Contributed By Arias, Fabrega & Fabrega
Panama does not have a developed mining industry, even though geological surveys carried out in the early to mid-twentieth century suggest that it has large deposits of copper, gold, manganese, silver and other minerals. For the greater part of its history as an independent nation, mining activity in Panama has been practically restricted to the extraction of materials needed for the construction industry.
The above geological surveys indicated that some of the mineral deposits in Panama might be regarded as being world class. Since the late 1960s, international mining companies and other multinational organisations (such as the United Nations) have sponsored further geological surveys and exploration activities that have confirmed Panama’s mining potential.
There are at least two significant copper deposits in Panama: Cerro Colorado and Cerro Petaquilla. Cerro Colorado is located on the western part of Panama (formerly part of the Chiriqui and Veraguas provinces, but now part of the Ngäbe-Buglé autonomous region) and is considered one of the largest copper deposits in the world. In the 1980s, Rio Tinto Company conducted significant exploration activities in Cerro Colorado, but opposition by local residents and environmental groups prevented the further development of the project, which to this date remains unexploited.
Cerro Petaquilla is another world-class copper deposit. In the last ten years, First Quantum Minerals Ltd. of Canada, through its Panamanian subsidiary Minera Panama S.A., has invested more than USD6 billion in the construction of mining infrastructure for the exploitation of Cerro Petaquilla, which started production in 2019 (the first exports of copper took place in June 2019). The Cerro Petaquilla mine is one of the ten largest mining operations in the world.
Panama also has important gold deposits. In the 1990s, two gold mines were in operation in the Veraguas province: Mina Santa Rosa and Remance. Between 2010 and 2014, Petaquilla Gold (an affiliate of Petaquilla Minerals Ltd. of Canada) developed the Molejon gold deposit in Cerro Petaquilla (adjoining the copper deposit). There are other untapped gold deposits in Panama, such as the Cerro Quema gold deposit in the Azuero region.
The legal system in Panama is based on the European civil law. Spanish and French laws have had great influence in the development of the Panamanian legal system.
Legislation in Panama (including laws applicable to mining activities) is enacted by the National Assembly (the legislative body of the government of Panama), sanctioned by the President and published in the Official Gazette.
The Code of Mineral Resources of Panama (adopted by means of Law Decree No. 23 of 1963, as amended – the CMR) is the legal body governing most activities relating to Panama’s mineral deposits (other than hydrocarbons). The CMR sets up a regime for the granting of concessions to private individuals for the exploration and/or extraction of mineral deposits. In the case of minerals used in the construction industry (sand, gravel, clay, etc), the CMR has been supplemented by Laws 55 and 109 of 1973, and Law 32 of 1996, in order to create a separate regime for the granting of concessions relating to those minerals.
Panama has resorted to enacting legislation creating a special legal regime for large-scale projects such as Cerro Petaquilla, depending on the particularities of the project and the investment required. For example, in 1997, the concession contract between Minera Panama S.A. (formerly known as Minera Petaquilla, S.A.) and the Republic of Panama, represented by the Minister of Commerce and Industries, was approved by the National Assembly of Panama by means of Law No. 9 of 1997 (hereinafter referred to as the “Petaquilla Law”).
The special regimes described above may include exceptions to the CMR and benefits that are additional to the ones included in the general law. However, the granting of mining concessions by means of special legislation is rare, with recent administrations preferring to grant all types of concessions by means of the applicable general legal regimes (available to all investors wishing to invest in the country), which are included in the CMR in the case of mineral resources.
Article 257 of the Political Constitution of Panama declares that all mineral deposits belong to the state. The CMR further develops and regulates the constitutional provision. The CMR provides for the granting of concessions to private individuals for the purposes of exploring and/or extracting minerals. Before being extracted, such minerals belong to the state, but the concession holder will own them upon their extraction, subject to the terms of the concession.
Surface rights (ie, ownership of land) may be owned by private individuals or the state. However, the mineral riches underneath such lands belong to the state regardless of the ownership of the lands. In practice, the government awards concessions to explore or extract minerals from deposits located underneath lands owned by parties other than the concession holder.
The law grants holders of concessions reasonable rights of access to and use of water, timber and soil within the areas covered by their concessions, subject to permission from the owner of the surface lands and/or the Ministry of the Environment.
