TAXES IN PANAMA

To understand taxes in Panama, the national taxes for Panama (according to Article 683 of the Fiscal Code and followings) are established as follows:

1. Income Tax
2. Goods and Services Transfer Tax
3. Property Tax
4. Property Transfer Tax (ITBI)
5. Tax on Commercial and Industrial Patents
6. Stamps
7. Banks, Financial Institutions and Exchange Offices
8. Soft Drinks, Alcoholic Beverages and Cigarettes (ISC)
9. Fuel Consumptions and Petroleum Derivatives
10. Ships
11. Insurance
12. Import

INCOME TAX

In Panama, taxable income, produced from Panamanian sources is taxed as long as it is executed inside the Panamanian Territory.  In Panama the principle of source is practiced.  A rate or aliquot of the tax is fixed by the Law on taxable income which is produced in the source (territorial source), including in some cases, income tax produced outside the country by natural and juridical persons domiciled abroad (Source).

INCOME FROM PANAMANIAN SOURCES

Taxable income, is the income produced in Panamanian Territory, without taking into consideration the nationality, domicile or residence of the beneficiary.  It is considered where the contract was held, the place from which it is paid or received and from whomever is the payer of the same, among which are those generated by Civil activities (careers), commercial activities (jobs), industrial activities (any service done within Panama) and similar activities.

EXEMPT OR NON-TAXABLE INCOME

Exempt or non-taxable income has been catalogued as exempt income, and therefore, not taxed by the income tax, which we include and quote as follows:

a. From international maritime commerce of national merchant vessels legally registered in Panama, even when the transportation contracts are held in the country or that the transportation of merchandise is carried out from abroad to Panama or from Panama to abroad;

b. From embarking or disembarking passengers or both, on boats at Panamanian ports, who are making crossing in international waters or through the Panama Canal; as well as to transport by air the passengers who embark and disembark here from such boats to or from Panama;

c. From the disposal of vessels or aircrafts registered in the national Merchant marine or of Panamanian Registry and which are engaged in the international commerce;

d. From the exploitation of vessels registered in foreign countries, if in the country where said vessels or aircrafts are registered, the principle or reciprocity governs which regards to the encumbrance of the income obtained in said country by vessels registered in the Panamanian merchant marine or aircrafts of Panamanian registry;

e. Form the exploitation of vessels or aircrafts of any nationality, by foreign persons residing or not in national territory, provided that the country of nationality of the natural persons or the country by which the juridical person was constituted , grants an exemption equivalent to the natural persons of Panamanian nationality or to the juridical persons constituted pursuant to the Law of the Republic of Panama, or to the persons who have fixed their domicile in the Republic of Panama in the view of the principle of reciprocity;

f. From interests that are acknowledged or paid on the deposits of savings accounts, either time deposit or of any other kind, that are maintain in the banking institutions established in the Republic of Panama, either as local or foreign deposits.  Also, interests and commissions shall be exonerated that such banking institutions acknowledge or pay to banks or international financial institutions established aboard, for loans, bank acceptances and other funding instruments of financial resources even if the proceeds of such resources are used by the loaning bank in the generation of productive assets, in accordance with the definition provided in Article 3 of Decree Law No. 9 of 1998.  In no events hall this exoneration be affected by the fact that the sum the bank established in Panama remits or credits directly or through its main office abroad, to a bank or financial institution established abroad, even when the latter have a branch established in the Republic of Panama.

g. From interest received or earned from loans granted to finance the constructions of houses of social interest, as certified in each case by the Ministry of Housing.  The Ministry of Economic and Finances and the Ministry of Housing shall approve the loan agreement with the purpose to verify that the interests convened have been reduced in the proportion of the exonerated tax and may request from the interested parties, those documents they may consider necessary to grant the certification;

h. From interest received or earned by  national or foreign banks, coming from loans granted to the farmers of the Republic of Panama, during the planning cycle, provided that the proceeds from these loans are used in the production of rice, corn, beans and sorghum and the same be convened with an annual interest not greater than eight percent;

i. From interests, commissions and other expenses paid by the National Government , autonomous entities, municipalities, government companies and other State entities, to banks or financial entities, due to loans contracted with these;

j. Form interest and commissions that the banks or financial or credit institutions may receive, by reason of loans or other credit facilities, destined to the agricultural or agro industrial sector, provided that the loans or other credit facilities comply with the requirements established by law.  On order to apply this article, the Superintendence of Banks shall determine the difference on the market reference rate;

k. From sums received or earned by persons abroad as royalties coming from persons situated in the Colon Free Zone.

