- Investment Basics
Foreign exchange control – The state owned bank, Banco Nacional de Panama, is responsible for supplying USD from the US Federal Reserve Bank of New York under a treaty signed in 1904.
Accounting principles/financial statements – Banks, insurance and reinsurance companies and companies registered with the National Securities Commission as issuers or holding a license granted by the Commission are required to file audited financial statements.
Business entities – These are the corporation, limited liability company, limited liability partnership, general partnership, joint venture and branch of a foreign corporation.
2. Corporate taxation
Residence – A company is resident if it is incorporated under Panamanian law or if its central management and control is exercised in Panama.
The following factors are taken into account in determining whether a legal entity is resident in Panama: (a) BOD meetings are carried out in Panama, (b) whether business activities are carried out from a headquarters located in Panama, regardless of the source of income. For determining tax residence purposes, and if the members board of directors have delegated their management or administrative to third parties, the delegation is disregarded if the persons exercising such responsibilities are in Panama at the time of exercise.
Basis – Panama operates a territorial tax system, under which residents and non-residents are taxed only on Panama-source income. Income that is not derived from Panama is not subject to tax.
Taxable income – It includes all income derived from business activities in Panama, less expenses incurred wholly and exclusively in the production of assessable income or the conservation of its source.
Taxation of dividends – Companies holding a notice of operations, or otherwise carrying out business in Panama, must withhold tax at a rate of 10% on dividends distributed out of domestic profits (20% in the case of bearer shares) and 5% on dividends distributed out of foreign-source profits or export profits.
The subsequent distribution of dividends will not be taxed if tax already has been withheld at the 10% or 5% rate. If a corporation does not declare dividends in a particular year, it must pay a “retained earning tax”, which is a deemed dividend tax, amounting to 10% of 40% of its after-tax income.
Capital Gains – Are derived from the sale of securities and negotiable instruments are subject to a 10% tax. The purchaser must withhold 5% of the sales price as an advance payment of income tax and remit that amount to the tax authorities. Gains from the sale or transfer of real property are considered capital gains.
Losses – They may be carried forward for five years, with a maximum of 20% of losses deducted per year. The deduction losses may not exceed 50% of taxable income in any year and carryback is not permitted.
Rate – Tax liability is assessed at the of a 25% flat rate on net income. A 1.17% rate on gross taxable income is the alternative minimum tax.
Surtax – No
Alternative minimum tax (CAIR) – This is assessed at a general rate of 1.17% on gross taxable income. A taxpayer can request that the CAIR not be applied when it has net operating losses or where the effective tax rate is higher than the standard 25% rate. Companies whose taxable revenue is less than USD 1.5 million are not required to calculate the CAIR.
Foreign tax credit – There is not unilateral foreign tax credit, but may be granted, however, under Panama’s tax treaties.
Incentives – A variety of tax incentives are granted to encourage investment in new projects and activities relating to tourist facilities, including an exemption from income tax, property tax, import taxes and other taxes, depending on the amount of investment and location. The incentives will expire between 2016 and 2020.
- Withholding tax
Dividends – Are paid to a non-resident on nominal shares are subject to a 5% or 10% withholding tax, depending on the source of the dividends; the rate is 20% for bearer shares. The withholding tax rate applicable to the distribution of dividends from real estate investment companies is 10%.
Interest – Interest paid to a non-resident is subject to a 12.5% withholding tax (50% of the interest is subject to the general 25% corporate tax rate).
Royalties – Royalty payments made to a non-resident are subject to a 12.5% withholding tax (50% of the general rate 25% rage) if the payments benefit a Panamanian resident or if the expense has been deducted in Panama.
Branch remittance tax – A branch of a foreign corporation must pay 10% of its after-tax income as a dividend tax, in addition to the corporate income tax.
Technical service fees – Fees for technical services paid to a non-resident are subject to a 12.5% withholding tax (50% of the general 25% rate).
- Anti-avoidance rules
Transfer pricing – Transactions between related companies must be valued according to the arm’s length principle, applying the standards in the OECD guidelines.
Thin capitalization – No
Controlled foreign companies – No
- Other taxes on corporations
Capital duty – No
Payroll tax – In addition to social security contributions, the employer must pay educational insurance tax at a rate of 1.5% of an employee’s remuneration.
Real property tax – A real estate tax is levied on Panamanian-situs real property, at rates ranging from 1.75% to 2.1%.
Social security – The employer must make social security contributions in an amount equal to 13.5% of the total remuneration of the employee and must withhold 9.75% on the employee’s behalf and remit it to the authorities.
Stamp duty – Stamp duty generally is 0.001 per PAB or fraction thereof, and is applicable to the issuance of certain documents.
Transfer tax – Transfers or real property are subject to tax at a rate of 2% of the greater of the value in the deed of transfer or the cadastral value on the date of transfer.
Other – All commercial and industrial businesses must have a notice of operations to engage in business, unless they are specifically exempt.
- Compliance for corporations
Tax year – The calendar year generally is used, although the taxpayer can request a special 12 month fiscal year in certain cases.
Consolidated returns – Consolidated returns are not permitted; each company must file a separate tax return.
Filing requirements – Companies must file a tax return within 90 days after the end of the fiscal year, although a one-month extension may be obtained upon request. Three advance payments of tax are required in June, September and December, with a final payment of tax due at the time the annual return is filed.
Penalties – Interest and surcharges are levied on late payments. Penalties may be imposed for late filing of the annual income tax return.
Rulings – No
- Personal Taxation
Basis – Both residents and non-residents are taxed on both Panama source incomes.
Residence – An individual is resident in Panama if he/she is in the country for more than 183 days in a calendar year or has established permanent residence in Panama.
Filing status – Joint tax returns are permitted.
Taxable income – Individuals are taxed on wages and salaries, income from the carrying on of a commercial or an agricultural business and investment income.
Capital gains – Are derived from the sale of securities and negotiable instruments are subject to a 10% tax. Gains from the sale or transfer of real property are considered capital gains. If the transaction is part of the taxpayer’s ordinary business, the gains are subject to the corporate tax rate, otherwise are taxed at a reduced rate of 10%.
- Other taxes on individuals
Capital Duty – No
Stamp duty – Generally is 0.001 per PAB or fraction thereof, and is applicable to the issuance of certain documents.
Capital acquisitions tax – No
Real property tax – If located in Panama is assessed by the government and tax is levied at rates ranging from 1.75% to 2.15.
Inheritance/Estate tax – No
Net wealth/net worth tax – No
Social security – An employee is required to make social security contributions in an amount equal to 9.75% of his/her remuneration. Independent contractors and professionals also must contribute 13.5% of their fees.
- Compliance for individuals
Tax Year – Calendar year
Filing and payment – Employment income is taxed by withholding individuals with only one salary as their source of income are not required to file an income tax return. Returns must be filed by 15 March following the end of the tax year, but this deadline may be extended by one month upon request.
Penalties – Interest and surcharges are charged on the late filing and late payment of tax.
Taxable transactions – VAT is levied on the invoice value of the sale, lease or transfer of goods or services, except for intangibles.
Rate – The standard rate is 7% with special rates of 10% for accommodations and alcohol and 15% for tobacco.
Registration – Is compulsory for businesses with monthly turnover exceeding USD 3,000 or annual turnover of USD 36,000.
Filing and payment – VAT returns must be filed monthly, except for professionals who may file quarterly returns.
Panama has 15 tax treaties in force and nine tax information exchange agreements have been signed.