Impact of savings tax on Panama

Impact of EU Savings Tax on Panama

Although Panama is not party to the EU savings directive, the following categories of structures will be subject to the EU savings tax directive:-
I	Panamanian untaxed entities and legal arrangements with a bank account in the savings tax territory. The bank is Paying Agent for the: Fideicomiso (Trust, governed by local law) Trust governed by foreign law Fundación de interés privado (Foundation) International Business Company (IBC)	Bank is Paying Agent
II	Any of the following Panama entities and legal arrangements if its place of effective management is within the savings tax territory, irrespective of where the bank account is:- Fideicomiso (Trust, governed by local law) Trust governed by foreign law Fundación de interés privado (Foundation) International Business Company (IBC)	The directors, trustee or council will have Paying Agent Upon Receipt responsibilities.
III	Any untaxed non-Panamanian entity or legal arrangement managed from within the savings tax territory with a bank account in Panama will have Paying Agent Upon Receipt responsibilities.	The directors, trustee or council will have Paying Agent Upon Receipt responsibilities.
IV	An individuals account in Panama managed by an entity, or legal arrangement based within the savings tax territory (including managed discretionary agreements).	The management of the party managing the account will be Paying Agent Upon Receipt.

Individual's Panama Bank Account
Out of scope: An EU-resident individual's bank account in Panama is not subject to EU savings tax if not managed from within the savings tax territory.	Not many EU residents hold bank accounts in Panama because few European banks have established any representation.
In scope by Paying Agent Upon Receipt: (Category IV) An individual's bank account in Panama managed by an entity or legal arrangement within the EU savings tax territory is subject to the savings tax. Responsibility of the Paying Agent Upon Receipt: The entity / legal arrangement managing the account, as Paying Agent Upon Receipt, applies the savings tax provisions on the beneficial owner. Note: A discretionary mandate by a bank is a legal arrangement. As such, this legal arrangement must act as a Paying Agent Upon Receipt.	For example: A portfolio in a Panama subsidiary bank managed by the head office in Andorra is subject to savings tax

Panama International Business Company
Out of scope: A Panama IBC is omitted from the savings tax directive if it hold its accounts with a bank outside the savings tax territory and its place of effective management is also outside the EU savings tax territory.	For example, a Singapore bank account held by a Panama company with Singapore directors is out of scope.
In scope by Paying Agent: (Category I) A Panama IBC, with management outside the EU savings tax territory, is subject to the savings tax if its bank account is with bank established in the EU savings tax territory. Responsibilities of Paying Agent: The bank as Paying Agent must *look through* the IBC to the beneficial owner. An interest payment shall be regarded as having been made to, or secured for, the immediate benefit of any individual, who is resident in a Member State other than that of the economic operator as the beneficial owner of the entity or legal arrangement. Beneficial Owner: The identity of that individual shall be established in accordance with the customer due diligence measures provided for in the EU directive on anti money laundering and terrorist financing. The Beneficial Owner of a company is:- any shareholder who owns more than 25% equity of a company, or alternatively, it is the natural person(s) who exercises control over the management of an entity	For example, a Swiss bank account held by a Panama IBC is in scope Note on nominee shareholders and directors: It is common for Panamanian company service providers to offer nominee shareholder and director services for IBCs. Paying Agents must look through the nominee shareholder or director of a company according to the EU money laundering directive. It is inconceivable today that a bank would ignore the “know your client” requirements and accept the nominee as the de facto Beneficial Owner or director.
In scope as Paying Agent Upon Receipt: (Category II) A Panama IBC is subject to savings tax if the place of effective management of the company is within the savings tax territory, irrespective of where the bank account is held. Note: If the bank account is within savings tax territory: A Paying Agent (bank) must report on interest payments to a Panama company if it is managed within another savings tax territory, no matter who the beneficial owner is. In territories where banks may withhold interest, if the Panama company management do not agree on having its payments reported, the bank must withhold 35% tax, irrespective of who the beneficial owner is. Responsibility of Paying Agent Upon Receipt: The management would become Paying Agents Upon Receipt who must identify the beneficial owners. The identity of that individual shall be established in accordance with the customer due diligence measures provided for in the EU directive on anti money laundering and terrorist financing. Beneficial Owner of a company is:- any shareholder who owns more than 25% equity of a company, or alternatively, it is the natural person(s) who exercises control over the management of an entity	For example, A Panama IBC with account in Panama and managed by directors based in Andorra Place of Effective Management of an entity, with or without legal personality, shall mean the address where key management decisions are taken that are necessary for the conduct of the entity’s activity as a whole. Where key management decisions are taken in more than one country or jurisdiction, the place of effective management shall be considered to be at the address where most of the key management decisions are taken relating to the assets producing interest payments within the meaning of this Directive;