l. From dividends and other profits distributed to the shareholders or partners of the juridical persons referred to an Article 699-a of the Fiscal Code;

m. From sums for bonuses received by the public employees that adhere to the voluntary retirement plan referred on paragraph x) of article 708 of the Fiscal Code;

n. From sums received due to the termination of a work relationship for advance notice, seniority bonus, indemnity, bonus and other benefits contemplated in collective bargaining agreements and individual labor contracts up to the sum of $5,ooo, plus the results from paragraph number 2 J) of article 701 of the Fiscal Code.  Also, the sums received by the employee from the retirement and pension funds refer to in law 10 of 1993 shall be exempted, provided that the termination of the labor relationship is due to retirement or withdrawal because of an indefinite license of the employee.  The sums to be received by the beneficiaries  from retirement and pension funds and other benefits pursuant to law 10 of 1993, shall be at the moment in which the periodic payments of the funds begin to be received in accordance with the retirement plan subscribed;

o. From rentals coming from international leasing contracts of merchants vessels and aircrafts engaged in international transportation;

p. From prizes paid by Government lotteries and in bets and prizes in activities exploited by the Government;

q. From prizes obtained in games of luck carried out by non-profit entities duly authorized by the Gaming Control Board;

r. From the prizes obtained from contests and events carried out with advertising purposes;

s. From sums received for indemnities for accidents at work and insurance in general, alimony and benefits paid by the Social Security due to the risk the latter may assume;

t. From assets received by way of inheritance, legacy or donations;

u. From the title benefits received from the employees or former employees, issued according to Cabinet Decree No. 50 of November 25th 1992;

v. From the commercialization of products extracted from forest plantations up to the final cut of the plantation, provided the properties are registered in the Forest Registry of the National Environmental Authority and the plantation had been established not later than February 3rd 2018, as established by Article 4th of Law 24 of 1992;

w. From all the other income exonerated by special Law.

INCOME FROM FOREIGNS SOURCES

The income coming from foreign sources, are not subject to the Income Tax, for example:

a. To invoice the sale of merchandise or products from an office established in Panama for a sum greater than the one by which said merchandise or products have been invoiced against the office established in Panama, provided the merchandise or products are moved solely abroad.  For these purposes, those goods in transit that arrive in the country to continue abroad, with bill of lading documents indicating they are consigned to persons not residing in the Republic and those goods that arrive in the country consigned to persons who are residents of the Republic with bill of lading documents indicating that these goods shall be sent abroad, immediately after they have arrived;

b. To direct from an office established in Panama, transactions to be perfected, accomplished or to take effect abroad.  This provision shall also be applied to the holders of special temporary visitor visas who receive their income directly  from their main offices located abroad even though they live in the country to carry out the activities to which this paragraph refers to;

c. To distribute dividends or participation quotas from juridical persons when such dividends or participation quotas come from income not produced within the territory of the Republic of Panama, including the income coming from the previously mentioned activities.

d. Service rendered outside the territory of the Republic which are not economically related with the taxable activities that the taxpayer carries out within the national territory;

e. Interests, financial commissions and other similar items obtained by natural or juridical persons, regardless of their place of domicile or constitution, coming from loans, deposits of money or from any other financial operations carried out with borrowers domiciled outside the country, and as long as the service and the use of the money is carried out outside of Panama, even though the reimbursement of the capital and interest is made in the country;

f. Interest, financial commissions and other similar items, coming from loans, liens of credit or any other type of financial operation carried out by juridical persons, regardless of their place of domicile or constitution, including life annuities, retirement or sickness benefits or other income which cover similar characteristics conferred, acknowledged or granted abroad, as long as these persons exclusively receive or earn income produced within the territory of the Republic, including those that they earn due to interests, financial commissions and similar, not taxable in the Republic and those coming from the International Maritime Commerce of Merchant Vessels legally registered in Panama;

g. Form the trusts established according to Law No. 1 of January 5th 1984 on assets located abroad, monies deposited by natural or juridical persons whose income is not from a Panamanian source, shares or securities of any kind issued by corporations whose income is not from a Panamanian source, even when such monies, shares or securities are deposited in the Republic of Panama;

h. The lease rentals that are paid to the lessor in the event of international financial lease contracts referred to in Article 2 of Law No. 7 of July 10th 1990;

i. Premiums coming from insurance and reinsurance that cover risks for persons and assets abroad; and the reinsurance premiums assigned to reinsurance companies located outside the territory of the Republic of Panama;

