Panama is a country that has been growing rapidly in the last decade, thanks to its strategic location, service-oriented economy, and canal expansion project. Panama has also been attracting foreign investment and promoting innovation through the creation of several free economic zones (FEZs), which are areas that offer special tax, legal, and regulatory incentives to businesses. In this article, we will explore the benefits and challenges of the main free economic zones in Panama: the Colon Free Zone, the Panama-Pacific Special Economic Zone, and the City of Knowledge.
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Colon Free Zone
The Colon Free Zone (CFZ) is the oldest and largest FEZ in Panama, established in 1948 as an import/re-export hub for goods coming from and to Latin America and the Caribbean. Located on the Atlantic side of the Panama Canal, the CFZ covers an area of 1,064 hectares and hosts more than 1,800 companies. The CFZ employs about 30,000 workers and accounts for 4% of Panama’s GDP.
Here are the main benefits of the CFZ in Panama:
- It offers a duty-free and tax-free environment for importing, storing, processing, and re-exporting goods.
- It provides access to a large and diverse market of over 500 million consumers in the region.
- It has modern infrastructure and logistics services, such as warehousing, transportation, banking, insurance, and telecommunications.
- It has a flexible and efficient administration system, with simplified procedures and electronic transactions.
These are the main challenges of the CFZ in Panama:
- It faces increasing competition from other FEZs in the region, such as those in Costa Rica, Dominican Republic, and Jamaica.
- It suffers from a decline in trade volume due to global economic slowdowns, trade disputes, and currency fluctuations.
- It relies heavily on low-value-added activities such as retail and wholesale, which have low productivity and profitability.
- It has limited linkages with the local economy, generating few spillovers or knowledge transfers.
Panama-Pacific Special Economic Zone
The Panama-Pacific Special Economic Zone (PPSEZ) is a newer and more diversified FEZ in Panama, established in 2007 as an industrial and residential park with a range of incentives for businesses. The PPSEZ is located on the Pacific side of the Panama Canal, occupying the former Howard Air Force Base. Home to over 160 businesses including 8 Fortune 500 companies, the PPSEZ occupies approximately 1,400 hectares and employs about 10,000 workers.
You might be interested to learn about the main strengths of the PPSEZ:
- It offers a competitive tax regime, with exemptions or reductions on income tax, dividend tax, import tax, property tax, and value-added tax.
- It provides attractive immigration incentives, including visas, work permits, and residency permits for foreign investors and workers.
- It supports a variety of economic activities, such as distribution centers, light manufacturing, aircraft maintenance services, back-office and call center services.
- It fosters innovation and technology development, with access to research centers, universities, incubators, and accelerators.
Naturally, the PPSEZ has its weaknesses as well:
- It faces high operational costs due to its location away from the city center and dependence on external utilities and services.
- It struggles to attract and retain qualified human capital due to the lack of adequate housing, education, health care, and entertainment facilities in the area.
- It has limited integration with the local supply chain, reducing its potential for creating backward and forward linkages with domestic firms.
- It has to comply with strict environmental standards and social responsibility norms due to its proximity to sensitive natural areas and indigenous communities.
City of Knowledge
The City of Knowledge (CK) is a different type of FEZ in Panama, established in 1998 as a technology park and an academic campus with a mission to promote knowledge creation and dissemination. The CK is on the Pacific side of the Panama Canal, occupying part of the former Clayton military base. Sitting on an area of 120 hectares, it is home to over 200 entities, including technology firms, international organizations, non-governmental organizations (NGOs), research institutes, and universities.
Here’s why the CK may appear appealing to foreign investors:
- It offers a conducive environment for learning and innovation, with access to state-of-the-art facilities, equipment, and networks.
- It provides a platform for collaboration and exchange among diverse actors from different sectors, disciplines, and countries.
- It contributes to social development and environmental sustainability through various projects and initiatives that address local and global challenges.
- It enhances Panama’s image and reputation as a regional leader in science, technology, and education.
At the same time, launching a business in the CK is no trifle:
- It faces funding constraints due to its reliance on donations and grants from public and private sources.
- It suffers from a lack of visibility and recognition among the general public and potential partners due to its low profile and outreach.
- It competes with other FEZs and institutions for attracting and retaining talent and investment in the knowledge economy.
- It has to balance its academic and commercial objectives and interests while maintaining social and ethical values.
Setting up a business in Panama is quick and easy, as you can complete the company registration process in a matter of days. Open to foreign investors from any country and age group, Panama does not limit the amount of money that you can bring in or take out of the country.
Panama also ensures the security and privacy of your assets in the country and offers tax and immigration advantages for foreign residents. For instance, you can get permanent residency in Panama in a short time, and qualify for Panamanian citizenship after living in the country for 5 years.
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