Since its origin in 1948, the Colon Free Zone (CFZ) has been a segregated free trade area for wholesale operations. The CFZ is located on the Atlantic coast, near the north entrance to the Panama Canal, offering the world a unique center for international commerce, becoming the leading free zone in the Western Hemisphere and the second largest in the world after Hong Kong.

Goods entering the CFZ may be imported, stored, modified, repackaged, and re-exported without being subject to any tax. In addition, companies established within the zone are exempt from taxes on the re-export of capital, or on the payment of dividends. There are no consular fees, nor any other charges, levied on shipments destined to the Free Zone, or on shipments from this area to consignee's abroad. A Surveillance Service Fee is charged, by the Customs authorities for the custody of the exported goods. The fee charged varies as per the good.

More than 1,584 companies are now operating from the area; the re- exportation of products being the most important activity carried out.

To operate from the Colon Free Zone, companies must obtain authorization from the CFZ Administration (an autonomous governmental institution). No business license is required, nor does any company need to comply with any minimum investment requirements. The CFZ Administration charges a US$ 200 annual fee for an Operation Code applicable to all companies. Operations may be carried out in any one of the following ways:

• A Company may lease premises from the CFZ, provided that it exports at least 60 percent of the goods store.
• A Company may lease land lots to build warehouse facilities for its own use or for the use of other companies.
• A Company may lease warehouse facilities owned by CFZ established companies. This form of operation requires a special authorization from the CFZ authorities, known as an Operation Permit, which requires the payment of a US $ 1,200 annual fee.
• A Company may sign a contract with an established CFZ firm that will represent it.
• A Company may use the public warehouse, where goods may be received and stored.

Companies operating from the CFZ may carry out the following operations:

Internal operations -- to sell merchandise from CFZ to buyers located within the customs territory of Panama, provided that import duties are paid.

External operations:

• Sales transaction, of local or foreign merchandise, for its exportation or re-exportation.
• The administration of transportation, storage and services related to the delivery of goods.
• The transfer of merchandise, eventually to be exported, within the CFZ or from one free zone to another.

• No income tax on profits obtained from external operations.
• Dividends paid on profits, obtained from external operations, and from direct sales, are not subject to dividend taxes.
• Royalties paid to companies established abroad are not taxable to the recipient, but the expense is not deductible for the payee.
• Local government agencies are not allowed to collect taxes or any other charge for goods entering or departing the CFZ.