Corporate Income Tax
The only income which is taxed is derived from within Panama. The sale of products or services to people, entities, or companies in Panama are considered as “Panama source income” and taxed. The sales of products or services to persons, entities, or companies located outside of Panama are not taxed. Income derived from the leasing or sale of Panama real estate is taxed. Commissions and interest earned from loans financing business in Panama is taxed. Call centers have a special law exempting their earnings from income tax. Trading companies which invoice products which never enter Panama are not taxed. Companies in Panama who facilitate business activities conducted outside of Panama are not taxed.
Interest Income Exempt: Interest from savings and CD bank accounts from licensed Panama banks are exempt. Interest from debt securities registered with the National Securities Commission and listed on the stock exchange are exempt. Non-resident financial institutions and lenders who receive interest and commissions paid by Panama banks or for the construction of public housing are exempt from taxes.
Income Tax: Taxable income is derived from subtracting foreign source income and exempt income from the gross income.
Deductions: Business expenses used to generate taxable income or to preserve the business are considered as deductible from income taxes and must be documented and are only allowed in the same year they occurred.
Income Tax Rates: Starting in 2010, corporate tax rates were lowered from 30% to 27.5% and further reduced in 2011 to 25%. Companies involved in telecommunications, banking, power generation, manufacturing cement, casino and gambling activities, and insurance or reinsurance will continue to pay the 30% rate until 2012 when the rate lowers to 27.5% and in 2014 is lowered to 25%. If the government owns 40% or more of a company’s capital will continue to pay the 30% rate. Companies involved in agriculture and small businesses have a special lower income tax rate.
Calculation: The traditional calculation of income tax is to simply multiply the net taxable income by the tax rate. Corporations with taxable income exceeding $1.5 Million use a different calculation. Their rate is the higher between the traditional calculation and multiplying the taxable income by 4.67%.
Monthly Payments: Starting in 2011, all companies and entities must pay their estimated income tax by the 15th of every month equal to 1% of the total taxable income accumulated the prior month. This is called “Monthly Income Tax Advance” or “MITA”. Companies engaged in gasoline, oil products, pharmaceuticals, food, and medical products pay a different MITA. At the end of the tax year, the company determines the total income tax and deducts the total MITA paid. If the total MITA paid is larger than the actual tax owed, the company can obtain a tax credit to be used towards future MITA’s.
Losses: Losses can be carried forward 5 years as long as the loss doesn’t exceed 20% of the total loss in any year. Certain regulated industries such as mining have special loss schedules.
Annual Returns: Income tax returns must be filed by companies within 3 months after the fiscal year ends. While most company tax year is the calendar year, companies can petition for approval of a different fiscal year.
Individual Income Tax
Individuals who earn less than $11,000 per year pay no income tax. Those earning between $11,000 and $50,000 pay a 15% tax rate while those earning $50,000 or more pay a 25% rate.
Deductions for married couples are $800 with their joint tax return. Mortgage interest paid on the primary home can be deducted up to $15,000 yearly. Student loans interest payments for the taxpayer’s or dependents’ education in Panama are fully deductible. Health insurance premiums are deductible. Contributions to private pension plans not exceeding 10% of the individual’s gross yearly income to a maximum of $15,000 yearly are deductible.
Foreign Residents: Foreigners who reside in Panama for more than 183 days per year and earn income in Panama will be taxed at the same rate as nationals.
Annual Returns: Individuals must file their annual income tax return before March 15th. Individuals whose sole source of income is a single salary are exempt for having to file an income tax return as the employer withholds part of each payment for taxes.
Social Security Tax
Employers and employees pay social security taxes when the employee is paid. Currently, employers pay 11.75% and employees pay 8% and this percentage will increase until 2013 when the employer will pay 12.25% and the employee will pay 9.75%. Employers are required to withhold a percentage from each employee’s pay for income tax and for social security tax. Failure to withhold and make payments to the Social Security Office will result in surcharges, fins, and even criminal prosecution. There is also a professional risk premium paid to the Social Security Office corresponding to a perceived risk the work entails which is withheld from an employee’s salary.
Educational Tax: An additional 1.25% of an employee’s wages are withheld as an “educational tax” while the employer pays 1.5%.
Non-Residents: Employers are required to withhold income taxes from non-residents who earn Panama source income. The Income Tax rate for individuals is used without deductions. However, if the non-resident earns income outside of Panama, but the Panama employer wants to deduct these wages from his income tax, the non-resident will only have half of the total amount paid subject to the withholding tax. The employer is required to pay the tax authorities the withheld amounts within 10 days following the payment.
Capital Gains Tax
The capital gains tax rate differs by the type of property being transferred. Only properties located in Panama are subject to the capital gains tax. The standard rate is 10% of the realized gain from the sale.
Transfer of shares of a Panama entity that obtains Panama source income requires the buyer to withhold 5% of the purchase price for the tax officials within 10 days. This is considered as an advance of the seller’s capital gains tax. The seller can declare the 5% to be the total capital gains tax or if the amount exceeds the normal 10% rate of the actual gain, the seller can claim a tax credit for the excess amount when the annual tax return is filed. A Panamanian entity whose exclusive income is obtained from non-Panama sources (outside of Panama) is exempt from the capital gains tax.
Transfer of shares from a Panama entity that are registered with the National Securities Commission through a licensed stock exchange are exempt from paying the capital gains tax even if the entity obtains Panama source income. Therefore, selling shares through the stock exchange is exempt from the capital gains tax. Mergers and reorganization of Panama entities registered with the National Securities Commission and listed on the stock exchange involving transfer of shares are also exempt from the capital gains tax if they meet specific requirements. Tender offers as defined by the securities regulations are not exempt and the purchaser must withhold 5% of the total purchase price as the capital gains tax.
