Made in Panama: what the Colón Free Zone means for manufacturers from Germany, Austria and Switzerland

For manufacturers from Germany, Austria and Switzerland, the American market has become unpredictable over the past two years.

Tariffs that change overnight. Fluctuating currencies. Supply chains dependent on China.

For some of these companies, Panama offers an option that has received little attention so far: final assembly in the Colón Free Zone – using components from Europe or Asia, calculated in US dollars, with questions that can be clarified in advance from a German, Austrian and Swiss perspective.

This is not about relocating entire factories. It is about identifying which stage between component manufacturing and the American market would be better located in Panama: final assembly, configuration, testing, packaging or regional distribution.

This article explains what holds up – and what does not.

The starting point: exports or local production?

Manufacturers from German-speaking Europe serve the American market in different ways: exports from Europe, their own factories in the USA or production sites in Latin America. The right combination depends on the product, the supply chain and the sales markets.

Direct exports from Europe. Since 24 July 2026, new additional US tariffs under Section 301 have applied: 10% on goods from the EU and 12.5% on goods from Switzerland. This is already the third tariff regime in 18 months. The Supreme Court struck down the blanket tariffs introduced in April 2025 in February 2026; a transitional tariff followed, then the current rules.

A factory in the USA. Many components come from China, often from the company’s own subsidiaries. They are still imported, and high tariffs apply. The greater difficulty is the lack of predictability: no one knows which rules will apply next quarter.

A production site in Latin America. Brazil is just one example. Countries such as Chile, Argentina or Paraguay may also be suitable, depending on the project. Conditions vary considerably: exchange rates, political predictability, infrastructure and access to sales markets all belong in a location assessment. Good production conditions alone are not enough if currency fluctuations or changing circumstances make cost planning uncertain.

Costa Rica also belongs in this comparison. For a combination of final assembly and regional distribution, Panama’s particular strength is the interplay between its dollar base, canal, ports and the Colón Free Zone. Whether these advantages are decisive depends on the specific project.

Panama is not on any of these tariff lists. Goods of Panamanian origin currently pay no additional tariff.

The perspective is therefore not USA or Panama, but USA plus Panama – as an upstream production and distribution stage within a reorganised supply chain.

What makes Panama different

Panama lies in the centre of the continent. Costs are calculated in US dollars. Dollar-denominated costs and revenues therefore carry no additional exchange-rate risk from a local currency. Exposure to the euro or Swiss franc remains.

The infrastructure is designed for trade between the oceans: the port of Manzanillo in Colón is the country’s largest, handling around 2.9 million containers a year. The railway to the Pacific coast covers the 77 kilometres in just over an hour. Panama City is a 45-minute drive away.

And Panama has the Colón Free Zone: more than 1,000 hectares, over 2,600 resident companies and around 18,000 direct jobs. The zone describes itself as the world’s second-largest free zone after Hong Kong. What is undisputed: it is the largest in the Western Hemisphere.

The zone is often seen as a large duty-free trading hub. Since 2023, that description has been too narrow.

Reform Law No. 412 of November 2023 explicitly authorised manufacturing and assembly in the zone. The law now defines final assembly, processing, quality testing, packaging – and nearshoring.

The zone is building on this: the roughly 280-hectare “New Field” expansion is specifically intended for light manufacturing and nearshoring. The government is investing around US$250 million; construction is scheduled to begin in November 2026.

Its status as a genuine free zone remains central: imports, storage and exports are fully exempt from customs duties and levies.

The model: final assembly with genuine value creation

The idea is simple: Asia → Panama → the Americas.

Components and subassemblies continue to be manufactured wherever it makes economic sense, often in Asia or Europe. They enter the zone duty-free. The stages that should be close to the market follow there:

Final assembly and integration
Configuration and testing
Quality control
Packaging and labelling
Regional distribution

The finished product then enters distribution.

Whether it qualifies as Made in Panama is determined not by Panama, but by the customs authority of the destination country.

For the USA, two separate tests apply:

Preference under the free trade agreement. The agreement between the USA and Panama has been in force since 2012. For most industrial goods, it requires a change in tariff classification: individual parts must become a product under a different tariff heading. For many machines and devices, assembly from parts meets this requirement.

Origin for additional tariffs. Here, the stricter standard of “substantial transformation” applies. Simple final assembly from prefabricated subassemblies is generally insufficient. Genuine local value creation is needed: machining, winding, welding, calibration and a meaningful number of processing steps.

A binding advance ruling from US Customs determines what is sufficient in each case. No one should invest without that ruling.

Origin planning therefore belongs in the production design from the outset, not as an afterthought.

