Taxes in Panama

This guide is only for information purposes, we will only describe the most remarkable taxes, bypassing some of them. For a complete perspective and to comply with tax laws and reporting requirements please contact a professional tax advisor and do your own research. It’s strongly suggested to be assisted by an expert to get proper guidance and strategic planning while meeting their tax obligations responsibly.

Introduction

Navigating personal taxes can be a hard task, regardless of the location. In Panama, understanding the complex tax system is crucial for residents and expatriates alike, and is a crucial effort and essential matter if you are looking to relocate in this Central American country.

Territorial Tax System

Panama applies the territorial tax system where Citizens, residents and non-residents are taxed only on Panama-sourced income. Foreign-source income is not subject to tax in Panama. This has made Panama an attractive destination for expatriates seeking favorable tax conditions The Territorial Tax System also applies to corporations, making it a significant advantage for multinational corporations that have income earned outside of Panama.

Tax Residency

First of all is important to define the concept of tax residency in Panama:

An individual is resident in Panama if he/she is in the country for more than 183 days in a calendar year and has economic and family interests in the country.

A company is considered a tax resident in Panama when it is incorporated in the country and if the management of the company is located in Panama.

Personal Taxes in Panama: An Overview

Income Tax

Taxable income has to be considered: employment income such as salaries, premiums, benefits, allowances and any benefits; income from commercial or agricultural business and investment income.

The income tax rates in Panama are progressive:

• Income from $0 to $11.000: 0% income tax.
• Income between $11.000 and up to $50.000: 15% income tax
• Income extending the $50.000: 25% income tax on the income above the $50.000 plus a fixed rate of $5.850

In any case, different exemptions are accessible, which can assist in mitigating tax liabilities such as Health insurance deductions and deductions for a mortgage.

Deductions of income taxes paid to foreign countries may be allowed under special cases.

Capital Gain Taxes

Capital gains are considered an income from the sale of shares, securities, dividends, negotiable instruments and real property. Only properties located in Panama are subject to the capital gains tax.

Capital gains derived from the sale of securities and negotiable instruments are subject to a 10% tax.

Capital gain derived from real estate property involves two types of taxes: transfer tax and gain tax on the net profit of the sale. A 2% real estate transfer tax plus a 3% gain tax advance payment must be submitted. Please note that:

• This total of 5% should be calculated on the gross transaction amount or the cadastral value, whichever is greater.
• For new properties, the 2% real estate transfer tax does not apply.
• The 3% should be deemed definitive; contrariwise, the tax will be assessed at 10% of the gain and the 3% of the advanced payment will be credited.
• If the 10% of the profit is higher than the 3% gain tax, the seller can opt to consider the 3% as the definite tax. If the 10% of the profit is lower than the 3% of the gain tax, the seller can request a reimbursement for the difference.
• If the person who sells the property is considered a real estate dealer, and so is a taxpayer’s ordinary business activities, the gains are subject to the corporate tax rate.

Property Taxes

The tax rate is determined based on the value of the property, with a progressive combined structure.

In the case of exemption for Family Assets or Main Home, the percentages are:

Land Tax (Impuesto sobre la Tierra): In addition to the Property tax, also the Land Tax is applied to all the properties. The tax rate is variable, based on the size and location of the land. Like property tax, land tax is paid annually to the municipality where the land is situated.

Tax exoneration: All the new buildings and apartments have a 20-year Property Tax exoneration starting from the year of the building.

Value Added Tax (VAT or ITBMS)

Panama imposes a value-added tax (VAT) on the sale of goods and services. The standard VAT rate in Panama is 7%. The VAT in Panama is also called ITBMS (Impuesto de Transferencia de Bienes Muebles y Prestación de Servicios).

Net wealth/worth taxes:

There are no net wealth/worth taxes in Panama.

Inheritance and gift taxes

These kinds of taxes do not apply in Panama

Corporate Taxes in Panama: An Overview

Panama's corporate tax landscape offers a mix of incentives and obligations that warrant careful consideration. Income derived from Panamanian sources is subject to corporate tax, making it essential for businesses to accurately delineate their revenue streams.

Corporate Income Tax

Income derived from a Panamanian source is subject to taxation whether it is received by a resident or non-resident entity.

The corporate income tax rate in Panama is flat, set at 25% of taxable income. While this rate may appear relatively high compared to some jurisdictions, various deductions and exemptions are available to mitigate tax liabilities. Businesses can claim deductions for expenses incurred in the generation of income, including rent, utilities, depreciation of assets, etc.

You should also consider the Local Municipal Tax, which is based on the gross income granted by the business, by the way, this tax normally does not exceed $2000.

Corporate - Capital Gain Tax

The sale of fixed assets is subject to 10% of the capital gain, and there is no WHT. Similar to the personal tax, a 2% real estate transfer tax plus a 3% gain tax advance payment applies for the transfer of properties. Different rates apply for new properties and if the core business of the corporation is the sale of real estate. The sale of securities is subject to a 5% Withholding tax, and a 10% capital gain tax.

Corporate - Withholding Tax

In case the recipient is a foreign corporation, these taxes will apply:

• A tax between 5% and 20% applies based on income determination. Dividends are subject to a 10% dividend tax when paid out of domestic profits; the rate drops to 5% when the dividends are paid out of foreign-source or export profits, or out of certain income (e.g. interest from government bonds and capital gains derived from the sale of such bonds and interest on bank deposits)
• Interest is subject to a 12.5% withholding tax.
• Royalties are subject to a 12.5% withholding tax.
• Capital Gains on the sale or transfer of capital or securities economically invested in Panama, either directly or indirectly, are subject to a fixed rate of tax of 10%.

In the case of treaties, special rules are applicable in order to avoid double taxation, and depending on the recipient's residency the % of taxes can vary.

Payroll taxes

Education insurance tax is made of 1.25% for employees and 1.50% for employers, on the wages and salaries issued. The maximum limit of taxable income is inexistent. ù Professional risk tax is a regular taxing obligation for employers. The tax range is from 0.33% to 6.25% according to the type of industry.

The amount of Social Security tax charged on wages or other compensation paid, including compensation in kind, is 9.75% for employees and 12.25% for employers. The taxable amount is not bounded by a particular maximum limit.

Other types of taxes may apply to both Corporate or natural persons.

Conclusion:

Navigating corporate taxes in Panama involves understanding the nuances of the country's tax laws and leveraging available incentives while ensuring compliance with reporting requirements. Despite its relatively straightforward tax regime, businesses must carefully manage their tax affairs to optimize their financial position and minimize tax liabilities.

List of remarkable tax advisors in Panama

• Candanedo y Candanedo
• K&B
• Chambonett y Asociados
• SARaccounting
• Hurtado & Asociados
• CPAtaxesconsulting
• William & Asociados
• CCA

Sources & Foot Notes

[1] PwC Tax Summaries - Taxes on Personal Income in Panama
[2] Kraemer & Kraemer - Personal Taxes in Panama
[3] Dirección General de Ingresos (DGI) - Panama
[4] PwC Tax Summaries - Taxes on Corporate Income in Panama
[5] Pardini & Asociados - Panama Double Tax Treaties