j. Disposal of shares and participation quotas of a juridical person constituted under the Laws of the Republic of Panama, when the activities of such corporations are made exclusively outside the national territory;

k. Services rendered outside the national territory to attend consultancies, professional presentations, conference and other similar activities, even when the periods of lay days outside the country during one year, do not reach thirty percent (30%) of the days in a calendar year;

l. Such generated by natural or juridical persons, domiciled abroad who receive payments for goods or services that are totally financed, contracted or executed outside the national territory in favor of taxpayers such as hotels, international car rentals, naval repairs and areas for vessels or aircrafts engaged in international exploitation, freights or other collections made by naval agencies by international naval lines and international tourist operators, as well as other activities of international business.

m. Such generated by natural or juridical persons, that due to their international business activities which include both the rendering as well as the receipt of goods and services, develop operations outside the national territory;

n. Such generated by natural or juridical persons, Panamanians or foreigners, engaged in the operations of cruise ships, or passenger vessels, of international service, even when they transit in Panamanian waters or make a stop on Panamanian ports, from the profit they receive for the sale of tickets, from the sale to their passengers of tours in Panamanian territory that third parties operate in Panamanian territory, from the promotions on board, or in publications or advertising material of the cruise ship, from commercial establishments located in Panama, from the services offered to their passengers during their stay in Panamanian waters and ports, nor from the payments they receive from the Republic of Panama for the disembarkment of passengers in Panamanian waters.

DEDUCTIBILITY OF EXPENSES

The following expenses and disbursement shall be deductible because it is considered that the costs expenses or loses generated or forced in business, industries, careers, activities or investments whose income is from a foreign or exempted source are not deductible.

a. Donations to non-profit educational or charity institutions of the country provided they are institutions previously approved.  The juridical persons may deduct up to a maximum of 1% of their taxable income, and natural persons, may deduce up to a maximum of US$ 50,000.00.

b. Fees paid to non-profit entities, associations or guilds of the country.

c. In credits secured with deposits, only the difference between the sum paid by the taxpayer for interests and the interests earned by the deposits securing said obligations shall be deductible.

d. The profits distributed to the workers by the employers.

CONESQUENTLY, THE FOLLOWING ARE NOT DEDUCTIBLE EXPENSES

a. Personal or subsistence expenses of the taxpayer and its family.

b. Expenses caused or paid due to constructions or permanent improvements made on a movable or immovable property.

c. Sums invested in recreation trips, fees, popular festivities, entertainment or attentions and in donations that are not propaganda.

d. Expenses of local distributing film companies that have a relationship with the film production company.

e. Any other expenses that, although it may be deductible, cannot be satisfactorily verified when proof is demanded.

JURIDICAL PERSONS (COMPANIES, CORPORATIONS IN GENERAL)

For juridical persons, all expenses or disbursements shall be deductible, if they incur in the production of income and the conservation of its source, except some non-authorized reserves.

NATURAL PERSON (SALARIED OR INDEPENDENT PROFESSIONAL)

For natural persons, only the following amounts are deductible.

Personal Income (Basic Deduction) -> US$ 800.00

Joint Income (Basic Deduction) -> US$ 1,600.00

Deduction per Dependants (ascending and descending relatives up to 2nd degree blood consanguinity, minors under 18 years and students not older than 25 years) -> US$ 250.00 each.

Medical Expenses (Hospital and medical insurance policies) -> 100%

Education Insurance (Withheld in payroll and/or paid on the income Tax Return) -> 100%

Mortgage Loan Interest ((main housing without preferencial interest) -> Up to US$ 15,000.00

Interest on Educational Loan incurred in Panama or abroad through the IFARHU -> 100%

Expenses to conserve or generate income ((Independent professionals and business natural persons) -> 100%

INCOME TAX RATE

After deducting the costs and expenses according to our Fiscal Code, the natural persons, which includes salaried persons, businessman or independent professionals, shall pay for their income tax from their taxable income in accordance with the following rate:

INCOME TAX RATES	TRADITIONAL METHOD		CAIR
	Amount	Rate
Up to $9,000		0%
From $9,000 to $10,000		13%
From $10,000 to $15,000	$730	16.9%
From $15,000 to $20,000	$1,555	19%
From $20,000 to $30,000	$2,505	22%
From more than $30,000	$4,705	27%
From more than $60,000			6%

BUSINESS EXPENSES

With business expenses, withholding shall be equivalent to 10% of the total earned in this concept.  Business expenses paid as an additional remuneration to the wage, salary or regular retribution for the worker shall be deductible to the taxpayers.  The worker shall add said item to its gross income.