A second point is equally important: since 2026, products with a high steel, aluminium or copper content have appeared on the Section 232 tariff lists. These include power tools and chainsaws, for example. A tariff of 25% on the full value applies to these products, regardless of the country of origin.

For these products, Panama offers no tariff advantage. This needs to be known in advance.

For industrial goods outside these exceptions, the calculation can change considerably. A comparison of selected countries of origin:

From Panama: 0% with recognised origin.
From Germany: 10% additional tariff.
From Switzerland: 12.5% additional tariff.
From Brazil or China: up to 37.5%.

Which markets this opens up

Panama has free trade agreements with 45 countries. These include the USA, Canada and Mexico, the EU, the EFTA states and the United Kingdom, all five Central American neighbours, as well as Chile, Peru, South Korea, Singapore and Israel.

Central America is the natural second market. Industrial goods from Panama enter Costa Rica, Guatemala, Honduras, El Salvador and Nicaragua largely duty-free.

Two limitations matter:

The Caribbean: there is no agreement with CARICOM. Partial agreements exist only with the Dominican Republic and Trinidad and Tobago.
South America: Chile and Peru are covered, Colombia partially. Negotiations with Brazil and Argentina have been underway since 2026. Preferences do not yet apply there.

Another point: inputs from the EU or Switzerland enter Panama duty-free. When exported to the USA, however, they do not count as originating materials. The value creation must take place in Panama itself.

Taxes in the zone

Companies in the Colón Free Zone operate under a separate tax regime:

No income tax on earnings from transactions outside Panama.
No customs duties or levies on imports and exports.
No VAT on goods destined for foreign markets.
A 5% tax on dividends from foreign profits.

Domestic sales in Panama are taxed normally.

The zone is not the only manufacturing regime in Panama. Depending on the circumstances, the Zonas Francas under Law No. 32, the Panamá Pacífico special area or the EMMA regime for group subsidiaries may also suit final assembly. The right regime depends on the individual case. More on the framework: Taxes in Panama.

The obstacle: the EU list

One obstacle has stood in the way: Panama has been on Annex I of the EU list of non-cooperative tax jurisdictions since February 2020.

For German companies, this has concrete consequences. Germany’s Tax Haven Defence Act provides for four measures, all of which now apply to Panama:

Non-deductibility: business expenses connected with transactions involving Panama have no longer been deductible since 2025.
Stricter controlled foreign company taxation: profits of a Panamanian subsidiary are attributed to the German taxpayer.
Withholding tax: on payments to recipients in Panama.
No relief for dividends and disposals of shares.

In Austria, the list affects controlled foreign company taxation and reporting obligations. Switzerland has no comparable countermeasures, but it also has no double taxation agreement with Panama.

As long as this remains the case, the list effectively blocks almost any serious project by a German company in Panama.

Panama has acted: Law No. 526 of May 2026 tied the disputed exemption for passive foreign income to local substance. In parallel, the Global Forum is reviewing the exchange of information.

On 9 October 2026, the EU Council of Finance Ministers will decide on the list again. The Panamanian government expects removal in October or, at the latest, in the following round in February 2027. The EU has made no commitment.

If Panama is removed, the German defensive measures cease to apply retroactively from 1 January of the year of removal.

Companies that prepare now can then start without delay. The next section explains what applies at home afterwards.

After removal: what applies in Germany, Austria and Switzerland

The zone is one side of the equation. Tax law in the home country is the other.

Four points determine whether the Panamanian advantage carries through at home.

Inputs from Europe

Industrial goods from the EU now enter Panama largely duty-free under the EU–Central America Association Agreement. Swiss goods are covered by the EFTA agreement of 2014. Imports into the free zone itself are exempt from duties in any case.

For onward exports to the USA, however, these inputs do not count as originating materials. The value creation must take place in Panama.

A subsidiary rather than a permanent establishment

None of the three countries has a double taxation agreement with Panama. This makes the local legal structure a pivotal decision:

Germany: a permanent establishment in the zone is fully taxed in Germany. Panama’s zero rate then provides no benefit, apart from German trade tax. A Panamanian corporate subsidiary shields its profits. Dividends paid to the German parent are 95% exempt with a holding of at least 10%; for trade tax, the threshold is 15%.
Austria: the picture is the same. Profits of a permanent establishment in Panama are subject to further taxation in Austria. Dividends from a subsidiary are exempt under the international participation exemption, with a holding of at least 10% for one year.
Switzerland: a permanent establishment is also an option here. Switzerland unilaterally exempts profits of foreign permanent establishments. Dividends from a subsidiary qualify for participation relief.