Holders of concessions will have unimpeded access to state lands, provided they are free from possessory claims. In the case of titled lands or lands that are subject to possessory rights, if the owner and the holder of the concession fail to come to an agreement, the CMR establishes a procedure for the expropriation of all lands necessary for mining or the creation of appropriate easements necessary for the project, upon the payment of fair compensation and costs to the affected party. In such instances, title to all surface land so taken will vest in the government of Panama, with all necessary rights being granted to the concession holder. Such rights of use will terminate when the concession ends.
Concession holders are obviously free to purchase lands within and outside the areas of their concessions. These acquisitions will be done on the basis of privately negotiated agreements, without intervention from the government or the need to notify it. These lands will be owned outright by the concession holder.
The Panamanian government has the role of grantor-regulator. In light of the economic policies followed by various governments during the last 25 years, the government is unlikely to assume a different role.
In the case of the Cerro Colorado deposit, until recently the state maintained the possibility of eventually becoming an owner-operator in association with an experienced mining company (which would manage the project). However, this position was abandoned in 2012 as a result of opposition to the project by local and environmental groups, which led to the enactment of legislation banning all types of mining within the Ngäbe-Buglé autonomous region, where Cerro Colorado is located.
According to the Panamanian constitution, the state owns all mineral deposits in Panama. However, based on the constitution and the CMR, the government may grant concessions to private individuals for the exploration and extraction of minerals. In effect, such concessions constitute mineral rights granted to private individuals.
The holders of such concessions acquire exclusive rights to explore and extract minerals within certain defined areas. The minerals extracted become the property of the concession holders, subject to the payment to the state of royalties, taxes and other duties, as stated in the concession agreements and the law.
The Directorate General of Mineral Resources (the DGMR), a directorate within the Ministry of Commerce and Industries, is the governmental entity in charge of overseeing mining activities throughout the Republic of Panama. According to the CMR, the DGMR handles the granting of mining concessions to private persons and certain governmental entities, and ensures that mining is carried out in accordance with the law. The actual granting of a mining concession is done pursuant to a concession contract entered into by the Minister of Commerce and Industries, in representation of the Republic of Panama, and the concession holder.
The granting, regulation and overseeing of mining activities in Panama is centralised, with the DGMR and Ministry of the Environment regulating mining activities in all parts of the country. Provincial and municipal authorities have little participation in the decision-making process.
The CMR and related laws provide a general framework for the granting of mining concessions, which is applicable to all projects and investors. The vast majority of mining concessions have been granted pursuant to the CMR and related legislation.
Mining concessions may be granted to private persons (regardless of their nationality) and local governmental entities (for example, the Ministry of Public Works). The CMR prohibits the granting of mining concessions to foreign governments and their dependencies, although these entities may own shares or participations in private companies that hold mining concessions. Most mining concessions are currently granted to private entities.
The DGMR is in charge of receiving and reviewing applications for mineral concessions and recommending their acceptance or rejection. The application process for mining concessions involves the submission to the DGMR of information on the legal, financial and technical status of the applicant, maps, mining plans and budgets for at least four years, a nominal application fee, and environmental impact studies.
The type and scope of the environmental impact study will depend on the degree of intrusiveness of the intended mining activities. Applicants must present their plans to the Ministry of the Environment for their review. The Ministry will then decide the type of environmental impact study required for the concession.
Since concessions are granted on an exclusive basis for a certain type of mineral in a particular area, applicants are prevented from applying for the same type of minerals and areas that are currently the subject of another concession.
Once the concession applications have been approved by the DGMR, the concession will be granted by means of a concession contract entered into by the concessionaire and the Minister of Commerce and Industries, representing the state of Panama. The applicant will have to submit performance bonds to the governmental authorities, which will secure the obligations of the applicant during the time of the concession. In order for a concession contract to be legally valid, it must be countersigned by the Office of the Comptroller General of the Republic and published in the Official Gazette of the Republic of Panama.
The Ministry of the Environment is the Panamanian government entity in charge of reviewing and approving environmental impact studies filed by applicants of mining concessions, and of overseeing concession holders' compliance with the approved studies and remediation plans.