JURIDICAL PERSONS (COMPANIES, CORPORATIONS IN GENERAL)

Juridical persons shall pay an Income Tax rate of 30% on the greater of:

• The taxable net income estimated by the established method, or
• The taxable net income resulting from deducting 95.33% from the total taxable income.  That is, 30% shall be applied to 4.6%, resulting in 1.401%.

DEADLINE FOR FILING INCOME TAX RETURNS

There are annual deadlines to file the corresponding income tax return of the Taxpayer, either as natural or juridical person:

• Natural Persons – March 15th
• Juridical Persons – March 31st

The Law has foreseen that those Taxpayers who cannot comply with their tax return filing during the regular period shall have to request a special period of grace called “extension” of 2 calendar months to the Tax Administration.  This request shall be made before the expiration of the regular period.

Non-compliance or not filing the income tax return within the terms previously explained shall constitute the following fines depending on the type of taxpayer:

• Natural person – US$ 100.00 per year;
• Juridical person – US$ 500.00 per year;
• Juridical person at the Colon Free Zone – US$ 1,000.00 per year passed.

TAXPAYER	FILING UP TO	EXTENSION UP TO	FINES AS OF
Natural persons and trusts	March 15th	May 15th	May 16th onward
Juridical persons	March 31st	May 30th	June 1st onward
Special period	3 months after closing of the special period	2 months after expiration of the deadline for filing of income tax return	First day after extension onward

PRESCRIPTION

Prescription terminates the tax debt according to the passing of time.  If interrupted, a new calendar calculation of the prescription period shall be restarted as of the date of the last intervention of the debtor on the payment or of the Administration.  Prescription gives the opportunity likewise to the passive individual and to the rest who are responsible of the debt; but when the prescription is interrupted for one, it is understood as interrupted for all the responsible ones.

In Panama case, the legal terms of prescription are the following:

FACT	PERIOD
Tax collection by the National Treasury	7 years as of the last day of the year in which the tax should have been paid
To pay what was withheld	15 years counted as of the date the withholdings should have been made
Tax Return	7 years counted as of the last day payment was made
Fiscal audit to determine an additional liquidation	3 years as of the presentation of the income tax return

The prescription period is interrupted:

• By writ of execution issued against the taxpayer or liable person;
• By payment arrangements held with the General Income Directorate or by written promise to pay from the taxpayer or liable person;
• By any written intervention of the component employee aimed to collect the tax; or
• By request of tax return filed by the taxpayer or liable person.

GOODS AND SERVICES TRANSFER TAX (ITBMS) or VAT (VALUE ADDED TAX)

The goods and services transfer tax is a tax applied to the transfer of any title of personal movable properties, the rendering of services of any kind and the importation of movable properties made by the Taxpayer.

FACTS SUBJECT TO TAXATION

• The property transfer tax made by businessmen, products or industrialists in the development of their activities. NOTE: Tangible or intangible (Copyrights) assets are not included within this rule.
• The rendering of all type of services by businessmen, producers, industrialists, professionals, lessors and renders of services in general. NOTE: Those personal services rendered with regard to dependence, distribution of dividends or participation quotas of profits (from juridical persons to partners or shareholders), Conventions involving the use of land lots or pits or crypts in mortuary places and the land lots or properties engaged in the farming activity and the financing services rendered by persons duly authorized for this activity are excluded.
• Import of personal property or merchandise destined either for the use or personal consumption of the introducer, for charity, educational, scientific or commercial purposes, for the transformation, improvement or production of other assets and for any lawful purpose in accordance with the laws.

REQUIREMENT TO PAY ITBMS

The obligation to pay this tax is born in accordance with the following rules:

• In transfers of goods, at the time of its invoicing or delivery, whichever occurs earlier from the referred acts.
• In the rendering of services, with any of the following acts, whichever occurs first:
  - Issuance of the corresponding invoice.
  - Termination of service rendered.
  - Receipt of total or partial payment for the service to be rendered.
• For imports, at the time of the customs declaration-payment.
• In the event of the use or personal consumption of the owner or partners of the company, the legal representative, officers or shareholders at the time of withdrawal of the goods or in his accounting, whichever occurs first.

TERRITORIALITY OF THE ITBMS

The transfer and services tax carried out by the Republic of Panama shall be subject to this tax.  This takes place regardless of the place where the contract was held as well as who received them and the place from where the payment comes from.

