How to Start a Business in the Colon Free Trade Zone, Panama

colonfreezone

The Colon Free Zone (CFZ), the duty-free commercial distribution area on the Atlantic coast of Panama, functions just like any other marketplace. Businesses must stay competitive in the CFZ and their success depends on the price and variety of the goods they offer. Since most merchants who sell goods in the CFZ have minimum order quantities that range from a single palette to a 20 ft. container, prices are bound to be competitive based on volume.

Merchants receive large amounts of goods direct from the manufacturer or supplier who is usually based in Asia, but also in North and Latin America. The merchant imports the goods duty free and resells (exports) them tax free at an increased price.

The basic premise of the CFZ is that merchants are able to charge an increased price because they are taking most of the risk. They hold large inventories and need to find customers to buy large quantities. Usually, merchants will provide their buyers with customer service, sales, marketing, financing, third party logistics and distribution.

Buyers will customarily enter the CFZ and fill container(s) with a variety of goods from different merchants. Therefore, variety is key for merchants, and their inventory needs to be constantly improved to stay competitive, because if buyers only want a large quantity of one product they could buy directly from the manufacturer and receive a lower price per unit than offered in the CFZ.

Delivery time is also another key factor to stay competitive. One reason buyers like to utilize the CFZ is that it eliminates the need to travel to Asia or wait for the products to arrive from Asia. By having goods shipped to them from Panama, assuming their final destination is in the same region, weeks and even months can be cut off delivery times.

Companies in the CFZ also stay competitive by doing a great job of logistics and knowing how to navigate the system. Their goal is turn over their inventory as quickly as possible, and in order to do so they need to be able to dispatch goods at a break neck pace. Companies have become very knowledgeable with Panamanian customs, or lack thereof when operating in the CFZ, as well as the policies and procedures associated with having goods enter the destination country.

How to Start Doing Business in the Free Trade Zone

Companies or individuals of any nationality may start a business in the CFZ without obtaining a commercial license or meeting a minimum investment amount. Companies interested in operating in the CFZ must file an application with the CFZ administration, employ at least 5 Panamanians if the business is owned by a foreigner, and re-export at least 60% of the imported merchandise. Also, the company needs to first become incorporated in Panama and be able to provide bank references. Additionally, all companies are subject to CFZ operating costs which are outlined below.

There are three main ways to create a business in the CFZ and begin operations:

1. Lease a Lot or Facility – Individuals or companies can obtain a 20-year lease on a lot in the CFZ where they can build a warehouse or other facilities. All building is subject to CFZ Administration approval. Companies can also purchase or rent an existing facility from the CFZ or a private owner.
2. Agreement with Established CFZ Merchant (Representative) – An existing company can be used as a representative where for a agreed upon fee they conduct logistics, receive and document goods, warehouse inventory and re-export, as well as in some cases even bill and collect. Agreements are subject to approval by the CFZ administration.
3. Public Warehouse Space – The CFZ Administration operates a public warehouse where individuals and companies can store goods. Cost is based on the weight or volume of the goods stored.

Once established, companies in the CFZ conduct business in one of four ways:

1. Re-export goods on hand in the CFZ to buyers from foreign countries.
2. Sell to businesses or individuals in the Panamanian domestic market (buyers are subject to import tax).
3. Sell goods not located in the CFZ to foreign buyers. Companies can have goods shipped directly from the manufacturer or supplier to the buyer without ever passing through the CFZ.
4. Transfer, or sale, of goods from one established company in the CFZ to another.

Challenges & Limitations

The Colon Free Zone has limited red tape, but there are still restrictions, challenges and limitations to doing business in the CFZ. First of all, companies have to work hard to stay competitive on price and merchandise variety. Also, the majority of goods that enter and leave the CFZ are slated for consumer retail only – no perishables and limited large capital equipment.
The majority of business in the CFZ is conducted in cash. The lack of regulation combined with a cash business creates somewhat of a frontier environment. Suppliers and buyers must do their due diligence before doing business with a company in the CFZ.

Goods are not allowed to be carried out directly by the buyer. The CFZ does not sell directly to consumers. Buyers will customarily receive their goods at their home country’s port, or even have them delivered directly to their own warehouse. In some cases merchants will send the goods to Panama’s Tocumen International Airport in-bond where the buyer can collect the goods on departure of the country.

Colon Free Zone Operational Costs

Setup Cost (onetime payment)
Deposit for Operation Permit $5,560
Deposit for lot and locale(s) equivalent to three months rent
Operations Permit = $ 2,400/annually
Operations PIN
Lease = $3,000/annually
Represented = $2,500/annually
Public Warehouse = $2,500/annually

Rent
Edifice and Locales are rented by the square meter. The cost of rent varies depending on location and ranges from $0.20 to $0.50 per square meter.

Other fees
Garbage collection $30/month
Security $50/month

Souce: Encuentra24.com

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