In addition to mineral concessions granted pursuant to the CMR, some concessions have been granted by means of contracts between the concession holder and the state of Panama. Once signed by the concession holder and the Minister of Commerce and Industries in representation of the state of Panama, these contracts are presented to the Office of the Comptroller General of the Republic to be countersigned, and are subsequently presented to the National Assembly of Panama for approval by means of a special law. Concessions granted pursuant to this method are commonly referred to as Contract-Laws. The Petaquilla Law is a Contract-Law.
Concessions for some of the largest infrastructure projects in Panama have been granted pursuant to Contract-Laws or special legislation. For example, Texaco’s former oil refinery (built in the early 1960s and refurbished in the early 1990s) and Northville’s trans-Isthmian pipeline (built in the late 1970s and refurbished in the 1990s and during the start of the 21st century) were both granted by means of Contract-Laws. In the case of mining, there are at least two examples of concessions granted pursuant to Contract-Laws: the Petaquilla Law and the Concession Contract between Vera Gold Corporation and the Ministry of Commerce and Industries, which was approved by means of Law 92 of 2013 (the concession corresponds to the Santa Rosa gold mine and adjoining deposits).
The Cerro Colorado concession was originally granted by means of a special law, Law 41 of 1975, to a government-owned company called Corporación De Desarrollo Minero Cerro Colorado – CODEMIN). Law 41 of 1975 was repealed by means of Law 11 of 2012. It is important to note that the indirect holder of the Cerro Colorado concession was the Republic of Panama.
Contract-Laws provide for certain flexibility because the terms of the concession can be tailor-made to the project; investors may secure some tax relief; special protections can be provided to lenders and financiers (for example, allowing lenders to step-in in certain circumstances); there is greater certainty as to the enforcement of security arrangements, etc.
Contract-Laws, however, have become increasingly rare. The government may be willing to consider special legislation for a mining project in extraordinary circumstances, taking into account the importance of the project to the nation, the amount of investment required, the difficulties of the project, etc. As a matter of general policy, recent administrations have insisted on the granting of mining concessions pursuant to the terms of the CMR. The preference of Panamanian governments has been to grant all types of concessions by means of the applicable general legal regimes (available to all investors wishing to invest in the country).
The CMR and related laws set forth two principal types of mining concessions: the exploration concession and the extraction concession. In addition, the CMR provides for the granting of prospecting permits and processing and transportation concessions.
Exploration concessions grant their holders three key rights:
Exploration concessions are available for initial periods of four years, subject to two discretionary extension periods of two years each.
A holder of a valid exploration concession benefits from the exclusive right to apply for an extraction concession on the same area. The CMR also provides for the award of extraction concessions over minerals not currently subject to exploration activities. Extraction concessions are granted for:
Extraction concessions may be extended, at the discretion of the DGMR, for three periods, the first one of ten years and the last two of five years each. In the case of construction materials, such concessions are granted for an initial period of ten years and a maximum area of 500 hectares, and their term may be extended for an additional ten-year period.
Prospecting permits are granted to individuals (not companies), and allow their holders to engage in preliminary geological surveying on a non-exclusive basis for an initial period of six years.
Transportation and processing concessions enable the holders thereof to transport and process, respectively, minerals on behalf of a mining operator legally entitled to extract those minerals. Each such concession may be granted for an initial period of 25 years, subject to three renewal periods, the first one of ten years and the last two of five years each. Holders of extraction concessions engaged in the ordinary course of extracting and selling mineral product are not required to obtain these supplemental concessions.
Concessions may be cancelled if the holders thereof breach their obligations under their concession contracts or relevant legal provisions under the CMR and other applicable laws. A mineral concession may also be cancelled if the holder is declared bankrupt or insolvent. The concession contract may include events of default that give rise to the cancellation of the contract that are specific to the concession.
The CMR allows a grace period of one year for payment defaults by concession holders, and provides that the concession will not be cancelled in the absence of repeated refusals or failures to submit required reports or comply with inspection requests from government officials. Moreover, a concession will be considered abandoned if mining operations cease for an entire year, in the absence of any force majeure event.
The cancellation of the concession will be decreed by the Minister of Commerce and Industries in an official document that will list the reasons for such cancellation.
