Compiled by Mike Godfrey, Tax-News.com, New York

Introduction

What is a tax shelter?

The ideal tax shelter turns income into capital without taxation. Such mythical beasts exist in no-tax offshore jurisdictions, but they are not usually to be found in high-tax countries, and when sighted are rapidly hunted down by heavily armed tax inspectors.

Most governments do however provide tax-friendly regimes to support particular economic activities they regard as beneficial, or alternatively allow tax-planning to continue if it delivers a public benefit. Forestry falls into both these categories: everyone loves trees, which are seen as environmentally valuable, provide recreational amenities, are beautiful, and even have a useful product. Many countries therefore offer tax-breaks to investors in forestry, or allow tax-efficient forestry investment to continue.

The basic tax equation with a forest is that you have to maintain it over a long period, during which the costs involved (often including the financial carrying cost of the investment) are deductible from taxable income. Yet there is no income from the forest until it matures, perhaps after 30 or more years. Then it can either be sold for a lump capital sum, or cropped over a period of time to provide an income. At the minimum, payment of tax will have been shifted many years into the future; at best, tax will be payable at a far lower rate than would have been due on the original income.

In this fifth section of our guide to worldwide forest taxation, we're covering Panama.

NB Information given here about the economics and taxation of forestry investments is strictly for general guidance and does not constitute investment or professional advice. Prospective or existing investors are strongly advised to seek professional advice on all aspects of investment in forestry and on its taxation, which is complex.

PANAMA

Foreign Investment In Panama

The Government of Panama and the business community actively promote the country's long-standing reputation as an international trading, banking, and services center, and as a site for foreign direct investment (FDI). Panama's dollar-based economy offers low inflation and no foreign exchange risk. The Panamanian Trade Development Institute (IPCE) and the President's export promotion office (PROPANAMA) provide investors with information, expedite specific projects, lead investment-seeking missions abroad, and support foreign investment missions in Panama.

Panamanian Governments in the 1990s were active in creating a business- and investment-friendly regime with specific incentives in many sectors including forestry.

With the exception of retail trade and certain professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative enterprise. Foreigners need not be legally resident or physically present in Panama to establish corporations or to
obtain local operating licenses for a foreign corporation. Business visas (and even Panamanian passports) are readily obtainable for significant investors. Banking, legal and financial services and the legal regime are strongly oriented toward attracting foreign business and banking activity.

Business, corporate, and banking laws are relatively modern and sophisticated and in general are enforced so as to create a favorable business climate, although there is no modern bankruptcy law. Mortgages, liens, and other security interests are recognized. There is a public property registry which is
undergoing expansion and modernization. There is a well-developed professional services sector, and as in any country it is highly advisable to use local professionals in entering into investment and real estate transactions.

There are no performance requirements such as minimum export percentages or significant local procurement rules. There are special tax and other incentives for manufacturers to locate in an export processing zone (EPZ). Official support for investment and business activity is especially strong for the
Colon Free Zone (CFZ), the banking sector, the tourism sector, and EPZs.The Panamanian government offers foreign and domestic investors alike a range of incentives.

Under Cabinet Decree 413 of 1970 and Law 3 of 1986, companies in manufacturing and processing industries which export all their production receive exemption from most direct taxes and from import duties on machinery and equipment. To take advantage of the incentives, a company needs to register with the Official Registry of National Industry, a department of the Ministry of Commerce and Industry.

These laws were followed by Law 28 of 1995 which offers superior incentives, but only to companies which give up their registration under the previous laws and re-register under the new Law. The main benefits of registration under Law 28 are as follows:

• total exemption until 31st December 2002 from income taxes generated by export activities;
• a uniform fixed rate of import duty on raw materials, semi-processed ingredients and capital assets employed in the manufacturing process; and
• for companies investing in technology in a range of industries, and not otherwise exempted from tax, a tax credit covering up to 25% of their tax bill in any one year.