Panama Trusts
Out of scope: A trust is not subject to savings tax if its place of effective management (trustee) is outside the EU savings tax territory and its account is with a bank outside the savings tax territory.	For example, a Panama trust with account in Panama and trustee in Panama is out of scope.
In scope by Paying Agent: (Category I) A Panama trust is subject to savings tax if it has its account with a bank within the EU savings tax territory. Responsibility of Paying Agent The bank as Paying Agent must *look through* the trust to the beneficial owner. An interest payment shall be regarded as having been made to, or secured for, the immediate benefit of any individual, who is resident in a Member State other than that of the economic operator as the beneficial owner of the entity or legal arrangement. Beneficial Owner: of a trust is:- where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property; or alternatively it is the natural person(s) who exercises control over 25% or more of the property of a legal arrangement, usually the principal settlor/ founder	For example, a Panama trust with an account in Switzerland is in scope.
In scope by Paying Agent Upon Receipt: (Category II) A Panama trust with its effective management within the EU savings tax territory is in scope, irrespective of where the bank account is held. The trustee then becomes a Paying Agent Upon Receipt. Note: If the bank account is held within savings tax territory: A Paying Agent (bank) must report on interest payments to a Panama trust if it is managed within another savings tax territory, no matter who the beneficial owner is. In territories where banks may withhold interest, if the Panama trustee does not agree on having its payments reported, the bank must withhold 35% tax, irrespective of who the beneficial owner is. Responsibility of Paying Agent Upon Receipt: An interest payment shall be regarded as having been made to, or secured for, the immediate benefit of any individual, who is resident in a Member State other than that of the economic operator as the beneficial owner of the entity or legal arrangement. 1. Immediate Beneficiary Entitled to the Payment The Beneficial Owner of a Trust is:- where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property; or alternatively it is the natural person(s) who exercises control over 25% or more of the property of a legal arrangement, usually the principal settlor/ founder 2. Unidentified immediate beneficiary: The amendment takes into consideration that it will be highly unlikely to identify a beneficiary immediately entitled to the payment received. In this case, the principal contributor, i.e. the actual settlor will be deemed the beneficial owner, irrespective if the settlement is irrevocable or not. The logic being that tax liability remains yours until transferred to someone else with a tax liability. 3. Paying Agent Upon Distribution if no principal contributor identifiable: In the event that a principal settlor is not identifiable, e.g. for a deceased settlor, then the structure becomes a Paying Agent Upon Distribution and must apply the savings tax to any individual who becomes entitled to the payment within 10 years.	For example, a Panama trust with account in Belize and trustee based in Jersey. Foreign trustees: It is common for Panama trusts to appointment non Panama trustees, usually related to the settlor. If the trustee is based in the EU savings tax territory, then the trustee becomes a Paying Agent Upon Receipt. Place of effective management of a trust or other legal arrangement shall mean the permanent address of the natural person who has the principal responsibility for the key management decisions relating to the assets of the legal arrangement, in the case of a trust the trustee.

