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Panama Energy Sector – Overview of Incentives

Panama is one of the the fastest growing and most dynamic economy in Latin America, with GDP growth of 6.0 percent in 2015 and estimated 6.3 percent in 2016. All of this growth has become a challenge for the energy sector by demanding more electricity and new energy sources.

Panama has traditionally relied mainly on hydroelectric production to meet its energy needs. However, during the last few years it has sought to change its energy mix due to the effect of climate change on its water reservoirs. Today, Panama’s energy matrix is composed of hydropower (56.6%), thermal/oil (41.34%) and other sources (2.06%) including wind and solar.

Panama expects that its energy demand will grow at an average rate of 6% until 2030 according to a proposed 2016-30 expansion plan by state power transmission company Etesa. The plan projects that annual electricity use and load demand will grow around 6%, spurred by expansion of the likes of the Panama Canal, new airport operations and new potable water and sewerage system. Forecast demand scenarios include exchange with Central America power grid Siepac and a planned interconnection with Colombia helping position Panama as an energy hub for the Central American region.

In March 2016, the Panamanian government approved the National Energy Plan 2015-2050. This new plan proposes that by 2050, 70% of the energy matrix coming from renewal energy with emphasis in solar and wind power.

Currently, there is a planned investment of:

  1. Construction of the 4th Transmission line with capacity of 1,280 (MW) by circuit of 500 KV with a length of 330 km.
  2. Incorporation of liquefied Natural Gas (LNG) energy generation plants.
  3. The Colombia-Panama interconnection line through an underwater cable with capacity of 400 megawatts ( MW ).
  4. Construction of the large Changuinola Dam II
  5. Update and expansion of transmission and distribution network.

As part of Panama’s strategy to diversify the country’s energy matrix, in 2011, 2012 and 2013, the Panamanian Government enacted various statutes that set forth tax and other incentives for renewable sources of energy, such as wind-based, biomass, natural gas-based and solar-based power generation facilities.

An excerpt of the tax benefits that applies to each of type of energy source follows:

Gas Based Power Generation Facilities

  • Tax credit applicable to the income tax of a maximum of 5% of the total direct investment value for civil works that become infrastructure for public domain, like highways, road, bridges, sewage systems, schools, health centers and other of similar nature, previous to an evaluation by the Public Entity that receives the corresponding work, in coordination with the Ministry of Economy and Finance. The referred credit cannot be subject of compensation, cession or transfer.
  • Exoneration of customs duties that could be caused due to the importation of equipment, machinery, materials, spare parts and others necessary for the construction, operation and maintenance of the plants.
  • Right to use an accelerated amortization method to depreciate fixed assets.
  • The exemption of all national taxes, for a period of 20 years, for companies dedicated to the manufacturing of natural gas generation equipment within Panama. Equipment includes mechanical, electronic, electromechanical, metallurgical and electrical type of equipment.

Wind Based Power Generation Facilities

  • Tax credit applicable to the income tax of a maximum of 5% of the total direct investment value for civil works that become infrastructure for public domain, like highways, road, bridges, sewage systems, schools, health centers and other of similar nature, previous to an evaluation by the Public Entity that receives the corresponding work, in coordination with the Ministry of Economy and Finance. The referred credit cannot be subject of compensation, cession or transfer.
  • Exemption of all taxes pertaining to the importation (which includes customs duties, introductions fees and VAT) of equipment and materials for the construction, operation and maintenance of wind powered generation plans. The exemption applies also to any natural or legal persons who import equipment for the construction, operation and maintenance of wind-powered generation plants with the purpose of promoting and selling this type of equipment.
  • The application of the accelerated depreciation method for equipment used for wind-powered generation.
  • The exemption of all national taxes, for a period of 15 years, for companies dedicated to the manufacturing and installation of wind-powered generation equipment within Panama.

Biomass Power Generation Facilities (Applicable for a period of 10 years) 

  • Full income tax exemption.
  • Payment exemption of commercial or industrial license tax.
  • Exemption on taxes, fees, contributions or any other municipal charges.
  • Exemption from VAT on importation.
  • Full exemption of custom duties, applicable to equipment and materials used for the development of the power generation project

Solar-Based Power Generation Facilities

  • Tax credit applicable to the income tax of a maximum of 5% of the total direct investment value for civil works that become infrastructure for public domain, like highways, road, bridges, sewage systems, schools, health centres and other of similar nature, previous to an evaluation by the Public Entity that receives the corresponding work, in coordination with the Ministry of Economy and Finance. The referred credit cannot be subject of compensation, cession or transfer.
  • Exemption of all taxes pertaining to the importation (which includes customs duties, introductions fees and VAT for specific items) of equipment and materials for the construction, operation and maintenance of solar-based generation plans.
  • The application of the accelerated amortisation method to depreciate fixed assets.

In addition to the tax incentives previously mentioned, there are additional tax benefits that applies to other renewable power projects, such as mini and small hydro generation facilities.

 About Harris Gomez Group: 

Harris Gómez Group is a Common Law-Latin American legal and business advisory firm. In 2001, HGG was the first Australian law firm to have a local office in Latin America. The firm specialises in Common Law and Latin American cross-border issues in areas such as Mining and Energy, Corporate, Mergers and Acquisitions, Tax, Intellectual Property and Business Enterprises. With over 22 years of experience immersed in the respective legal and business cultures of Australia and Latin America, we create a seamless bridge between the two regions and have become an essential partner to many multinational enterprises.