ITBMS TAXPAYERS

Taxpayers of this tax are:

• Natural persons, corporations with or without legal capacity.
• The importer by its own account or third parties.

ITBMS WITHHOLDING AGENTS

The withholding of the mentioned tax shall be done by:

• Government bodies, decentralized entities, public companies, municipalities and other entities of the public sector.
• Taxpayers of the tax from carrying our taxable operations and who find themselves affiliated to the credit card system.
• Those who pay or credit retributions for taxable operations for natural persons domiciled or constituted entities abroad.
• Corporations without legal capacity.

TAXABLE BASE

FACTS	TAXABLE BASE
Transfers of assets and rendering of services	The price earned
Effect on the personal use or consumption of the company assets	The value in books
On the exchange	The amount of the service of greater value
On payments on account, or contribution to corporations or in any other taxable fact that transfers the domain of the real property or a service is rendered	The value of the transferred assets or services rendered
On imports	The CIF value plus all the taxes, rates, rights, contributions or custom taxes that affect the imported goods
In the lease if real estate properties and on other acts in which the purpose is to use or enjoy the property	The value invoiced of the rent or, failing that, the value of the contract during all its term in force

TAX RATE

AMOUNT TO BE TAXED	GOODS AND SERVICES
5%	This amount is generally applied except on some exceptions
10%	Wholesale and retail importations of alcoholic beverages
15%	Wholesale and retail importations of products derived from tobacco

GOODS AND SERVICES NOT LEVIED WITH THIS TAX:

• Transfers on marriage articles, contributions or division of conjugal assets.
• Expropriation, sale and rendering of services done by the Government, except those carried out by industrial and commercial companies thereof.
• Adjudication of assets within any ordinary or special trials.
• Transfers of negotiable documents and titles and securities in general.
• Payments including interest paid and received which were generated by financial services.
• Payments and interests of contributions to pension funds, services funds, mutual funds and other savings means.
• Legal professional services rendered to persons domiciled abroad who do not generate taxable income within the republic of panama.
• Legal services rendered to international trade vessels registered in the national merchant, as well as the registration of their vessel mortgages.

THE FOLLOWING ARE EXEMPTIONS FROM THE GOODS AND SERVICES TRANSFER TAX:

Movable Property exempted of the ITBMS:

• Agricultural products in their natural state.
• Exportation and re-importation of goods.
• Goods within the free zones and those found in custom precincts and warehouse deposits.
• Soft drinks.
• Crude petroleum, fuels, lubricants and derived products.
• Food products.
• Manufactured fertilizers specified on the Import Tax items or groups.
• Insecticides, fungicides, herbicides, disinfectants and similar used in agriculture and cattle farming.
• All the seeds used in agriculture.
• Barbed wire specified on item 73.13.00.20 of the Importation Tariff.
• Hand tools used for agriculture.
• Newspapers, magazines, magnetic media of an educational nature.
• Drinking water supplied by the IDAAN (National Water and Sewage Institute).
• Medicinal and pharmaceutical products.
• Foreign currency, shares, as well as public and private securities.

Rendering of services exempted of ITBMS

• Related to the health of human beings.
• Leasing and subleasing of immovable property destined exclusively for home or room of the lesse.
• Related to education when they are rendered by juridical or natural persons enabled by the Ministry of Education.
• Loans to the Government.
• Cargo as well as passengers, air, maritime and land transportation.
• Generation, transmission and distribution of electric energy.
• Land line telephones.
• Social communication.
• Mail rendered by the Government.
• Betting games at private and government casinos and racetracks and those granted as concessions.
• Insurance and reinsurance.
• Of exportation.
• Access service to residential Internet and for entities which render education service acknowledge as such by the Government.
• Sewerage and cleanup services rendered by public or concession entities.
• Public cultural shows as determined by the National Institute of Culture.
• Stock exchange activities of securities, commodities and financial activities of cooperatives.
• Food vending at commercial premises where alcoholic beverages are not sold or consumed.

