Some of the questions any citizen would ask on seeing the recent press uproar surrounding the so-called “Panama papers” are: What benefit does having a company in Panama involve? What is a tax haven? Is Panama a tax haven?

A tax haven is a territory with low or zero taxation, and which also implements the preservation of banking secrecy which does not allow the beneficial clients of banks accounts and companies to be identified, facilitating money laundering.

Many of the documents obtained, the so-called “Panama papers”, show that most offshore companies are located in territories considered to be tax havens, such as the British Virgin Islands, the Bahamas and the Seychelles, among others.

Through certain structures used by tax havens, the intention is normally not to pay the taxes which would correspond to profit obtained in a country with a standard taxation system. This is what is known as “tax evasion”, although this could include other offences such as money laundering.

Panama continues to have somewhat peculiar domestic legislation greatly protecting the identity of persons or entities possessing assets there and, due to these characteristics, it means the country can be used by persons or entities as part of a structure seeking tax evasion or money laundering.

Thus, holding a company in Panama does not a priori involve any unlawful action: the use made of such company could indeed involve a criminal act. To give a simple example: does purchasing a vehicle involve a criminal act? Clearly not, but if its owner drives at 200 Km/hour, then a criminal act is indeed being committed.

With companies incorporated in Panama, relatively speaking, it could be understood that something similar occurs; if they are used for laundering money coming from unlawful activities or for the purpose of evading the payment of taxes, then these would indeed be clearly criminal activities subject to punishment.

Another question arises: do all those persons or entities holding a company in Panama use them for fraudulent purposes? Not necessarily: Panama is a country offering interesting business possibilities in the area of construction as well as regarding tourism and leisure activities. In any case, due to the characteristics mentioned, certain suspicion arises, which is why the Tax Authorities should carry out in-depth investigation into the information contained in the Panama papers, upholding the presumption of innocence, but being unforgiving in view of any criminal conduct or tax evasion.

Finally, it should be noted that, for years, the countries comprising the G-20 and the OECD have been adopting measures aimed at eradicating tax evasion, and at ensuring those companies with operations in different jurisdictions, usually acting through legal structures, are subject to taxation in the country where they obtain the profit; this implies a change of concept in international taxation, with domestic legislation and International Conventions having to be adapted.

Lluís Basart Serrallonga

Lawyer and Partner at Auren