Law 254 of November, 2021
Changes on Accounting Records Requirements
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On November 11, 2021, the Panama government enacted Law 254, which introduces adjustments in terms of fiscal transparency and prevention of money laundering.
This law is divided into three main points; Accounting Records, Due Diligence and the System of Registration of Final Beneficiaries.
In this article we will focus on the changes regarding the legal entities obligations of Accounting Records.
Although there was already the obligation of all Panama companies and foundations with operations or assets outside Panama, to maintain accounting records and support documentation, the recent law hardens these requirements, and mandates the legal entity to send at least a copy to the resident agent every year of said records and supporting documentation and gives reporting obligations to the resident agent to inform to the Panama authorities which entities are in compliance with said requirements and which are not. More details below.
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Accounting Records
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Definitions:
Accounting Records: Those that clearly and precisely indicate the operations of the legal entity, its assets, and incomes, as well as that serve to always determine the financial situation with reasonable accuracy and allow the preparation of financial statements.
Supporting documentation: That which includes contracts, invoices, receipts and / or any other documentation necessary to support the transactions carried out by a legal entity.
Legal entity: Refers to the company or foundation.
Resident Agent: The lawyer or the law firm that exercises the obligatory role of agent of the company or foundation, which functions as a liaison between the client and the authorities of Panama and is considered an obligated subject to maintain the due diligence and other requirements required by law for the entities it administers.
Obligation to keep accounting records.
Legal entities that do not carry out operations that are perfected or consumed or have their effects within the Republic of Panama, as well as those that are dedicated exclusively to being an asset holder, inside or outside Panamanian territory are obliged to keep accounting records and maintain their supporting documentation.
How long should accounting records be kept?
The accounting records and supporting documentation must be maintained for a minimum period of 5 years, counted from the last day of the calendar year in which the transactions for which these accounting records apply were generated.
Where should these accounting records be kept?
Accounting records and supporting documentation may be maintained at the offices of the resident agent within Panama or anywhere else, inside, or outside Panama, as determined by the administration agencies of the legal entity. Legal entities shall be obliged to provide the resident agent annually, as of April 30, with the accounting records or a copy of the accounting records relating to the fiscal period that ended on December 31 of the immediately preceding year.
Obligation to always keep the information updated.
Legal entities are also required to notify the resident agent in the event of any changes to the person who maintains the accounting records or supporting documentation in their custody.
Legal persons shall be obliged to inform the resident agent annually in writing of the name and contact details of the person who maintains the accounting records and supporting documentation in their custody and the physical address where they are kept.
Support documentation.
If there is a request by the competent authority, in addition to the accounting records or copies of the accounting records, legal persons shall be obliged to provide the resident agent with the supporting documentation of the accounting records within the time established by the competent authority, to comply with the requirement.
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The accounting records shall be provided as follows
1. In the case of legal persons which do not engage in acts of trade or business, and which are exclusively engaged in being holders of assets, they shall provide information demonstrating the value of the assets held, the income received from those assets and the liabilities relating to those assets.
2. In the case of legal persons engaged in acts of commerce, they shall provide their accounting journal and the general accounting ledger.
If there is a request from the competent authority, legal persons shall be obliged to provide any supporting documentation and additional information within the time required by the competent authority.
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Time to comply with this obligation for existing companies.
Legal entities established before the entry into force of the law (before November 11, 2021), will have until October 10, 2022, to deliver to the resident agent the accounting records or copies of the accounting records, to be maintained in the offices of the resident agent within Panama.
In addition to a copy of the accounting records, if required, legal entities shall be obliged to provide the resident agent with the supporting documentation of the accounting records within the time established by the competent authority to comply with said requirement.
On the companies currently suspended, it will be required that they present the accounting records to be reactivated.
If legal entities are suspended in the Public Registry before the entry into force of Law 254, to be reactivated they must provide their resident agent with the accounting records or copies of the accounting records to be kept in the offices of the resident agent within Panama.
If legal entities are suspended in the Public Registry before the entry into force of the law, in addition to a copy of the accounting records, the legal entities will be obliged to provide the resident agent with the supporting documentation of the accounting records within the time established by the competent authority to comply with said requirement.
In cases of change of resident agent.
The legal entity must provide the new resident agent, before the registration of his appointment in the Public Registry, with the accounting records and supporting documentation or copies of the accounting records and supporting documentation, whatever the case may be, which must be kept in the offices of the new resident agent within the Republic of Panama.