By law, the government of Panama has the right to terminate a concession agreement for reasons of public interest (ie, without the existence of defaults) and upon payment of fair compensation. This principle applies to all the concessions that may be granted to a mining company for the development of a mining project (mining, water, power, road building, etc). The details of what constitutes public interest and fair compensation depend on the type of concession. Typically, the reasons of public interest will be explained in the decree that declares the termination of the concession.
In the absence of special dispute resolution provisions in the applicable concession contracts, an affected holder may have to recur first to the Administrative Tribunal of Public Contracts and ultimately to the Third Chamber of the Supreme Court of Panama to challenge any unjustified termination of its rights. It may be possible to negotiate with the government for the inclusion of an arbitration clause in the concession contract to address the resolution of potential disputes, but generally the government is reticent about the inclusion of such clauses.
In addition, if any holder hails from any country that has entered into a BIT with Panama, it may recur to the remedy and protection mechanisms provided in such treaty.
The protection of the environment and natural resources in Panama is overseen by the Ministry of the Environment, which has many responsibilities, including evaluating environmental impact studies, including those related to mining activities. It is also the authority responsible for the conservation, protection and restoration of the environment. It is the designated authority that may impose sanctions and fines, and direct and supervise the execution of environmental policies.
The Ministry of the Environment may impose administrative fines for the following:
Such violations shall be sanctioned by the Ministry of the Environment by way of a written admonishment, or with a temporary or definitive suspension of the activities, and/or with a fine according to the situation and the severity of the violations. These fines are without prejudice to further principal and accessory fines that may be imposed on the infringing party according to the law and to its liability to third parties who have been affected by acts or omissions of the infringing party.
The fines imposed by the Ministry of the Environment will be proportionate to the severity of the risk and/or the environmental damage generated by the breach, regardless of the economic capacity of the infringing party and whether or not the damage is recurrent. The Ministry of the Environment may also order the infringing party to pay the cost of clean-up, mitigation, or compensation for the environmental damage, without prejudice to any additional civil and criminal liabilities.
Activities and projects – whether private or public – that may create environmental risks must undergo an environmental impact study prior to the start of the project (particularly mining activities). These studies are reviewed and approved by the Ministry of the Environment. An environmental impact study has the purpose and objective of guaranteeing the fulfilment of the environmental requirements, and also serves for continuous verification by the Ministry of the Environment; as such, any person may alert the authorities of violations to the project that are not consistent with the applicable environmental impact study.
The Ministry of the Environment has issued an extensive list of activities that require an environmental impact study (or EIS). The studies are divided into three categories, as follows:
A project is considered to produce significant, adverse environmental impact if it meets one or more of the following criteria:
Environmental impact studies must be carried out by qualified professionals, who may be either natural or legal persons, independent from the developer of the project, who are duly certified by the Ministry of the Environment for such work.
A resolution by the Ministry of Environment approving an environmental impact study is valid for two years, and can be extended for justified reasons. The execution of the project must begin during this time; otherwise, a new filing must be made.
Environmental impact studies must also include environmental management plans. These plans are documents that establish in detail and in chronological order the activities that the company must carry out to prevent, mitigate, control and compensate for possible environmental damage, or increase the positive environmental impact of the activity. An environmental management plan must also include plans for follow-up and monitoring, and for contingencies. Companies are required to comply with these plans, and such compliance is monitored by the Ministry of the Environment. The resolution approving an environmental impact study also establishes the frequency with which periodic reports must be submitted to the Ministry of the Environment. These reports must be drawn up by certified environmental auditors.
In the case of mining concessions, applicants must contact the Ministry of the Environment and present their project plans. These plans are also included in the filings to be made with the DGMR for the granting of a concession. Depending on the activities, the Ministry of the Environment may request a certain type of environmental impact study. The approval process of an environmental impact study involves a process of consultation with the communities surrounding the mining concession.
There are environmentally protected areas in Panama, where, generally, no mining concessions may be granted. The law seems to provide for the possibility of granting mining concessions in such areas, subject to a process of public hearings and the performance of satisfactory technical and environmental analyses. However, from the practical point of view, it remains very challenging for mining concessions or other types of activities to be permitted in environmentally protected areas.
The law established a National System of Protected Areas (SINAP) under the oversight of the Ministry of the Environment and the Directorate of Protected Areas and Biodiversity.
