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On March 14th, 2018, in a matter of minutes, the public announcement regarding the closing down of the law firm, which played a leading role in the well-known "Panama Papers", is being published worldwide. The law firm Mossack Fonseca & Co., Bufete MF & Co. or Grupo Mossack & Fonseca has closed its activities on the 30th of April, 2018, in all of its branch offices around the world, including its head quarter in Panama City. In Panama, the "offshore" incorporation and financial business sector is an important pillar for the national economy, and sustains almost 50% of the service sector. What are the consequences for the affected clients? Change of Resident Agent According to Article No. 2 of Law No. 32 of February 26th, 1927 all corporate bodies in Panama must have, mandatorily, a registered agent or resident agent in Panama; which can be a law firm or a practicing lawyer that represents the corporate body in Panama. If the corporation is left without resident agent (due to the resignation thereof), it will only have a period of 90 days to appoint and register a new resident agent in the Mercantile Section of the Public Registry of Panama. Otherwise, the Panamanian government will proceed to fine the affected corporation and will inactivate its status through official order. Inactive Corporations In September 2017, by means of the Resolution No. 201-5612, the process for the inactivation of corporations due to arrearage in payment of the mandatory annual franchise tax for more than three (3) consecutive years has been approved. In the past, after ten (10) years of not paying the annual franchise tax, the affected corporations were dissolved by official order. With the change of this legal base, thousands of corporations in Panama are currently "inactivated" by the tax collector office (DGI for its acronym in Spanish), which also affects their status in the Mercantile Section of the Public Registry, often without knowledge of the owners (foreign shareholders) of said corporations. For the reactivation of an inactivated corporation, a fine of one thousand US Dollars (USD$1,000.00) must be paid to the competent authority (additionally to the payment of the pending franchise tax plus interests), and the reinstatement of the corporation must be requested formally at the Panamanian tax collector office. Later on, the tax collector office must inform the Public Registry of the re-activation of the corporation, which will then reset the original status. Illegal Use of "Offshore" Corporations The incorporation of an "offshore" corporation does not constitute an illegality in itself, since the crime depends on the purposes for which it was created. Such as defrauding the treasury, money laundry, drug trafficking or other criminal intentions being the leading objective of the "offshore" corporation, where the main characters involved prefer to hide in the shadows. Although an "offshore" corporation offers greater autonomy to manage a business, it does not grant the right to commit crimes. It is for that reason that the Panamanian government has established certain transparency laws, binding for financial and non-financial individuals, including lawyers and accountants, obligating these professionals to report any suspicious activity or any potential tax evasion to the competent authority. Transparency in Legal Proceedings It is for that reason, that each case must be considered individually, in order to assure that the objective of the "offshore" corporation complies with the established rules and regulations in order to guarantee its ethical and legal operation at all time. The creation of an "offshore" corporate body may help to reduce its tax burden in a meaningful manner. But this does not mean that the tax laws in the country of origin may be or can be fully avoided. Trying to hide money from the tax system in the country of origin is deemed as an unlawful use of an "offshore" corporation. Elimination of the "Offshore" Type Corporation Through Resolution No. 201-1254 issued by the tax collector office of Panama (DGI) and published in the Official Gazette on the 9th of March 2018, the categorization of corporations has been restructured. From now on Panamanian corporations will be categorized by the fact that their income derivates from a Panamanian source, or not, with the purpose of establishing their tax obligations in Panama and abroad. Corporations that derivate their income from a Panamanian source (as low as its percentage may be), will be determined as "type A", and are obligated to file an annual income tax return (ISR for its acronym in Spanish) or an Income Affidavit with the Panamanian tax office. Those corporations that are only incorporated for the purpose of ownership of a certain asset or real estate property ("holding"), that do not conduct any business, nor derivate any income from a Panamanian source, or if their income is derived 100% from a foreign source ("offshore"), are considered "type B", and therefore, are not obligated to file an annual income tax return with the Panamanian authorities nor declare their income, since these corporations are currently tax-exempted. The "E-tax" System and Income Tax Return in Panama It is important to mention that those corporations that did not declare the origin of their income at the time of their registration, must do it now, by updating their information in the "e-tax" system, in order to avoid that the tax collector office in Panama will fine them for not submitting the annual income tax return on time. Gomez Tomiczek International Group