Panama Fundación de Interés Privado
Out of scope: The foundation is not subject to savings tax if Council is not based in the EU savings tax territory and the foundation holds its account with a bank outside the savings tax territory.	For example a Panama foundation, with Panamanian Council with bank account in Panama is out of scope.
In scope by Paying Agent: (Category I) A Panama foundation is subject to the EU savings tax if it has its account with a bank established within the EU savings tax territory. Responsibilities of Paying Agent: The bank as Paying Agent must look through the foundation to the beneficial owner. The Beneficial Owner: where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property; or alternatively it is the natural person(s) who exercises control over 25% or more of the property of a legal arrangement, usually the principal settlor/ founder	For example, a Panama foundation with a bank account in Andorra is in scope. In practice a beneficial owner of a foundation will not be identifiable by the bank, because the foundation does not name beneficiaries. The 2nd review of the EU savings tax directive should deem the principal contributor of assets of the foundation as the beneficial owner, i.e. the principal founder.
In scope by Paying Agent Upon Receipt: (Category II) A Panama foundation is subject to the EU savings tax if its Council is established within the EU savings tax territory, irrespective of where the account is held. The council will be Paying Agent Upon Receipt. Note if account held within savings tax territory: The Paying Agent (bank) must report on interest payments to a Panama foundation if the council is established within the savings tax territory, no matter who the beneficial owner is. In territories where banks may withhold interest, if the council of the Panama foundation does not agree on having its payments reported, the bank must withhold 35% tax, irrespective of who the beneficial owner is. Responsibility of Paying Agent Upon Receipt: The council as Paying Agent Upon Receipt must *look through* the IBC to the beneficial owner. An interest payment shall be regarded as having been made to, or secured for, the immediate benefit of any individual, who is resident in a Member State other than that of the economic operator as the beneficial owner of the entity or legal arrangement. 1. Immediate Beneficiary Entitled to the Payment The Beneficial Owner of a Foundation is:- where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property; or alternatively it is the natural person(s) who exercises control over 25% or more of the property of a legal arrangement, usually the principal settlor/ founder 2. Unidentified immediate beneficiary: The amendment takes into consideration that it will be highly unlikely to identify a beneficiary immediately entitled to the payment received. In this case, the principal contributor, i.e. the actual founder will be deemed the beneficial owner, irrespective if the settlement is irrevocable or not. The logic being that tax liability remains yours until transferred to someone else with a tax liability. 3. Paying Agent Upon Distribution if no principal contributor identifiable: In the event that a principal founder is not identifiable, e.g. for a deceased founder , then the structure becomes a Paying Agent Upon Distribution and must apply the savings tax to any individual who becomes entitled to the payment within 10 years.	For example, a foundation with its bank account in Panama and Council based in Gibraltar. Place of effective management of an entity, with or without legal personality, shall mean the address where key management decisions are taken that are necessary for the conduct of the entity’s activity as a whole. Where key management decisions are taken in more than one country or jurisdiction, the place of effective management shall be considered to be at the address where most of the key management decisions are taken relating to the assets producing interest payments within the meaning of this Directive;

Non Panama entity or legal arrangement managed within savings tax territory with bank account in Panama

In scope by Paying Agent Upon Receipt: (category III)
An untaxed non-Panamanian entity or legal arrangement managed within the savings tax territory is subject to the savings tax if its bank account is in Panama.

Responsibility of Paying Agent Upon Receipt:
The management as Paying Agent Upon Receipt must look through the structure to the beneficial owner. An interest payment shall be regarded as having been made to, or secured for, the immediate benefit of any individual, who is resident in a Member State other than that of the economic operator as the beneficial owner of the entity or legal arrangement.

Immediate Beneficiary Entitled to the Payment

The Beneficial Owner is:-
- where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property; or
- alternatively it is the natural person(s) who exercises control over 25% or more of the property of a legal arrangement, usually the principal settlor/ founder

Unidentified immediate beneficiary:
The amendment takes into consideration that it will be highly unlikely to identify a beneficiary immediately entitled to the payment received. In this case, the principal contributor, i.e. the actual settlor will be deemed the beneficial owner, irrespective if the settlement is irrevocable or not. The logic being that tax liability remains yours until transferred to someone else with a tax liability.

Paying Agent Upon Distribution if no principal contributor identifiable:
In the event that a principal settlor is not identifiable, e.g. for a deceased settlor, then the structure becomes a Paying Agent Upon Distribution and must apply the savings tax to any individual who becomes entitled to the payment within 10 years.

For example, a Guernsey trust with bank account in Panama is in scope.

- EU Savings Tax Expert -
Although I regularly consult with the EU Commission, not all my interpretations of the directive have been confirmed by them.