The Republic of Panama has 104 protected areas that are under the custody of the Ministry of the Environment, which must develop a management plan for each protected area determining its purpose, usage, restrictions and management.
Communities near a project may express their opinion as part of the review and approval process of environmental impact studies. The CMR does not provide for a procedure for incorporating or listening to the comments from communities at the time of granting a mining concession.
In practice, mining companies in Panama adopt social responsibility projects and policies for communities located nearby mining projects. Even though these projects and policies are not mandated by law, practically all companies pursue them in order to gain good will for their mining projects and to open and maintain communication channels with the communities.
The Ministry of the Environment may convene public consultations on environmental problems or issues that might be important to or affect communities. These public hearings are generally part of the review and approval process of environmental impact studies. As part of these public hearings, officials from the Ministry of the Environment inform the community about projects that may have an adverse effect on the environment or communities in order to obtain the opinion of the public and suggestions regarding the planned activities and, in general, to get an idea of the effects of the proposed activity and the manner in which to mitigate any potentially adverse effects.
The National Environmental Advisory Committee was created by law to allow citizen participation in the review of national and inter-sectoral environmental issues, and to make observations, recommendations and proposals to the Ministry of the Environment. This committee is made up of 15 members, including citizens, government officials and representatives from the indigenous regions.
In addition, the law provides for the sharing between the central government and local communities of the amounts collected as surface taxes and royalties from companies engaged in exploration and extraction activities.
The CMR states that 20% of such amounts will be allocated to communities surrounding the mining project, 95% of which will correspond to the municipalities where the projects are located, while the remaining 5% will be delivered to the towns and communities adjoining such municipalities (even if no direct mining activity takes place in them). These funds must be used exclusively for development programmes in education, health and socio-environmental projects. Towns and communities adjoining the municipalities where the projects are located may also use these funds to fund electrification projects in their communities.
The CMR also states that, in the case of projects that pay 5% or more in royalties, 2% of the amounts collected by the government as royalties will be used in the construction of infrastructure and for social development programmes in the communities adjoining the mining project, and 1% of such amounts will be delivered to the Social Security Administration to become part of the funds belonging to pension and retirement plans managed by such governmental institution.
The CMR does not require prior consultation with the public for the granting of a mining concession. However, such consultations are part of the process for reviewing and approving environmental impact studies, and are carried out by the Ministry of the Environment.
There are indeed specially protected communities made up of indigenous peoples, some of whom have their own autonomous regions with their own government bodies.
The main autonomous regions are the Guna Yala and the Ngäbe-Buglé autonomous regions. In the Ngäbe-Buglé autonomous region, the law (Law No. 11 of 2012) prohibits the granting of mining concessions within the region (except for concessions relating to construction materials to be used in social projects for the benefit of the autonomous region).
It is important to mention that the Cerro Colorado copper deposit is located within the area of the Ngäbe-Buglé autonomous region. Therefore, because of Law No 11 of 2012, no mining concession of any nature may be granted with respect to the Cerro Colorado copper deposit. In effect, by means of the enactment of Law No 11 of 2012, the Cerro Colorado concession (approved by means of Law 41 of 1975) was repealed.
Indigenous communities have the right and obligation to assist the Ministry of the Environment in the conservation and protection of their territories, seeking a sustainable use, management and exploitation of natural resources.
As explained above, it is common to have community development agreements between the sponsors of mining projects and communities, although this is not mandated by law.
Minera Panama S.A. (the holder of the Petaquilla copper concession, also known as “Cobre Panama”) has entered into agreements with the communities surrounding its project providing for the investment in facilities and infrastructure. According to information posted on its website, Minera Panama S.A. has invested USD44 million during the last ten years in infrastructure projects for the benefit of 22 communities surrounding the Cobre Panama mine.
Thus far, the Cobre Panama project seems to have been successful in its environmental and community relations/consultation around its mining project. As explained in 2.6 Community Development Agreement, Minera Panama has established good relations with surrounding communities. It has been a source of well-paid jobs for those communities in addition to providing infrastructure and facilities that have improved the lives of the inhabitants of a remote and rural area.