Under Law No. 25 of 1992 (as amended by Law No. 28 of 1996) export processing zones can be established by companies singly or in groups, in which all activities, including support services, are exempt from direct and indirect taxation, and from import duties; in addition, dividends and interest payments are exempt from withholding taxes. These incentives are particularly aimed at making use of the extensive facilities becoming available throughout the country as a result of the departure of US forces during the hand-over of the canal to Panama.

While the Government of Panama has revised its labor code, the code nevertheless remains highly restrictive and pro-labor. Minimum wages are set at $0.69/hour in the agricultural sector, $0.84 in the commercial sector, and $1.13 in the construction sector.

Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing. The private sector has access to a variety of credit instruments. Panama's banking sector is regulated by a new Banking Law, passed in March 1998.

Panama has no legal restrictions on the transfer abroad of funds associated with, profits deriving from, or capital employed in an investment. Panama uses the U.S. dollar as legal tender. Inflation, bound by the dollar, is low and predictable, thus enhancing the attraction of foreign investment.

There is a constitutional prohibition against foreign land ownership within ten kilometers of the national border or on an island. Neither Panamanian citizens nor foreigners may own beaches or the shores of rivers or lakes. Builders and investors generally rent the land for 20-30 years, via the Ministry of Finance. The tourism incentives law expands this period for up to 40 years.

Panama has a court and judicial system built around a civil code, rather than the Anglo-American system of reliance upon case law and judicial precedent. Many investors lack confidence in the Panamanian judicial system as an objective, independent arbiter in a legal or commercial dispute, especially when the case involves powerful local figures with political influence. When disputes with foreign investors arise, as they do from time to time, the investors often choose not to pursue remedies available to them via the court system. The decision by investors to avoid the court system is understandable, given massive case backlogs and the aforementioned political influence in case outcomes.

Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany and Taiwan. Panama is not a party to any agreements providing for completely free trade, but does have bilateral preferential trade agreements with Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, Colombia, Dominican Republic, Mexico, Germany, Bulgaria, Czech Republic, Hungary, Romania, Russia, and Poland. Panama has committed to negotiate a free trade agreement with the Andean Pact and is negotiating agreements with Mexico and Chile. Panama has no double tax treaties with other countries.

Unlike many of its Latin America neighbors, ownership of real estate property and/or private investment in it, is guaranteed and protected by Panama's Constitution under Article 44. Since it was enacted, the Civilian Code has stipulated that Panamanian law is applicable to both nationals and foreigners alike.
Real estate property has been, since Panama's separation from Colombia in 1903, attractive to foreign investors, particularly those from the United States.

In Panama all real estate property titles are registered at the "Registro Público" (Public Registry) through a bureaucratic yet straight forward process. In some situations, people will sell their "derecho possessorio" or "rights to possess". Derecho possessorio can refer to two situations:

• Government land occupied by peasants, where after a length of time, the occupant can claim the occupied piece of land, and officially obtain the "right of use" for a indeterminate period (it has been known to pass from one generation to another.) This right can de sold.
  

• The other derecho possessorio or Right of Ownership refers to unused idle private land that is occupied and worked by third parties for an extended period, (over at least 5 years) which can be claimed by the people who have worked the land. It is a legal process that requires probes and witnesses. Consequently tracts of land must be periodically inspected or populated with live stock or buildings to show proof of use.

Development Of Forestry In Panama

Panama has retained 32 percent of its original frontier forests (large tracts of relatively undisturbed old growth forest), the second largest percentage among Central America countries. Panama also has the largest percentage of protected land (17 percent) among Central America countries. However, economic development projects in the last 30 years of the 20th century, particularly those aiming to improve transportation, posed a threat to the remaining forest. The Government's reforestation programmes and accompanying tax incentives have gone some way to reverse the destruction of forest, although inappropriate planting, particularly of clear-felled old forest, is sometimes a problem.

