Buying the Property or Buying the Company? What Investors Should Review Before Closing in Panama

Panama City

When evaluating the purchase of real estate in Panama, a buyer may be presented with two different structures: acquiring the property directly or purchasing the shares of the company that owns it.

At first glance, these alternatives may appear equivalent. After all, the economic objective is the same: to obtain control and use of the property. Legally, however, they are different transactions, and each requires a specific review.

The question should not be limited to which structure allows for a faster closing. Before deciding, an investor should understand exactly what is being acquired, which obligations may accompany the transaction, and which documents are needed for adequate protection.

Direct purchase of the property

In a direct real estate transaction, the individual or company shown as the registered owner transfers the property to the buyer by means of a public deed. Once the deed is recorded with Panama's Public Registry, the buyer becomes the new registered owner.

The legal review focuses primarily on the property and on the seller's authority to transfer it.

Among other matters, the buyer should verify:

• Registered ownership and the authority of the person signing on behalf of the seller.

• Mortgages, attachments, claims, usufructs, restrictions, or other recorded matters.

• The real estate tax account and the information registered with the General Directorate of Revenue.

• The property's cadastral status before the National Land Administration Authority.

• Required clearances and, in the case of condominium property, outstanding fees or special assessments.

• Occupancy, lease agreements, and the status of utilities.

• Permits, plans, improvements, or construction that should be properly documented.

  
  

A direct transfer also involves tax obligations and closing costs that should be calculated during the negotiation stage. Panama's tax authority provides for, among other filings, the Real Estate Transfer Tax return and the capital gains tax return applicable to the sale of real property. Their specific application should be reviewed in light of the seller and the circumstances of the transaction.

Purchase of the shares of the property-owning company

In a share purchase, the registered owner of the property does not change: the property remains in the name of the same company. What changes is the ownership of the shares and, consequently, control of the legal entity.

This distinction is essential. The buyer is not acquiring only the economic benefit of the property. The buyer is acquiring a company together with its corporate, tax, contractual, and accounting history.

If the company was incorporated solely to hold one property and has never carried on any other activity, the transaction may appear straightforward. Even so, this assertion should be verified. A company may have outstanding obligations despite not operating an active business.

Due diligence should therefore be conducted at two levels.

1. Review of the property

The buyer should conduct substantially the same registry and administrative review required for a direct real estate purchase. The fact that the property will remain registered in the company's name does not remove the need to examine liens, taxes, condominium fees, occupants, utilities, permits, and other contingencies concerning the asset.

The review should not be limited to the Public Registry. Plans, access points, and the physical condition of the property may also be important, particularly when the asset is a large parcel of land. For example, the company may be in good standing and have no debts, while the property is affected by a right of way or by a road used by third parties. That situation may limit the property's use or make a future sale more difficult.

Depending on the type of property, a site inspection and a review of the plans may therefore be as important as the registry search.

2. Review of the company

In addition, the buyer should confirm, as applicable:

• The company's good standing and status at the Public Registry.

• The articles of incorporation, amendments, and the authority of directors, officers, and representatives.

• The identity and authority of the shareholders and the chain of title to the shares.

• The issuance and cancellation of share certificates.

• Corporate records, minutes, and the approvals required for the transaction.

• The status of the annual franchise tax, taxpayer registration, and applicable tax obligations.

• The existence and maintenance of accounting records and supporting documentation.

• Bank accounts, loans, guarantees, contracts, litigation, and claims.

• Employees, suppliers, leases, or other relationships that may create liabilities.

• Compliance with applicable due diligence and beneficial ownership obligations.

  
  

It is also important to determine whether a mortgage, financing arrangement, lease, or other agreement requires notice or consent upon a change of control of the company.

A share purchase also involves taxes

A share purchase is sometimes presented as a faster transaction or as a way to avoid the taxes payable on a direct property transfer. That can create the wrong impression: buying the shares does not make the transaction tax-free.

In a share purchase, the buyer must withhold five percent (5%) of the total purchase price from the seller as an advance payment of capital gains tax. The buyer must report and pay that amount to Panama's tax authority through Form 108 within ten days after the payment obligation arises.

The share purchase agreement is also subject to stamp tax. As a general rule, the tax is B/.0.10 for each B/.100.00, or fraction thereof, of the amount stated in the agreement.

Therefore, neither a direct purchase of the property nor a purchase of the company's shares eliminates tax obligations. What changes is the applicable tax, its calculation, and the filing and payment procedure. Any cost comparison should be completed before signing, based on the actual facts of the transaction.

The share purchase agreement is essential

A satisfactory review does not eliminate every risk. A share acquisition should be documented through an agreement that clearly identifies what is being sold, the price and payment terms, closing conditions, and each party's obligations.

Depending on the transaction, the agreement may include:

• Representations and warranties concerning the company and the property.

• Confirmation that no liabilities exist other than those disclosed.

• An obligation to discharge specified debts or liens before closing.

• Indemnification mechanisms for pre-closing contingencies.

• Holdbacks, escrow arrangements, or conditions precedent.

• Delivery of corporate books, certificates, credentials, contracts, and accounting records.

• Resignations and appointments of directors and officers.

• Updates to beneficial ownership information, the resident agent, corporate records, and tax registration, as applicable.

Closing should not be reduced to the delivery of a share certificate in exchange for payment. There should be a coherent closing package that gives the buyer effective control of both the company and the property.

Which alternative is appropriate?

There is no universal answer. A direct acquisition may be more transparent for a buyer who wishes to acquire only the property and has no interest in assuming an existing corporate structure. A share purchase may be viable when the company has been used solely to hold the property, its history is properly documented, and the risks are allocated through an adequate agreement.

The decision will depend on several factors, including the company's history, the property's registry status, the financing structure, tax consequences, the purpose of the investment, and the buyer's risk tolerance.

The appropriate question is not only, “Am I buying a property?” The investor should also ask, “Which obligations, relationships, and historical matters accompany the structure I am acquiring?”

Before transferring a deposit or signing an agreement, an investor should understand exactly what is being purchased and how the investor will be protected after closing.

This article provides general information and does not constitute legal or tax advice for a specific transaction. Each matter should be reviewed according to its own documents and circumstances.

Roxana Rangel Villarreal