On the other side of the spectrum, the Cerro Colorado project did not enjoy the same luck as Cobre Panama. Until 2012, the state held title to the concession to the Cerro Colorado deposit, when a law (Law No 11 of 2012) was passed cancelling the concession and prohibiting further mining activities in the area.
Since the 1970s, the government had sought the co-operation of international mining companies for the purpose of conducting exploration activities in Cerro Colorado. In the 1980s the project faced opposition from environmentalist and local indigenous communities. The opposition did not abate even though the mining activities in the area ceased or were reduced. The government continued to seek the assistance of international mining companies in the 1990s and into the early years of the 21st century, but the opposition from local indigenous communities continued until 2012, when the government had to adopt Law No 11 of 2012, which effectively banned all mining activities within the Ngäbe-Buglé autonomous region, where the Cerro Colorado project is located.
Climate change initiatives have had limited effect on the mining industry in Panama.
Currently, Panama holds a limited number of initiatives aimed at addressing climate change, and the few in place have little bearing on mining activities.
However, the Ministry of the Environment has been specifically empowered by Law No 8 of 2015 to foster initiatives to address and counter climate change in Panama, which may include the adoption of rules applicable to the mining sector.
Thus far, no climate change legislation specifically related to mining has been passed or is being discussed. However, as stated above, the Ministry of the Environment has been entrusted with the fostering of initiatives aimed at countering climate change, and it is likely that the future may see legislation and regulations applicable to the mining sector as part of a comprehensive effort by the state to address such a global problem.
There are sustainable development initiatives in Panama. In 2016, the government made the decision to bring together all social and political forces to work towards a plan for sustainable development, entitled “Panama 2030”. The stated aim is for Panama to reach the goals of sustainable development provided by the United Nations by the year 2030.
Foreign and national investors are treated equally under the laws of Panama. Therefore, there are no distinctions in the taxing of foreign and national investors with respect to their mining operations or otherwise.
Since the enactment of the CMR in 1963, concessionaires have been expected to contribute the following to the government:
Law 13 of 2012 introduced a set of amendments to the CMR, which, inter alia, included a new regime regarding duties and royalties applicable to mining concessions:
Holders of concessions are also required to post performance bonds. The 2012 amendments to the CMR state that these bonds would range from USD0.10 per hectare for exploration concessions to USD0.25 per hectare for extraction concessions.
Performance bonds may be posted in cash or through the delivery of bonds issued by the government of Panama or surety bonds issued by insurance companies qualified to do business in Panama.
Any payments to the government may be made in US dollars.
Failure to pay the government the amounts due under the concession contracts and the law will trigger defaults under the concession contracts, and will give the government the right to terminate concessions. The CMR allows a grace period of one year for payment defaults. In practice, third parties (such as creditors) may step in and pay the duties owed to the government.
In general terms, mining investors do not enjoy tax incentives or benefits that are not otherwise available to investors in other economic activities. However, the CMR exempts equipment and vehicles used in mining operations from import duties.
Mining companies that have invested USD2 million or more may apply for a legal and tax stability regime pursuant to Law 54 of 1998. The stability regime has a ten-year duration.
In the case of large and complex projects, it may be worth considering requesting the government to grant the mining concession by means of special legislation (ie, by means of a Contract-Law). As explained in 1.6 Granting of Mineral Rights, the advantages of such special legislation include the following:
However, as explained above, the past government administrations have not been sympathetic to the concept of Contract-Laws.
Mining concessions may be transferred, but the assignment or transfer requires government approval, to ensure that the assignee or transferee has the same technical and financial capacity as the holder or transferor.
In order to process the transfer approval, the parties will have to pay a USD100 duty to the DGMR. Once approved, the transfer will have to be entered into the mining registry, which is also kept by the DGMR.
Any income generated from the transfer of a mining concession is subject to income taxes, which will be calculated at the income tax rates of general application (which, in the case of companies, are currently set at a flat rate of 25% of net taxable income). There is no special capital gains tax regime for mining concessions.
There are no transfer taxes that currently apply on the transfer of mining concessions. The transfer or sales agreement relating to the transfer may be subject to the payment of stamp taxes (which are calculated at the rate of USD1 per each USD1,000 or fraction thereof of the face value expressed on the agreement – ie, the sales price).