Reforestation began to take off after the 1992 passing of the forestry incentive law (Law No. 24 of November 23, 1992), which promotes, regulates and provides incentives to the reforestation activity, and Decree No. 89 of reforestation incentives. See below.

The principal objective is not only forestry, but also to contribute to the preservation of the environment with the usage of idle or under-employed land. Panama produces around 38 million board feet of lumber per year, most of which is obtained from the rain forests, not all according to sustainable models. The country plans to obtain much of its supply from local plantations or from imports in order to conserve the existing forests.

According to estimates by INRENARE, around 75% (5.7 million hectares) of national lands have forestry potential, due to topography, soil, and climatic conditions. Currently, reforested hectares are planted with Pinus Caribe (40%), Teak (30%), and the rest with other species. The State provides an important service in the research sector with the aid of international organizations and private and professional institutions. Reforestation has made an impact in various segments of the economy, such as tourism, most importantly in eco-tourism. It signifies a new industry and brings vast tracks of hitherto unused land into the economy, even to the point of bringing much-needed cash to people in remote villages, since the establishment and development of every reforested hectare creates jobs.

According to experts, it is preferable to employ a diversity of species in order to prolong the useful life of the land and to gradually obtain benefits from it. It has been possible to identify and to work with a great number of species of trees, including Pino Caribefio, Teak, Acacia Magnum, African Mahogany and native species such as Cedro Espino, el Roble, Eucalyptus, Laurel and others. There are vast areas in the Central Cordillera and the Pacific slope of the Isthmus that are almost bare of trees. As a legacy of deforestation these lands are currently being used for agriculture and farming but, the soil of which has a greater potential for forestry use.

The objective of the incentive legislation is to create a 30-year period in which priority and full support are given to private reforestation; to increase all forms of reforestation, either for energy, educational or industrial purposes; to promote the establishment, development and improvement of the forestry industry; the promotion of businesses, associations and communities involved in the activity, and to study, research and publish all information pertaining to reforestation.

The return of the Panama Canal strip to national ownership exacerbated the danger of damage to its forest cover. The loss of forest was particularly a problem in the areas surrounding the Canal basin: deforestation could seriously affect the rivers that feed the Canal, which would endanger the maintenance of the waterway. The Panama Canal Commission and the Institute of Renewable Natural Resources (INRENARE) launched a campaign to protect the basin and have achieved considerable results.To ensure that the mostly forested area remains intact and its protection benefits local residents, the Panamanian Center for Research and Social Action (CEASPA in its Spanish acronym) is working with the national environmental agency, the tourism institute, and the Interoceanic Regional Authority, the agency charged with coordinating how the reverted lands will be used.

CEASPA must also counteract a prevalent attitude that after nearly a century of U.S. presence in San Lorenzo, the land is available to whoever can move in first with a chainsaw. CEASPA is helping to train
forest rangers who will patrol the area and work with residents and local governments so everyone understands what is permitted and what is not.

Since 1974, the population of the canal zone - containing 372,000 hectares of natural forests - rose from some 50,000 people to more than 200,000. A recent study revealed that in recent years the destruction of the forests in the canal basin has been stalled due to the series of protection laws and measures, but that human and industrial activity are still having a negative impact on water quality.

Darien, a remote labyrinth of jungle rivers and three mountain ranges, is another part of Panama under threat from deforestation carried out in the name of development. Uncontrolled occupation and use of land in Darien has led to growing deforestation. Between 1980 and 1997, deforested areas more than doubled from 620 square miles (1,600 sq km) to 1,530 square miles (3,970 sq km). Settlers make up 45 percent of Darien's population but a lack of access to credit has trapped many in patterns of slash-and-burn agriculture on shallow jungle soil that produces lower yields, followed by low-intensity cattle grazing.