SETTLEMENT AND PAYMENT OF THE ITBMS

The ITBMS shall be settled and paid by monthly or quarterly periods according to the Taxpayer’s classification and to the categories to which the purposes hereof are detailed as follows:

TAXPAYER	SETTLEMENT AND PAYMENT
Taxpayers whose monthly average gross income is greater than US$ 5,000.00	Monthly
Taxpayers whose monthly average gross income is less than US$ 5,000.00 but greater than US$ 3,000.00	Quarterly
Persons who work in jobs and occupations on their own or independently and dedicate themselves exclusively to render professional services	Quarterly

TAX EVASIONS DUE TO ITBMS

The following are acts of tax evasion in reference to this Tax:

• Those who carry out acts or agreements, clearly use improper manners, or stimulate a legal act implying the total or partial omission of a tax payment for themselves or for others.
• Those who omit documenting their operations of taxed transfers when they are in the legal obligation of doing so and those who make tax deductions without being duly documented.
• Those who omits registrations or falsely register their accounting operations referring to this tax and use them in their tax returns before the fiscal authorities with the purpose to totally or partially decrease payment of the tax.
• Those who do not declare or deliver the sums caused by this tax to the fiscal tax authorities within the deadline set forth on the legal payment requirement, except as provided in Paragraph 11. (60 days).
• Those who act as accomplice or accessory to help in carrying out some of the actions or omissions typified in the previous numbers.

Tax evasion as per this tax shall be punished with a fine not less than 5 times nor greater than 10 times the sum evaded or an arrest of 2 to 5 years, except when a special sanction is pointed out.  This penalty shall be without prejudice of the accessory penalties referred to in Law 25 of 1994, regarding commerce exercise and exploitation of Industries.

SANCTIONS TO THE ITBMS TAX

Sanctions shall be applied to this tax at the time of extending or correcting the sworn tax returns-liquidations of this tax, there shall be a cost of US$ 500.00, if it is presented after a period of 12 months counted as of the legal date of its filing.

The taxpayer who commits a penalty or infringement due to this tax and who is found in some of the following cases when previously verified:

• Those who document irregularly, either by omission of the Taxpayer’s number as a transferor or purchaser in the event that both are taxpayers of the tax either due to an omission of any legal requirement, when the irregularity is not interpreted as a decrease of the tax payment.
• Those that use documentation or invoices in their operations without having registered them before the General Income Directorate when they were in the obligation of doing so.
• Those in the case of number 4 of the previous paragraph who submits a late tax return without caused tax to pay per the total of credits to his favor.
• Non-compliance of any of the formal obligations imposed be the General Income Directorate in accordance with Paragraph 14th of this Article.
• The penalty or infringement established in number 3 shall be sanctioned with a file of US$ 10.00.  The other penalties or infringement established herein shall be sanctioned with fines from US$ 100 to US$ 500.00 the first time, and with fines of US$ 500.00 to US$ 5,000.00 if repeated, regardless of the administrative close of the establishment due to default or infringement that it may entail.

PROPERTY TAX (IBI)

The property tax levies all the land located in the Panamanian territory, as well as the buildings and other permanent constructions made or to be made on such lands, whether they have or do not have a Property Title registered in the Property Division of the Public Registry.  Article 756 of the Fiscal Code establishes that this tax liens the property whomever is the owner or user and shall have preference on any lien resting on such property.

EXEMPTIONS

The following Real Estate Properties are excluded from this tax according to Article 764 of the Fiscal Code:

• Those of the Government, Municipalities and of the Municipality Associations.
• Those of the autonomous or semi-autonomous institutions of the Government, subject to their own legal provisions.
• Those destined or to be destined to services permitted by the Government, the council seminaries and Episcopal churches.
• Those destined or to be destined exclusively to religious-social assistance without profit purposes.
• Those destined or to be destined to public charity or social assistance without profit purposes.
• Those exempted from this tax in accordance with international treaties or agreements where the Republic has been the contracting party.
• Those that constitute the family patrimony.
• Those properties whose taxable base, including improvements does not exceed US$ 30,000.00.
• Properties owned by social organizations legally constituted dealt on Article 340 of the Labor Code, provided such properties are not destined for profit purposes.
• Farms engaged in agricultural activities whose value does not surpass US$ 150.

Law 21 of October 15th 2008, that modifies Law 6 of 2005 on fiscal equity, introduces a GENERAL BENEFIT for all the improvements whose construction permits had been issued as of September 1st, 2006 (check date extension), from the date of registration of the improvements in the Public Registry where exoneration shall be granted according to the following table:

1. IMPROVEMENTS FOR RESIDENTIAL USE:

Value of improvements	Years of Exoneration
Up to US$ 100,000.00	15
From US$ 100,000.00 up to US$ 250,000.00	10
More than US$ 250,000.00	5

2. OTHER IMPROVEMENTS:

Value of improvements	Years of Exoneration
Whatever is the value	10

Likewise, Law 21 of 2008 introduces an EXCEPTIONAL BENEFIT, which shall entitle 20 years of exoneration of the property tax to those improvements that comply with the following requirements:

• That their construction permit had been issued before July 1st, 2009.
• And that the registration of said improvements in the Public Registry is made before December 31st, 2011.

