New Panama Property Tax Withholding Law Goes into effect January, 2019




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Panama’s Ministry of Finance issued a decree requiring real property lenders to withhold funds on mortgages to pay for the property tax. The new decree takes effect on January 1, 2019.  In addition, another decree around the same time provides benefits to primary residences’ property tax.

Property Tax Law

Law 66 of 2017 lowered Panama property tax rates in general, which in all cases continue having a “Progressive Combined Tax” (see table below). The law also provided an exemption of the first US$120,000 of the property’s registered value if the property qualifies as “Tributary Family Patrimony” (TFP) or “Primary Residence” (PR).

For properties that qualify as TFP or PR, the property tax for values from US$120,001 to $250,000 pay a property tax rate of 0.5%. Properties values of $250,001 and above pay a 0.7% rate.

Definition of Tributary Family Patrimony

Tributary Family Patrimony, or in Spanish, “Patrimonio Familiar Tributario” (PFT) is a property that is destined for permanent habitation family use by its owner(s), in accordance with the article 476 of the Family Code.

Definition of Primary Residence

Primary Residence, or in Spanish, “Vivienda Principal” (VP) is a property that is destined for permanent residential habitation use by its owner (whether it is a natural person or juridical person), and the property does not constitute a Tributary Family Patrimony.

New Executive Decrees

Executive Decree 363: On December 4, 2018 Executive Decree 363 established the requirements and process for new primary residence property tax rates. This is explained below.

Executive Decree 362 – Withholding of Property Taxes: Executive Decree 362 regulates the amount of property tax withholding and set up the process of collections.

The collection of property taxes becomes easier for the government with the new withholding requirements. In lieu of the reduced property tax rates, the government seeks to ensure all property taxes be collected in advance of the annual due date.

Property Tax FAQs

What Properties are Subject to the Withholding of Property Taxes?

Banks and other mortgage lenders will set aside part of the monthly mortgage payments for the withholding of property taxes. However, an exclusion exists for the principal family residence and other housing already exempt from the property tax. Therefore, the real properties subject to the withholding of property taxes include:

  • Second homes;
  • Raw land;
  • Commercial properties; and
  • Industrial properties.

Who is Responsible for Paying the Property Tax?

Executive Decree 362 makes the mortgage loan debtor responsible for paying the property tax. Even if the debtor does not own the property, by virtue of taking out a loan to pay for the property, the debtor bears sole responsibility.

How will the Government determine if the Lender is Withholding?

Every withholding agent (banks and other lenders) must file information with the government tax agency, Directorate General of Revenue (DGI), regarding all financing for the real properties subject to the withholding.

Staring January 1, 2019 banks and lenders will report on every new financing along with all canceled loans and those transferred to another lender. This will maintain constant updates regarding the real properties subject to withholding. All withholding of property taxes will be paid into the National Treasury.

What Type of Information does the Debtor Receive?

The banks (or lender) will inform their customers (the debtors) the amount withheld including interest and fees. Debits on existing balances of the loans paid by the debtor’s accounts will be made and designated as withholding tax on the customer’s statements.

If the Debtor does not have a Designated Account

The DGI must be informed by the lenders of any debtors not having designated accounts for loan payments with the bank or lender. If withholding cannot be performed because no designated account exits, the Treasury may ask the debtor to make the payments directly. If that fails, the DGI can follow up with collection.

Non-bank financial institutions and cooperatives will designate the withholding of funds for these purposes in their funding letter for the real property.

How often does Withholding Occur?

Banks can do them in either 1, 3, or 12 installments per year as agreed upon with their customers. However, if the withholding tax is annually taking place within the first two months of the year, the withholding will be 90% of the total property tax. The law provides a 10% discount for those paying the entire tax year within the first two months.

Withholding occurring three times per year will coincide with the current tax payments. The first payment by April 30, the second by August 31, and the final by December 31.

What if Claims are made?

DGI has the full authority to resolve any disputes and claims regarding the property tax assessment. The bank or lender has no jurisdiction to resolve any claims.

Who Pays for the Bank’s Costs?

Banks and lenders must pay for the accounting time and computer programming for the withholding system. However, the government provides a tax credit to compensate for these additional costs. Every year a tax credit of 1% of the total amounts withheld will be applied.

Primary Residence Property Tax

The government now provides benefits to the owners of their primary residence in Panama. The benefit applies to a family or a single person’s primary residence.  The benefit exonerates the first $120,000 of the primary residence’s value from property taxation. While the decree distinguishes between a family and a single person’s primary residence, the benefits apply equally to both.

A family’s primary residence includes married couples, with or without children, or single parents. In the case of two different married couples living in the same home, the benefits only apply to the primary residence so the $120,000 exoneration can only be used by the two married couples for the same property.