While government-backed reforestation is mostly a good thing in Panama, commercial pressures have led some real estate promoters into inappropriate projects involving the clear-felling of mixed-wood tropical forest and its replacement with a monoculture of teak. It is one thing to take landscapes that have been altered by grazing, and replanting native trees, it is another to turn rain forests into teak plantation. Investors need to be aware that while teak planted in the warmer, wetter parts of Panama will grow fast, the trees can be of substandard quality, and will have very little value commercially. It is important to retain the services of a qualified forestry professional before making forestry investments.

Panama's National Environmental Authority (Anam) agrees that teak plantations can be profitable but is vigilant that planting occurs on land that has already been cleared. Carlos Vargas, Anam's forestry
director, regrets that the tax incentives have done little to encourage the type of reforestation Anam wants - by small farmers who could be rewarded for managing woodlands, rather than clearing the land.

"In our culture we see the woods as an obstacle," says Mr Vargas. "If you go to the agricultural development bank, they give you loans to chop them down." Many reforesters are in the real estate business, he adds, and not very interested in the final product.

The Economics Of Forestry In Panama

In Panama production has grown steadily since a 1992 incentive law giving tax exemptions to forestry schemes. Many investors were tempted into the business and there are now more than 30,000ha of reforestation in the country, nearly half of it in teak.

The economic life cycle of a teak plantation stretches over 25 years. Teak trees are first cut commercially
at about seven years old, to thin the plantation, then again at 12 to 15 years, with the final and most profitable harvest taking place at 25 years.

The relatively slow pace of reforestation in Panama can be accounted for partly by a lack of local financing. "One of the reasons long-term plantations had problems establishing themselves in Latin America is because of the financing," says Julio Cesar Centeno, a Venezuelan forestry expert who took part in negotiating the International Tropical Timber Agreement. "In this part of the world, people have wanted to invest today and get a return tomorrow."

Forestry investment includes the purchase of equipment, the purchase of land destined for reforestation, the creation of tree nurseries, the purchase of plantations and the construction of infrastructure for the development of the reforestation activity. There are a number of different forestry investment routes available in Panama. Direct purchase of planted or unplanted land is possible, but it is more usual for an investor to buy the future income stream from a specified plot in return for a payment and annual management fee, which brings in cash flow for the owner.

The Government of Panama is leasing under 20 year contracts (renewable for 20 additional years), over 20,000 acres of land in the water shed of the Panama Canal and also in Central Provinces, to anyone interested in establishing forestry projects, for commercial purposes. Private forestry projects may be combined with fruit production plans and eco-touristic plans. Size of parcels vary from 250 to 4,000 acres, with no limit to total amount of land rented by a single individual or concern. Rental prices range from $8.00 to $16.00 per acre per year.

An alternative model is to 'securitise' the plantation asset. In 1999 Panamanian company Jones Forest and Development issued $1.8m of convertible "forestry bonds" giving buyers the option to convert the bond into tree ownership in the future. The company, which also produces revenue from farming cattle and sheep that graze among the trees, has 1,200ha of teak plantations in the Darien and elsewhere in
Panama.

The tax incentives for forestry investment are essentially available for all these investment routes (see below).

But in some cases investors have been disillusioned - and producers given a bad name - because companies made exaggerated claims about likely wood yields and financial returns. The yield of a teak plantation can vary between 5 cubic metres per hectare per year and 20 cubic metres per hectare per year, making the difference between a heavy loss on investment and a handsome profit. In Panama, which has good growing conditions due to its climate, a well-chosen and technically effective project should generate rates of return between 8% and 12%; some promoters claim 16% to 20%, but such offers need to be examined very closely.

Alberto Mantel, Jones Forest's administrative director, believes his company's teak trees can produce about 250 cubic metres of wood per hectare over 20 years. High-quality teak fetches about $4,000 in developed markets. Prices dipped during the Asian crisis but have now recovered and are likely to rise at around 2.5% per year over the long-term, according to some forecasters.

The cost of establishing a plantation varies considerably - from $800 to $1,300 per hectare depending on the conditions of the area, access, number of hectares and the form in which the project is carried out, in addition to mechanization and other requirements.The total cost of planting and maintaining a teak forest for 20 years is estimated to be about $5,000 per hectare.