SPECIAL TREATMENT

The Law establishes a Special Treatment in this tax as follows:

• Each property owned by companies engaged in the generation or transmission of electric energy shall pay up to a maximum of US$ 25,000.00.
• Natural or juridical persons offering private teaching services in kindergartens, grammar schools, high schools or universities, may deduct the amount to pay as Property Tax on their own properties destined to the rendering of the service, the sums spent as permanent and complete scholarships for Panamanian students.
• Natural or juridical persons operating as private hospitals may deduct the amount to pay as Tax on properties destined to the rendering of service, the sums spent as medical attention services to underprivileged Panamanians of low income.

TAX RATES

A Combined Progressive Table is established on Article 766 of the Fiscal Code for the application of this tax as follows:

MORE THAN	UP TO	DIFFERENCE	% OF EXCESS
0	30,000.00	30,000.00	Does not pay
30,000.00	50,000.00	20,000.00	1.75%
50,000.00	75,000.00	25,000.00	1.95%
75,000.00	Over 75,000.00		2.10%

Likewise, according to Resolution No. 201-1411 of October 16th, 1995, an Alternative Combined Progressive Table is established for the payment of this tax which shall be applied on every real property that is up to date in its payments and the Taxpayer files a sworn tax return of the estimated value of its real estate property duly ratified by a real estate assessment company up to December 31st, 2007.  The Land Registry and Patrimonial Properties have the power to accept or not the new proposed value.

ALTERNATIVE COMBINED PROGRESSIVE TABLE

MORE THAN	UP TO	DIFFERENCE	% OF EXCESS
0	30,000.00	30,000.00	Does not pay
30,000.00	50,000.00	20,000.00	0.70%
50,000.00	75,000.00	25,000.00	0.90%
75,000.00	Over 75,000.00		1.00%

The law makes clear the date and places of payments, of the Property Tax in the following manner:

• The tax corresponding to one year can be paid in three installments.  The first payment can be made no later than April 30th, the second no later than August 31st and the third payment no later than December 31st.
• When the annual tax does not exceed US$ 10.00, payment shall be made in one sole sum, the latest on December 31st of each year.
• A surcharge of 10% shall be charged past that date.

The Government may proceed to collect by way of execution.  It can hold the assets which are owed in this case.

A prescription period is established for the tax payments as of ten years counted from the last day of the year in which it should have been paid.

Said prescription may be interrupted in the following circumstances:

• By the writ of execution issued against the debtor.
• By a written promise to pay made by the Taxpayer.
• By any written action of the component officer aimed to collect the tax.

GENERAL PROVISIONS OF RELEVANCE

• The Public Registry shall not make any registration related to real estate properties subject to this tax as long as the property is not confirmed as being in a free and clear status.
• All information involving a real estate property shall include a free and clear certificate of the property.

PROPERTY TRANSFER TAX (ITBI)

A 2% transfer tax on Real Estate Properties is established either by means of purchase and sale contracts, exchanges, and payments in kind, donations, payments or by means of any other agreement useful to transfer the ownership of real estate properties.

TAXABLE BASE AND RATES

According to Law 106 of 1974, the Taxable Base shall be the greater of the following values:

• The value agreed on the transfer deed;
• The land value of the real estate property in reference on the date when the transferor purchased the property, plus the value of the improvements carried out on the same, if any, plus a sum equivalent to 5% of the referred land value and the improvements for each complete calendar year that may have passed between the date of acquisition and the disposal of the property and, in its case, between the date of the incorporation of the improvements and disposal.

TAXPAYERS.

The transferor shall be acknowledged as the taxpayer of this tax who must pay its amount to the National Treasury before carrying out the transfer.  The Property Transfer Tax must be paid by the seller and the transfer of the same is null and void to the buyer by virtue of a private agreement.

Payment of the tax on the respective Public Deeds and the corresponding sworn statement data shall be set forth.  Without this requirement, the public notary shall not be able to attest the respective contract under the penalty of destitution and payment of the pertinent tax.  The Directors of the Public Registry shall suspend the registration of every transfer which does not carry this evidence.

TAX EVASION

Any false statement regarding the real value of the transfer shall be considered as tax evasion both for the seller as well as the buyer which shall entail sanctions established on Art. 752 of the Fiscal Code, in the following manner:

• A penalty not less than 5 times or greater than 10 times the sum evaded, or an arrest from one month to one year.
• When there is an accomplice, benefactor or an accessory, the penalty is divided in equal parts.

