits after the law’s enactment, are exempt from real estate taxes imposed on land and declared improvements for a period of 30 years, starting from the occupancy permit date.

d. Transfer Tax Exemption: The law exempts the first transfer, commencing from its effective date, of a building or land within the Casco Antiguo that has undergone construction, reconstruction, or restoration (either in whole or in part) from the real estate transfer tax. To be eligible, a minimum investment of $50,000 is required.

e. Import Tax Exemption for Equipment and Materials: Equipment and materials utilized in the construction, reconstruction, or restoration of buildings within the Casco Antiguo are exempt from import taxes, provided they are not adequately produced within the country in terms of quantity and quality. To avail of this incentive, a certification from the DNPC is required when the respective activity has been carried out.

IV. Other Provisions:

The 2013 investment incentive law introduces additional provisions stemming from amendments to the original 1997 law. These provisions warrant a distinct examination:

a. Relocation of Occupants in Unrestored Buildings: These provisions were initially introduced in the 2002 law to facilitate the relocation of individuals residing in buildings slated for restoration. In practice, many of these provisions were either disregarded or lacked sufficient support from authorities. Consequently, this failed to benefit residents, hindered the development of social interest projects, impeded squatter eviction, and discouraged private enterprise, significantly impeding Casco Antiguo’s value enhancement.

b. Administrative Sanctions for Non-Compliance and Enhancement: A comprehensive section introduced in the 2013 law outlines fines of up to $150,000 and the potential for building expropriation for non-compliance with restoration regulations. This section presents challenges for investors who, because of reasons beyond their control, miss the restoration deadlines set within the specified timeframe. Additionally, cases of property owners blatantly violating regulations have often gone unchecked by authorities, undermining both the enhancement of the Old Town and the diligent efforts of active investors striving to comply with restoration regulations.

V. Conclusions:

The investment incentive law for the enhancement of Panama’s Casco Antiguo played a pivotal role in kick-starting the neighborhood’s rehabilitation process in 1997. It continues to hold significant importance in fostering construction activities in an area where building costs, land prices, and the number of unrestored buildings pose substantial challenges.

Recently, the private sector has achieved remarkable milestones, with standout projects such as the Sofitel Legend and Hotel La Compañía, which have immensely boosted our status as a tourist and cultural hub. Nevertheless, a substantial portion, approximately 50%, of Casco Antiguo’s buildings still await restoration or rehabilitation.

Casco Antiguo stands as Panama City’s most promising tourist destination, drawing visitors from all over, as corroborated by statistics. This is our chance to welcome these tourists, offer them an exceptional experience, and introduce them to the broader array of tourist attractions our country has to offer.

Let’s not forget the privilege we hold, as Casco Antiguo of Panama City retains its prestigious UNESCO World Heritage Site designation. As trailblazers in Casco Antiguo’s restoration, we firmly believe that the forthcoming government administration should consider the imperative to extend and revise Law 136 from December 31, 2013. This revision is essential to realize the envisioned development for Casco Antiguo, uphold our commitment to the preservation of our historic center, and honor its UNESCO recognition.

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