One firm offering direct ownership of reforested plantations is Fortress Management. Its Futuro Forestal Project was established in 1996 and is located on the Pacific Coast line in the Province of Chiriqui, an area which has been used in the past for extensive cattle farming. With tropical climate with a sufficient dry season makes Chiriqui ideal for reforestation. One of the main goals of this project, says the company, is not just a long-term investment into a commodity, but rather, to avoid an atypical monoculture, thus promoting the natural growth of trees as in a mixed forest plantation.

Fortress plants 600 trees on a plot of one hectare according to the recommendations of an agricultural engineer. The tree species include, Mahogany, Zapatero, Teak, Cedro Espino and Almendro. During the twenty-five year period, the trees will be maintained and trimmed to guarantee perfect development as well as to produce optimum lumber. As a result of the trimming, only the best trees will remain, and after the 25-year period roughly 140 ideal trees will be left.

Says Fortress: 'The following example helps to demonstrate how the reforestation program can work as a safe, high-interest investment:

'Imagine that 25 years ago you bought one hectare of our forest in Panama, with 600 tropical trees. At that time you would have paid, US$ 3,200 for the hectare, which includes the 25-year maintenance plan. Today you could sell the lumber from your one-hectare forest and generate over US$ 52,000. Total income from the investment (three harvests over 25 years) would have been $95,000 with costs of $43,000.

'Now, if we transfer the same example to today, and project 25 years into the future, we could expect an investment of US$ 19.900 and a tax-free return of US$ 209,000. The initial investment buys one hectare of the tropical forest with 600 trees and a 25 year maintenance plan. This translates to an annual rate of return of around 9.5% without risk of inflation.'

As Fortress points out: 'this is only one example of many possible scenarios. However, it depends on a variety of environmental and market factors, and does not represent a guaranteed return. The return of the investment could be higher or lower, depending on these factors and their fluctuation through time. Projected returns do not include the increasing value of land, nor the possible income from the sail of bound Carbon dioxide for climate change mitigation.'

Futuro Forestial is certified by Smartwood USA (implemented worldwide for the certification of natural forest management and tree plantations) and in accordance with the guidelines set forth by the FSC (Forest Stewardship Council.) Fortress Management describes the advantages of its approach as follows:

• The seeds and trees come from a certified nursery; only the best specimens are be used in this project;
• The Reforestation project includes a 10% Nature Reserve within the project area and apart from your land;
• Your trees will not be grown in a monoculture, but a Natural Forest which creates an ecological system with improved conditions to resist pests, diseases and storms;
• You have the freedom to decide the kind of trees that will be planted on your land. The project manager will give you recommendations according to the soil and terrain.
• FMG offers a 25-year maintenance contract included with the investment. Similar projects often end their maintenance contracts after only 10 years thereby pressuring you into a renewal fee.
• Agricultural engineers and project managers trained in Argentina and Germany live within the reforestation area, providing a guarantee of close maintenance.
• Also included in FMG's contract is permanent auditing and control by the certification organization SmartWood (USA).
• The various trees cultured in the Futuro Forestial project will have a high demand in the near future: Mahogany, Teak, Spanish Cedar, Zapatero (Ironwood) or Nargusta.

Fortress also points out that by investing a minimum amount of $40,000 into this project, an investor will have met all the investment requirements issued by the Panamanian government to apply for a second residency. With "Financial and Forestry Incentives," Law No 42, of November 23, 1992, the Panamanian government made it possible for foreigners to acquire residency by purchasing land designated for reforestation.