How does a Person or Family Apply for the Primary Residence Benefits?

The DGI will be issuing a special form along with the required documents to support it. While the decree comes into force on January 1, 2019, the DGI can receive the forms starting on December 4th. Since the first property tax payment is due in April, the form can be filed before that date. If there is no response from the DGI within 3 months from filing the form, it is understood that the form was approved. However, if the DGI later determines the form was fraudulent, the status may be revoked.

Horizontal Properties (Condominiums) Property Tax Exemption

Horizontal Properties (PH) having an existing property tax exemption will continue to receive the benefits of that exemption. However, if the owner files the form requesting primary residence status, the remaining years of property tax exoneration will be lost. The owner will then be subject to the normal primary residence property tax rates.

Future Valuations of the Property

Upon filing the primary residency form it is not required to update the property’s value. However, the property tax is based upon the higher value between what appears in the DGI records and in the Public Registry showing the changing value during the history of a property’s ownership transfers.

Property Tax Rates for Primary Residency

The property tax rates for a primary residency, as of 1 January 2019 are:

PROPERTY VALUE PROPERTY TAX RATE PROPERTY TAX
Up To US$120,000 Exempt (0%) -US$0-
US$120,001 – US$700,000 0.5% US$2,900
US$700,001 onwards 0.7% ?

 

Example of a Primary Residency Property with a registered value of US$500,000

PROPERTY VALUE PROPERTY TAX RATE PROPERTY TAX
First US$120,000 Exempt (0%) US$0
US$380,000 (remaining) 0.5% US$1,900
TOTAL: US$500,000 TOTAL PROPERTY TAX: US$1,900


Note:
The bank or financial institution holding the mortgage on the primary residence will not withhold the property taxes. The property owner pays the property taxes directly to the DGI when they become due.

Property Tax Rates for All Other Properties (not Primary Residency)

The property tax rates for all other properties, as of 1 January 2019 are:

PROPERTY VALUE PROPERTY TAX RATE PROPERTY TAX
Up To US$30,000 Exempt (0%) -US$0-
US$30,001 to US$250,000 0.6% US$1,320
US$250,001 to US$500,000 0.8% US$2000
US$500,001 onwards 1% ?

 

Example of a Property with a registered value of US$500,000

PROPERTY VALUE PROPERTY TAX RATE PROPERTY TAX
First US$30,000 Exempt (0%) US$0
US$220,000 0.6% US$1,320
US$250,000 0.8% US$2000
TOTAL: US$500,000 TOTAL PROPERTY TAX: US$3,320

 

Current Property Tax Exemptions for New Construction

As per law 28 of 2012, any new Residential construction with construction permits issued from 2012 to the 31st of December 2018, may benefit from the following tax exemptions (on the construction improvements value only, not on the registered land value):

CONSTRUCTION VALUE TAX EXEMPTION
Up to US$120,000 20 years
US$120,001 to US$300,000 10 years
US$300,001 onwards 5 years

 

For all other Types of construction (commercial, industrial, etc) with any construction value, they receive a benefit of a 10 year tax exemption on the construction value (not on the registered land value).

The above mentioned tax exemptions on construction / improvements granted will continue their normal term, as long as the property owner does not register the property as a Tributary Family Patrimony or Primary Residence.

New Formula for New Construction Tax Exemptions

As per Article 4 of the new law 66 of 2017, all new residential construction that is the purchasers first residence and is constituted as Tributary Family Patrimony or Primary Residency, and the registered cadastral value is between US$120,000 to US$300,000, shall be exempt from property taxes for a period of 3 years, as of the date of the issuance of the occupation permit or the date of inscription in the Public Registry, whatever happens first.

As of the 1st of January 2019, as per Article 764-A of Law 66, 2017, all properties with a value that does not exceed US$120,000 (including land and construction improvements), and that are registered as Tributary Family Patrimony or Primary Residency, will be exempt from property taxes.

Retired or Pensioner Property Tax Benefits

Any person who is retired or pensioned or is of legal age for retirement (57 years old for women and 62 years old for men) may incorporate their domicile (property) as Tributary Family Patrimony or Primary Residency.

About Manoj Chatlani


Manoj Chatlani is a Senior Partner at POLS Attorneys, a full-service law firm in Panama City, Panama. Specializing in offshore services, including asset protection, estate planning, offshore banking, and offshore corporations, as well as Panama immigration and real estate transactions, POLS Attorneys offers clients a streamlined solution to all their Panama legal needs. Manoj is a Panamanian lawyer and holds a law degree from USMA and earned a Masters in Communication Law and Panama Tax law.

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