In the case of legal entities whose records and supporting documentation are kept in any place other than the offices of the resident agent, inside or outside the Republic of Panama, they must inform the name and contact details of the person who maintains the accounting records and supporting documentation in their custody and the physical address where they are kept.
In the event of dissolution:
The accounting records and supporting documentation or copies of the accounting records and supporting documentation, whatever the case may be, shall be maintained for the five years prior to the registration of the dissolution, and made available by the resident agent of the legal person for a minimum period of five years, counted from the registration of the dissolution in the Public Registry of Panama. In this case, the Public Registry of Panama will only register the respective public deed of dissolution that includes the express declaration of the resident agent indicating that it maintains in its possession the accounting records and supporting documentation or copies of the accounting records and supporting documentation, whatever the case may be, in accordance with the provisions of the Law.
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The Public Registry will only register the deeds that contain the express declaration of compliance with the above provisions, by the new resident agent.
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Affidavit to the DGI on accounting records
The resident agent must submit to the DGI (Panama Direction of Revenue) an affidavit, annually, as of July 15, containing a list of the legal entities for which he exercises the service of resident agent, including the name, RUC (Panama TAX ID) and containing the following:
1. The list of Legal entities whose original accounting records and supporting documentation are maintained in the offices of the resident agent within Panama.
2. The list of Legal entities whose accounting records and supporting documentation are kept in any place other than the offices of the resident agent, to declare that it has copies of the accounting records and the name and contact details of the person who maintains the original accounting records and supporting documentation in their custody and the physical address where they are kept.
3. The list of the legal entities of which they do not have the information established in paragraphs 1 and 2 mentioned above. The competent authority may apply penalties to legal persons which the resident agent includes in the declaration referred to in this paragraph.
The Executive Body shall regulate the format in which this declaration shall be submitted.
The legal entities established before the entry into force of this law, the resident agent must send the first declaration within thirty calendar days, counter from the expiration date of the six-month period given by law so that existing companies comply with this requirement, that is, June 12, 2022.
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Additional on the Accounting Records
The authorities may request the documentation at any time.
In all cases that the competent authority requires the supporting documentation of the accounting records, the legal entity must provide the documentation to the resident agent within the time established by the competent authority, in accordance with the regulations of this law.
The competent authority may request from the resident agent the accounting records and supporting documentation at any time in accordance with the provisions of the law, for the faithful fulfillment of its functions.
Confidentiality of information and documentation.
The competent authority for the purposes of national and international cooperation may request any information in accordance with the provisions of this law and its regulations, without this constituting a violation of confidentiality.
All information that is delivered to the competent authority in compliance with this law and its regulations by resident agents, directors, dignitaries, representative employees, will not constitute a violation of professional secrecy or restrictions on disclosure of information, derived from the confidentiality imposed by contract or by any legal or regulatory provision and will not imply any responsibility for resident agents or for the dignitaries, directors, employees or representatives.
The information received by the competent authority of the resident agent shall be kept in strict reserve and may only be used by the competent authority for the faithful performance of its duties, in accordance with the respective laws. Failure by an official to comply with this obligation of confidentiality shall be punished as a serious administrative offence, without prejudice to the civil and criminal liability resulting therein.
The Executive Body shall regulate the form and time in which the resident agent, upon request of the competent authority, must send a copy of the accounting records and supporting documentation.
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Penalties
Penalties for legal entities for non-compliance with Accounting Records:
Legal entities that fail to comply with the obligations of accounting records will be sanctioned with a fine from USD 5,000 to 1,000,000 considering the seriousness of the fault, recidivism, and the magnitude of the damage.
In addition, the Public Registry will be ordered to suspend the corporate rights of the legal entity that fails to comply, without prejudice to its compliance with the obligations established in the law, and regulations.
The DGI is empowered to order the Public Registry to forcibly liquidate the legal entity.
Penalties to the Resident Agent for non-compliance with Accounting Records:
The DGI will sanction the resident agent who does not comply with the obligations in the present law with fines from USD 5,000 to 100,000, considering the seriousness of the fault, the recidivism, and the magnitude of the damage.
The above penalties will also be applicable when in the supervision processes non-compliance with the obligations established in this law is detected.
Appeals for reconsideration and appeal may be lodged against these sanctions, in accordance with the provisions of the ordinary tax procedure. The Executive Branch shall regulate the procedure for the application of sanctions.