Fortress suggests the following procedure for making a forest investment:

• You will need to issue Fortress Management Group a Power of Attorney in order for us to act on your behalf during the purchase process;
• FMG recommends, in relation to possible secondary citizenship and for asset protection reasons, to incorporate a Panamanian IBC, which will act as the buyer;
  You will need to transfer the full purchase price, to our Escrow Agent;
• Upon the reception of complete documentation and payment, we will initiate, with Futuro Forestal, the Purchase Plan;
• A notary contract regarding the purchase of the land (1 hectare or more), the reforestation, and the maintenance of the trees is made out;
• The purchase price for a 1 hectare plot, including the initial planting and the maintenance contract, notary costs, public deed, land survey, setting of boundary stones, annual maintenance and an investment inspection is US$ 19,900.00;
• After the notary contract has been signed, your plot will be surveyed, legally registered in the Panamanian Land Registry and have the boundary stones set;
• An application to officially transfer the title of the land is accompanied by the issuance of the new title and all other official documents needed;
• Futuro Forestal, S.A. will plant 600 tropical trees on each hectare you decide to buy, accompanied with a 5 year guarantee. This guarantee includes stipulations for the replacement of dead or abnormally growing trees. Each tree will be numbered and registered in the Futuro Forestal, S.A. database;
• An annual report will be sent to you containing information about the development of the trees, the reforestation activities and the SMARTWOOD certification of your plot(s).

Reforestadora El Tecal, S.A. offers a similar package, which it describes as follows:

'Since 15 years Reforestadora El Tecal, S.A buys land in the low country of the province Chiriquí, which is situated in the north of Panama at the boundary to Costa Rica. We would like to point out expressly that the land acquired by us is farm land (not deforested jungle). We pay attention to best soil quality. The acquired land is divided in parcels by at least one hectare of size, which is then planted with approx. 1200 young teak trees from own tree nursery.

'These properties we offer interested investors, who receive a notarized document officially written in the registry office with the purchase of the reforested land. In the sales contract we commit ourselves additionally to maintain the land at least 10 years. The cost of the maintenance work is included in the purchase price. Additionally we would like to refer to a special incentive for reforestation in the Panama legislation: Who invest at least US $ 40.000. in reforestation, receives a unlimited residence permit in Panama.

'Since 1985 we extended our reforestation projects steadily and administer now over 510 hectares. Of it approx. 300 hectare companies and private investor from Panama, further 110 hectares belong belong to Latin Americans, US Citizens, Germans and Swiss.

'Since the investor is the owner of the land and its trees, he also receives all its profits If trees are cleared etc., then he receives the net-profit from the sales of the wood. Altogether we count on a growth cycle of 25 years, but already beforehand several clearings must be made, so that the trees do not obstruct themselves mutually in their growth. In accordance with specification in the technical literature concerning Teak woods we expect an annual net yield from on the average of 8 to 11%. Under Panama's law the earnings from these wood sales are tax free.'

Panamanian Forestry Taxation

Summary of Panamian Taxation System

Taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself. The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation.

Income tax is payable on the income of a Panama or foreign corporation or other entity derived from business carried on within Panama; a corporation carrying on business both inside and outside Panama will pay tax on the proportion of its income that arises within the country. Capital gains are counted as income after deduction of allowances.

The rate of income tax in Panama is 30% on chargeable income; a higher rate of 34% applies to income over PAB 500,000 for companies that are registered with the Official Registry of National Industry or that have government contracts. Companies with gross income below PAB 200,000 pay lower rates on the first PAB 100,000 of their taxable income.

There is a withholding tax of 10% on dividends paid out of taxed income. If less than 40% of taxed income is distributed, then Undistributed Profits Tax of 10% becomes payable on the undistributed balance; this therefore amounts to a maximum of 4% tax. In effect this is an advance withholding tax, and it is creditable against the 10% tax on later distributions of the taxed profit.

There are annual taxes on the value of real estate, plus capital gains tax on profits from the sale of real estate, and a transfer tax arising on sale.

The annual tax, under Article 766 of the Fiscal Code, is based on official valuations, and is levied on a sliding scale, starting from 1.4% on the first PAB 10,000 of value, and rising to 2.1% on value in excess of PAB 75,000.

