Selling Real Estate: Asset Deal or Share Deal? Which is the best option?
Updated: 3 days ago
What should I do, sell the shares of my corporation or just transfer the ownership of my property to the buyer? In this week’s blog I explain you two very common situations which only apply to Panamanian corporations (SA - sociedad anónima) since private interest foundations have no legal framework to "sell" a foundation because they are originally used as a living will, for estate planning purposes and therefor the transfer of a foundation is not regulated (from a tax point of view), but this would be a topic for another blog.
If I wish to sell my property, that is to say, transfer the title of ownership to the buyer, the taxes that the owner must pay to the tax office must be calculated, that is to say, the Real Estate Transfer Tax ("ITBI") which is 2% that must be paid based on the higher value of either the sale price or the updated cadastral value (VCA).
Photo: www.pixabay.com // Jens Neumann
But this value will be different from the one calculated by you, because for the Panamanian tax office, the property has as increase in value over the years (regardless of the global economic situation or crisis). Therefore, the period of time the property has been kept by you without selling it, will influence the calculation of the VCA. That means that the VCA calculated by the tax office might differ from the original value of the property.
A property that costs $25,000 dollars, and being kept in your hands during 15 years increases its value. When you sell this very same property, the tax office will take into account this increase in value (the system calculates it automatically and you cannot modify it) using a coefficient of 0.75 for the full 15 years. That is to say that for the tax office that property had an increase of the VCA of $18,750.00 dollars. If you add this increase in value to the $25,000.00 dollars that you have in your deed, then your property is now worth: $43,750.00 dollars (for the tax office, regardless of the market value).
Now, this tax for this specific example will be about $875.00 dollars, not much compared to the price, and it is still in your best interest to sell the property and not the shares and I will explain why.
We continue with the same example of only 2% but with another sale value: If the sale value of the property is $352,500.00 dollars and under the same example, the property was kept for 15 years in your hands gaining value as a long term investment, the tax office is going to perform the same calculation with a coefficient for the land (0.75) and another for the improvements, the house, (0.5) because the value between land and improvements (house), results in the value of the property; In this example it turns out that the VCA is now $529,375.00 dollars. Even if you sell your property for a lower price, the government will base its calculations on the higher value in order to apply the 2% tax. This means you will have to pay $10,587.50 dollars and on top of that, the cadastral value of the property will increase (if applicable).
In this particular case, it is recommended to sell the shares of the corporation that owns the property, because there is a capital gains tax on the sale of securities (shares of the corporation) which is 5%. For territoriality purposes, it is considered as Panamanian source income , an income produced by capital or securities economically invested in the national territory, whether its sale has taken place inside or outside the Republic of Panama.
Therefore, if you sell the shares instead of the property, you will not increase the official registered value of the property (remember that annual property taxes are calculated based on this value). You pay your transfer taxes for the share deal and sell the property without further charges. The taxes for a share deal must be withheld and remitted by the buyer to the Panamanian tax office within 10 days after the closing. Taxpayers who commit tax fraud, and do not pay this tax to the national treasury, will be sanctioned with a fine of not less than 5 times nor more than 10 times the amount defrauded.
The other tax to be paid is the Capital Gains Tax, which is 3% on the official registered price and the gain (if any) on the sale price. It is said "updated" because if you built "improvements" i.e. a house on the property, the improvements incorporated to the real estate must have been declared and registered in the Public Registry of Panama, otherwise legally they do not exist. These taxes were created to tax transfers of real estate, personal property and securities, made by individuals and legal entities.
Each case is unique and special and we cannot guarantee that this example is accurate for your needs, but it does provide you necessary information to understand a little more about how buying and selling in Panama works so you can make an informed decision when selling your property or investing in real estate in Panama.