In all three cases, Panama’s 5% withholding tax on dividends from foreign profits remains a cost. Without an agreement, it can neither be credited nor reclaimed.

Controlled foreign company taxation: assembly counts as active income

A subsidiary taxed at 0% would normally trigger consideration of controlled foreign company rules. This does not apply to an assembly company:

Germany’s Foreign Tax Act explicitly classifies the “manufacture, treatment, processing or assembly of goods” as active activities. This also applies when the subsidiary assembles exclusively for its own parent.
Austria attributes only passive income: interest, royalties, dividends and finance leasing. Production is not covered.
Switzerland has no controlled foreign company rules.

However, mere repackaging, labelling or putting items together does not count as assembly in Germany. The subsidiary then becomes a trader, and trading with its own parent is passive.

The question of genuine manufacturing depth therefore arises twice: with US Customs and with the German tax authorities.

Three limits to the advantage

Transfer pricing. A pure contract assembler receives a cost-plus return under the arm’s length principle. The zero rate benefits only that margin. A greater benefit requires more functions in Panama: purchasing, regional sales and quality responsibility.

Transfer of functions. Anyone moving assembly out of a German factory must examine the transfer package. An exception exists for pure contract assembly without proprietary know-how. If nothing is reduced in Germany and additional capacity is built in Panama, there is no transfer of functions. A move from a foreign factory, such as one in the USA or Brazil, does not constitute a transfer of functions from a German perspective.

Minimum tax. The global minimum tax applies to groups with revenue of at least €750 million. The zero rate is then topped up to 15% at home. The model targets medium-sized businesses below that threshold.

Personnel and residence

Germany, Austria and Switzerland are on Panama’s “Friendly Nations” list. Posted executives can obtain an initial two-year residence permit through an employment contract, followed by permanent residence.

Managers and specialists employed by companies in the Colón Free Zone also have access to a dedicated work permit outside the usual foreign-worker quotas.

More on this: Residence permits in Panama.

Connections and local contacts

Lufthansa flies nonstop from Frankfurt to Panama City in just over twelve hours. From Zurich and Vienna, connections involve one stop via Amsterdam, Madrid or Paris. The time difference is six hours in winter and seven in summer.

Companies from German-speaking Europe are already established in Panama: as regional headquarters, such as Adidas or Nestlé; as logistics hubs, such as DHL and Kühne+Nagel in the Colón Free Zone; or as manufacturers, such as ABB, which has been assembling under the EMMA regime since 2022. Switzerland is among the country’s four largest investors.

There is a German chamber of commerce abroad, a German embassy and a trilingual German school locally.

Who this is suitable for

The key question is not whether Panama is better than China, Mexico or the USA. It is which function Panama can take on in your existing supply chain.

The model suits a narrow segment:

Manufacturers from German-speaking Europe with their own production for the American markets
Products with a high value-to-weight ratio, modular design and assembly steps that can be standardised
Components from several countries, including Asia, with a high import share
A genuine local manufacturing and testing step, not merely assembling a kit
No need for heavy industry
Products outside the Section 232 lists for steel, aluminium and copper goods
Several sales markets in North, Central and South America
A willingness to operate a separate company with genuine manufacturing in Panama, not just a branch

Typical candidates include manufacturers of technical products, pumps, electrical components, automation equipment, selected medical devices and industrial goods. Tools and garden or forestry equipment qualify only if the specific product is not covered by Section 232.

For most companies, this route is not relevant. For the few that fit the profile, it can make the difference.

Seven initial questions

Seven questions help determine whether Panama fits your supply chain:

Where do you currently manufacture for the Americas?
Which components come from Asia?
Where does final assembly take place?
Which tariff risks do you currently bear?
Which processes could be reorganised geographically?
What role does regional distribution play for you?
Which function could Panama take on?

The answers form the basis of any feasibility assessment.

If you are considering a second location outside Europe more generally, you will find context here: Why more entrepreneurs are looking for a plan B outside Europe.

Our approach

We first assess whether the model fits your supply chain. The feasibility assessment covers:

Supply chain and product structure
Value creation: which stage belongs in Panama and which does not
Customs and origin, including tariff classification and a Section 232 check
The appropriate regime in Panama
Logistics and premises
Personnel
Investment requirements

If it does not fit, we say so.

If it does, we support implementation on the ground – together with experienced local customs, legal and operations specialists, and with a binding advance ruling from US Customs as the first milestone.

Tax structuring in Germany, Austria or Switzerland belongs in the hands of your tax adviser. We provide the Panamanian side: figures, regimes, contacts and substance.

Our role is to provide a sound basis for an informed decision. No more, but no less.