Capital Gains Tax is levied on real estate gains under Article 701 of the Fiscal Code and Articles 89 and 90 of the Income Tax Regulations. The rate of tax is 30% on the taxable gain after deductions, but the calculation basis is quite complex, at least for persons not otherwise paying much tax.

The tax on the transfer of real estate (not new homes) is 2%, payable by the seller, which is credited against capital gains tax.

Most official and public documents in Panama require stamping, including sales invoices, receipts, legal submissions and contracts. Fiscal stamps are on sale in various denominations; pre-stamped paper can be bought at PAB 4 the sheet.

It is possible to account for stamp duty on a quarterly or half-yearly basis to the tax authorities.

There are no statutory residence rules as such, but an individual is considered resident if he is present in Panama for more than 180 days in any one tax year. Residence has to be officially recognised by the Government. As regards taxation, there is no distinction between foreign and Panamanian individuals. The territorial basis of taxation applies to individuals as it does to business entities, so that individuals pay income tax on Panama-source income. 'Panamanian-source' means, that the services rendered are deemed to be provided within Panama - if a Panamanian entity pays an employee for services rendered abroad, tax will not be due.

VAT (impuesto a la transferencia de bienes corporales muebles) is a tax on consumers imposed on transfers of personal property by sale or otherwise, and also applies to imports. The taxable value is the price paid plus ancillary charges, or in the case of imports, the customs value plus customs charges. The rate is generally 5%, but it is 10% for imports, alcohol and tobacco.

Tax Incentives For Forestry

Pursuant to Law No. 24 of 1992, special incentives were established concerning the activity of Reforestation.

The incentives stated in the law include:

• Total exemption from the payment of income tax on earnings derived from the commercialization of products extracted from forest plantations, up to the final cutting, and that are established within a period of twenty five (25) years counted as of the date of the Law, as long as the owners of these plantations are recorded with the forestry registry;

• Total tax deductibility of the direct or indirect forestry investments made, as long as the amounts invested come from a source different to the reforestation activity;

• Total exemption from import duties, taxes, levies or any other charges on the importation of machinery and agricultural equipments, spare parts, tools, agrochernicals, seeds, and any other elements necessary for the exclusive use of the reforestation activity;

• Total exemption from the payment of property tax and property transfer tax, as long as the farms engaged in reforestation use more than 50% of their land for this purpose or have a minimum of 200 hectares under reforestation;

• Total exemption from the payment of income tax on all earnings derived from bonds, shares and securities of companies engaged in reforestation and from the earnings derived from the transfer of said bonds, shares and securities;

• The executive branch shall promote the creation of lines of credit with preferential interest, and of "Preferential Forestry Loans", through official credit institutions and private banks, savings and loan associations, finance companies or any other lending institution that previously registers with the Ministry of Finance and Treasury.

• The "Preferential Forestry Loans" shall have a preferential treatment of up to four percentage points, less than the interest rate commonly offered in the local market.

• Total tax deductibility of the interest incurred in financing the reforestation and the activities derived therefrom.

The investor should maintain his/her forestry investment until the final cut of the forestry plantation. In case of an indirect investment, the investor shall maintain it for a minimum of ten years.

A direct investment in this activity can be in nursery or plantations. On the other hand, indirect investment involves the purchase of bonds and stocks of companies engaged in reforestation and related activities. Such investments are 100% deductible for income tax purpose.

In order to qualify for the forestry incentives the investor is required to provide an annual technical and financial forestry report, detailing the amount of investment for the corresponding year and the development status of the plantation. INRENARE, will later conduct an evaluation and inspection the project, certifying the invested amount to the Ministry of Finance.

The "Financial and Forestry Incentives," Law No. 42, of November 23, 1992, made it possible for foreigners to acquire residency by purchasing land designated for reforestation, given that all is in conformity and satisfaction with the provisions of its legislation. An investor having placed more than US$ 40,000, into reforestation project(s), is entitled to apply for residency under this law.