The Panamanian Second Passport Program

Panama has become a popular destination for many Americans and Canadians for retirement purposes. As the Switzerland of Latin American, it is also a popular destination for many South Americans particularly Venezuelans and Colombians. Historically, Panama has been and remains politically and economically stable. The currency is tied to the U.S. dollar. For purposes of this article, the attractiveness of Panama is the relative ease and low cost to obtain a second passport in Panama. Additionally, Panama has a valid treaty for the E2 Investor Treaty which is very attractive.

Panama has adopted a series on incentives to attract wealthy foreign capital. One of these programs is a second passport. The requirement to obtain the second passport is straight-forward. The second visa requires the investment of $350,000 in a personal bank account in a Panamanian Bank. The fixed deposit is for a minimum time period of five years with a current yield of approximately three percent. The second passport is issued within the course of a month with no need to reside or spend time in Panama. The family members also receive the benefit of the second passport. The Panamanian second passport provides for visa-free travel to 100 countries including twenty seven European countries.

Most EB5 investment programs have generally been speculative and illiquid. In some respects, the return of the investor’s capital for the EB investor is a blessing in itself. The Panamanian second passport is available on a liquid basis with principal guaranteed from the National Bank of Panama which has a Standard and Poor’s rating of ÄA. The foreign investor who does not have the benefit of an E2 treaty with the United States can utilize the Panamanian Second Passport Program to access the benefits of the favorable E2 treaty with the United States. The treaty provides for a five year term which may be easily renewed.

If you are Brazilian, Chinese national or resident of Hong Kong or Middle Eastern looking to live in the United States without getting locked into the adverse tax consequences of being a U.S. resident, then this program is for you. Panamanian residency and a Panamanian second passport is the pathway for easy access to obtain the E2 investor Visa to own and operate a business in the U.S. while traveling inside and outside of the United States at will.

Tax Consequences of U.S. Tax Residency

The U.S. may be one of the only country that requires resident and citizens to pay tax on their worldwide income. Additionally, the wealthy permanent resident and taxpayer will have their worldwide assets subject to federal gift and estate taxation as well. Considering that many foreign investors end up in high tax jurisdictions such as New York and California, the combined tax effect is no small matter.

Tax Compliance

[box type=”note” style=”rounded” border=”full”]One of the objectives of foreign tax structuring is the avoidance of the foreign individual falling within the jurisdiction of the IRS. U.S. individual residency for tax purposes is a major tradeoff. Many foreigners come from foreign jurisdictions where the fiscal authorities lack the enforcement capability of the IRS. As a result, many foreigners do not appreciate or underestimate the full enforcement capability of the federal government for tax compliance purposes. The “quid pro quo” between wealthy foreigners and their governments for tax purposes does not exist in the U.S. A second component of the tax compliance issue is the requirement for foreign bank account reporting (FBAR) and foreign investment account reporting for permanent residents and U.S. citizens. I have often heard from tax attorneys in Miami that the national debt could easily be satisfied if every Latin American in Key Biscayne was fully FBAR compliant.[/box]

The qualitative point here is that many foreign investors come from a background where not only do they not trust their government in their home jurisdiction, and may not fully trust every member in their extended family. Financial disclosure is limited to a very small group of personal advisors. It is an assumption that these foreigners are not fully tax compliant in their home jurisdictions.

The problem with U.S. residency or citizenship is the need to disclose their stockpile of cash in Switzerland, Panama or The Cayman Islands. The current number of countries that have tax information treaties with the U.S. and that have signed onto to FATCA now includes most of the tax haven jurisdictions. There is not where left to ride and hide!

The wealthy foreign investor needs to come to terms with the idea of annual FBAR reporting, Schedule B of Form 1040 and Form 8938. A willful intent to disregard these requirements is to face the unpleasantness of the criminal side of the IRS. Maybe it is better to stay home and visit the U.S. whenever the foreigner wants and for as long as he wants without residency.

Part 2 of a 3 Part Series

• Considering Other Alternatives to the EB-5 Visa: Part I – Considering Other Alternatives to the EB-5 Visa
• The Panamanian Second Passport Program – Considering Other Alternatives to the EB-5 Visa Part II – Considering Other Alternatives to the EB-5 Visa
• Considering Other Alternatives to the EB-5 Visa: Part III – Relinquishing Permanent Residency or U.S. Citizenship

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Gerald Nowotny

Law Office of Gerald R. Nowotny
266 Lovely Street
Avon, CT 06001
United States

860-404-9401
TaxManDotCom.com

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