Real Estate: Panama real property transfers involving persons considered to be in the business of selling and/or buying real estate are subject to the capital gains tax. Such persons are considered real estate dealers who sell 10 or more properties within a year. Their capital gains tax rate is 10% of the realized gain from the sale. Prior to the recording of the deed, the seller is required to pay the tax officials 3% of the larger amount between the sales price and the recorded property value as an advance of the capital gains tax. Similar to the sale of shares, the seller can claim this payment was in excess of the actual capital gains tax on the realized gain and receive a tax credit on the difference. This tax credit can be used to pay other taxes, be converted into cash by the tax officials, or transferred to 3rd parties. Starting July 1, 2010, the capital gains tax rate will be reduced to 3.75% of the larger amount of the sales price or the registered value of the property.
Dividends Tax
There is a 10% dividends tax made by entities that have a commercial operations permit and have Panama source income. The dividend tax is only 5% if the earnings come from foreign sources, is export related, or other specific laws exempting the income. Companies located in the free trade zones pay a 5% dividend tax for all income. The entity making the dividend withholds the tax and pays the tax authorities. There is no income tax on those receiving dividends. Dividends paid to holders of bearer shares must pay a 20% dividend tax.
Retained Earnings Tax: If no dividends are paid or paid dividends are less than 40% of the current Panama sources after tax earnings; there is a 10% tax for the difference between the 40% and what was paid. If no dividends are paid or paid dividends are less than 20% of foreign source income or specific exempt income, there is a 10% tax for the difference between the 20% and what was paid. This tax is known as the “complimentary tax” (impuesto complementario”) is credited towards future dividends and can be seen as an advance of the dividend tax in relation to the 40% or 20% of the current earnings. Registered subsidiaries of foreign corporations pay this tax on their total current earnings without regard if any distribution was made.
Commercial Permit Tax
All persons and entities engaging in business activities within the Republic of Panama must obtain a commercial operation permit (“Aviso de Operacion”) which is issued by the Ministry of Commerce and Industry. The annual tax for the permit equals 2% of the company’s net worth with a maximum payment of $60,000. Companies located in special economic or development zones within free trade zones pay a rate of 1% at a maximum payment of $50,000.
VAT
Value added tax is known in Spanish as the “ITBMS” or sales tax in other countries. This tax applies to imported goods, products sold or services rendered in Panama. The importer, seller, or service provider pays this tax whereby most simply add this tax to be paid by the consumer. Beginning July 1, 2010 the ITBMS increased from 5% to 7%. Higher rates exist for the sale of alcoholic drinks (10%), tobacco products (15%), and specific services such as housing services (10%). Exceptions to paying this tax include free trade zone transactions, power generation & distribution services, cargo and passenger transportation by sea, air, or land. Most businesses pay the tax monthly.
Importing Products
Products imported into Panama which are not exempt by law or by international trade agreements are subject to import tariffs and the ITBMS tax. The import tariffs differ by products and are set forth in a tariff line system.
Real Estate Taxes
Property Tax applies to the value of the land and all registered improvements. The standard property tax rate begins at a value of $30,000 up to $50,000 having a rate of 1.75% while the rate is 1.95% between $50,000 and $75,000 with everything over $75,000 at a 2.1% rate.
There is another “alternative progressive” rate which applies to existing properties in good standing where the taxpayer submits a sworn statement for a new value based on a certified appraisal company. Properties with occupancy permits issued before July 1, 2012 shall be taxed at this rate as long as the improvements were filed at the Public Registry by July 1, 2011. New construction with building permits issued after July 1, 2010 with improvements registered within one year after the issuance of the occupancy permit. Additionally, the land value must be updated if it has been more than 5 years from the time the improvements were registered. This rate is at 0% up to $30,000 for the land and improvement value and 0.75% between $30,000 up to $100,000 and from $100,000 the rate is 1%. Plots of land where condominium buildings sit incorporated as “horizontal properties” with a condo owner’s proportionate value in the land not exceeding $30,000 will be at a 0% rate. Otherwise the land will be taxed at a 1% rate.
Real Property Transfer Tax has a 2% of the greater of the total value of the sale or the registered value plus the value of the improvements plus 5% for each year since obtaining the property and the sale.
City Taxes
Municipalities can levy taxes on their own, but are not considerable.
Other Taxes
Stamp taxes can be applied based on the value of certain documents, such as contracts. Panama banks and some financial institutions pay a yearly tax based on the type of institution or total assets. There is a 5% tax applied to the issuance of specific insurance policies.
Regulated industries such as free & paid television, telecommunications, power generation, banks, insurance and reinsurance companies, and securities companies pay a yearly regulatory fee called “tasas” in an amount regulated by law.
Tax Incentives
Certain industries receive tax saving incentives to encourage foreign investors such as agriculture, tourism, mining, exporting non-traditional goods, power generation, construction and operating government concessions, processing and storing oil related products, maritime, manufacturing, and reforestation.
Anyone who invests $2 Million or more in specific activities and meets certain requirements can apply to the Ministry of Commerce and Industries to have the investment included in the Registry of Investments. Inclusion will allow the investor to have 10 years of customs, tax and labor stability.
Avoiding Double Taxation
Panama continues to negotiate and sign tax treaties with other countries to avoid their citizens investing in Panama to face income taxes from both countries on their Panama source income. Basically, a double taxation treaty allows full credit of the investor’s income taxes paid to Panama towards any income taxes owed back at home based upon the Panama source income.