Another way of transferring mining concessions is by transferring the shares of the company that holds the concession. Even though the law does not seem to formally require such transfers to be notified to or approved by the DGMR, in practice, such transfers have been notified to the DGMR.
The capital gains generated from a transfer or sale of shares in Panama are subject to income tax at a rate of 10%. The law obligates the purchaser to withhold 5% of the total consideration payable to the seller, and to tender such amount to the tax authorities within ten business days of the transfer, as an advance on the seller’s capital gains tax. The seller has the option to consider the amount so withheld by the purchaser as its definitive capital gains tax. Alternatively, if said amount exceeds 10% of the capital gain actually realised on the sale, the seller has the option to file, within the same fiscal year in which the transaction occurred, a sworn declaration with the tax authorities claiming either a non-assignable tax credit for the amounts paid in excess, or the return of said amounts.
If the transfer takes place through transfers or sales of shares of corporate structures located outside of Panama, capital gains taxes will also apply. In such cases, the capital gains tax will apply to the portion of the total sales price that corresponds to the value of the Panama operation in the foreign corporate structure. In other words, if the shares of a mining company with operations in several countries (including Panama) are transferred, capital gains taxes will apply to the portion of the price that corresponds to the Panama operation. The percentage of the sales price applicable to the Panama operation will be the higher of (i) the percentage corresponding to the value of patrimony of the Panamanian operation as part of the total patrimony of the entire foreign structure to be sold; or (ii) the percentage of the value of the assets of the Panamanian operation as part of the value of all of the assets of the entire foreign structure.
No transfer taxes will apply on the transfer of the shares of concession holders. The transfer or sales agreement relating to the transfer of shares may be subject to the payment of stamp taxes (which are calculated at the rate of USD1 per each USD1,000 or fraction thereof of the face value expressed on the agreement – ie, the sales price).
Panama has entered into a number of treaties aimed at preventing double taxation, which, depending on the nationalities/domiciles of the parties involved and the terms of the treaties, may provide for more favourable results than the ones described above.
The CMR contains the general investment regime applicable to mining companies, which applies equally to foreign and local companies, without differentiating between Panamanian and non-Panamanian nationals. However, the CMR prohibits foreign governments, nations or entities from holding mineral concessions.
The official currency of Panama is the Balboa, which exists only in coins. Since 1904, in accordance with the laws of Panama and diplomatic agreements with the United States, the US dollar is on a par with the Balboa and, in practice, has been the currency used for all commercial and financial transactions. The US dollar is legal tender for all transactions, including the payment of obligations owing to the Panamanian government. Since there are no Balboa banknotes, in practice, US dollar banknotes and coins circulate freely and are the accepted medium of exchange. Businesses in Panama may keep their financial books and records in US dollars.
There are no exchange controls of any kind in Panama. Consequently, funds of any denomination and in any amounts may move freely in and out of the country at any time, may be deposited in local or foreign banks, and may be held by any domestic or foreign natural or legal person. It is also lawful to hold funds in any currencies.
There are no export limits on mineral products currently in effect. By law, the government may compel mining companies to deliver a portion of their production for internal use in Panama. The government will have to pay for such product, with the price to be set at production prices (which are deemed to be the prices that a third party in Panama pays for the mineral). Thus far, the government has not made use of this right.
The above investment regime has been in place in Panama for several decades. As explained above, companies wishing to obtain further assurances may seek to register under Law 54 of 1998, which provides for a legal and tax stability regime for companies investing USD2 million or more in Panama. The stability regime has a ten-year duration.
As discussed under 5.1 Attracting Investment, the rules applicable to investments in mining ventures in Panama apply equally to foreign and local companies, without restrictions on account of nationality, but the CMR prohibits foreign governments, nations or entities from holding mineral concessions. This restriction does not prevent foreign governments from owning participations in companies that hold mining concessions.
The Republic of Panama has entered into several treaties concerning the treatment and protection of investment (including BITs with the United States, Canada, Chile, the Czech Republic, the United Kingdom, France, the Netherlands, South Korea, Singapore and Spain, to name a few). These treaties provide for a general protection regime, and generally provide for the possibility of resorting to international arbitration in case of disputes.
Most exploration and extraction activities in Panama are carried out by foreign companies, which in most cases fund their operations from sources outside of Panama.
In the case of exploration activities, companies typically fund their operations from their working capital. These companies in turn fund their operations through the issue of securities in foreign securities markets.
In the case of extraction projects, companies seek financing from a variety of sources: project financing extended by private lenders, government-owned financial entities and/or multilateral agencies, and/or issuing securities in foreign securities markets, etc.
The local securities market has little bearing on the financing of mining activities in Panama. As explained elsewhere, mining companies with operations in Panama have almost always resorted to international securities markets.
The following collateral security arrangements, among others, are available to creditors in mining projects:
The type of security arrangement will depend on the type of collateral. Mortgages may turn out to be expensive security arrangements.
Registration duties applicable to real estate mortgages are based on the principal amount secured, at the rate of USD3 for each USD1,000 or fraction thereof secured by the mortgage. In the case of chattel mortgages, the applicable duties are USD42 for the first USD20,000 and USD30 for each USD10,000 or fraction thereof secured by the mortgage. In addition, their registration requires their text to be typed on notarial paper (which has a cost of USD8 per page). If any agreement is in English, it will have to be translated into Spanish by an official interpreter.
Stamp taxes also apply to agreements expressing obligations to pay, including security agreements, at the rate of USD0.10 for each USD100 or fraction thereof of the face value of the obligation expressed on the document. Amounts paid in notarial paper and in registration duties for the documents that have to be registered are deducted from the applicable stamp tax.
Mortgages on mining concessions have to be registered at the Mining Register and, as indicated above, the prior approval of the Ministry of Commerce and Industries will be required. The applicable registration duty is USD100 (regardless of the amounts secured by the mortgage). The law is somewhat unclear on whether such mortgages must also be registered at the Public Registry of Panama (wherein real estate and chattel mortgages are registered) in order to be effective against third parties. If the latter conclusion also applies, the registration duties applicable to real estate mortgages (discussed above) will also apply to the mortgages on mining concessions.
With the start of production and export by the Cobre Panama project, mining is likely to become the largest export activity in Panama (in terms of both volume and value). Cobre Panama possibly represents the largest private investment in the history of Panama, second only to the Panama Canal (which was originally funded by the United States and its recent expansion by the Republic of Panama). In addition, Cobre Panama has become an important contributing factor in the reduction of unemployment in Panama.
In addition to Cobre Panama, there are other mineral deposits that may bode well for the future of mining in Panama: the old Santa Rosa mine (gold) and Cerro Quema (also gold). Combined with the advantages that Panama offers to foreign investors, the mining sector should continue to expand.
There are some issues that the government should attend to in order to improve the climate for mining.
A decision rendered by the Supreme Court in late 2017, but made public in mid-2018, has called into question the validity of the Petaquilla Law (Law No 9 of 1997), which provides for the special regime applicable to the Cobre Panama project. The ruling of the Supreme Court was in the context of claims filed by environmental NGOs questioning the constitutional validity of Law No. 9 of 1997. Thus far, procedural filings made by the parties before the Supreme Court have prevented the ruling from becoming effective and, in accordance with Panamanian law, the Petaquilla Law continues to be valid and binding. However, the procedural filings only have the effect of retarding the validity of the Supreme Court’s ruling while the justices review them and issue their decision. Such procedural filings may only request the Court to clarify sections of its ruling; they cannot have the effect of forcing the Court to reconsider its ratio decidendi, as already expressed in its ruling. Moreover, rulings rendered by the Panama Supreme Court are final and binding.
One possible solution to the ruling by the Supreme Court on the Petaquilla Law is for the National Assembly to ratify Law No. 9 of 1997 and in the process address any issues raised by the Court in its ruling.
Another issue to address is the ban on the Cerro Colorado deposit. The law currently prohibits any type of mining activity in the area in which Cerro Colorado is located, and the government will have to address the concerns that the indigenous groups and NGOs may have on the project before any attempt is made to lift the ban. This will not be an easy task, and the government will have to handle it delicately.
Finally, another item on the agenda should be amending the CMR. Mining operations require substantial investments and the state should consider granting additional incentives and further assurances regarding the legal and tax stability regime available to significant investments in mining. The rules should be clear and available to everyone. Moreover, these amendments should also serve as an opportunity for the state to clarify the relationship between the environmental regulations, indigenous and local groups, and the mining sector.