EXEMPTIONS

The following are exempt from this tax:

• Expropriations
• Purchases and sales made by the Government
• Transfers on a donation basis shall not be caused provided they are among the following:
  - Transfers in favor of the Government, its Autonomous Institutions, Municipalities and the Municipality Associations.
  - Transfers between relatives within a first degree of consanguinity and the spouses.

DEDUCTIBILITY OF THE PROPERTY TRANSFER TAX (ITBI)

The property transfer tax paid by the transferor may be deductible only from the income tax caused by the disposal of a real estate property subject of this matter determined in accordance with the procedure established on paragraph a lf Article 701 of the Fiscal Code, and up to the concurrence of the amount of this last tax, solely in those events that the Taxpayer does not choose to pay the tax based on the definite fixed rate of 10% referred to in paragraph a) of Article 701 of the Fiscal Code.

TAX ON COMMERCIAL AND INDUSTRIAL PATENTS (NOTICE OF OPERATIONS)

TAX RATE

Commercial License -> 2% on total of capital

Notice of Operations -> (Minimum of US$ 100.00 and maximum of US$ 40,000)

EXEMPTIONS

• Juridical Persons with an invested capital less than US 10,000.00;
• Companies developing farmer activities;
• Companies not developing operations in Panama;
• Independent professionals by constitutional mandate.

STAMP TAX

In Panama, official or stamped paper has been eliminated. Commercial paper and documents, such as contracts, bills, Invoices, notes and checks must have fiscal stamps attached.  The amount of stamps depends on the value of the document, and on whether the document is a check, receipt, negotiable instrument, landing permit invoice, bill of landing, or any other.  Contracts and bills must be stamped at a rate of US$ 0.10 for each US$ 100.00 or fraction thereof of the value stated in the document. Stamps can be purchased or imprinted with the use of a postal meter.

Companies with sales subject to ITBM are not required to pay the stamp tax on sale invoices or receipts.  Offshore operations of banks and trading companies and companies operating in the Colon Free Trade Zone are exempt from the stamp tax.

TAX ON BANKS, FINANCIAL ENTITIES AND MONEY EXCHANGE OFFICES

This tax is regulated in the Title XI of the Fiscal Code by which banks, non-banking financial entities and money exchange offices established in Panama are Taxpayers.

TAX RATE

Bank with a General License	Tax ranges between US$ 50,000.00 and US$ 350,000.00 annually according to the amount of its total Assets
Banks with an International or Representation License	Fixed annual tax of US$ 50,000.00
Money Exchange Offices	Fixed annual tax of US$ 2,500.00
Non-banking financial Entities	Annual tax of 2.5% on Paid Capital with a maximum of US$ 12,500.00
Banks of Promotion and Microfinance	Fixed annual tax of US$ 15,000.00

OTHER FINANCIAL ENTITIES

Financial entities regulated by Law No. 42 of July 23rd, 2001 shall pay an annual tax of 2.5% from their paid capital paid by December 31st of each year.  The tax to pay shall not exceed US$ 12,500.00 in any case.

TIME AND MANNER OF PAYMENT

Payment of this tax shall be made within the first 3 months of each year.  Delinquency in he payment shall cause surcharges and legal interest.

ALL OTHER TAXES, CONTRIBUTIONS OR TRANSFER REGIMES AND GIFT TAXES AND LEVIES

1. The taxes within this category, which have not been previously identified as Indirect taxes, are:

• Social Security Contributions: Employers and employees must make social security contributions totaling 10.75% and 7.25, respectively, of salaries and wages.
• Educational tax: Both employees and employers must pay a tax destined for educational programs.  Employers must deduct from the employee’s pay 1.25% and employers must contribute 1.50% to educational programs. Independent workers who are paid by fees must pay 2.75% of their annual income subject to income tax. This tax is a deductible expense for both employee and employer.
• Workmen’s compensation:  The Social Security Institute also manages a workmen’s compensation system which covers work-related personal injuries, death and occupational diseases. Premiums for protection against these risks are compulsory and are in addition to the social security contributions. They vary from one industry to another, from a minimum of 0.56% to a maximum of 5.67%.
  
  All employers are required to deduct and withhold from their employees monthly payroll those amounts corresponding to income tax, social security, educational programs and workmen’s compensation.
• Municipal Taxes:  Municipalities levy various taxes, which is usually based on the type of activity, gross sales or production, and must be paid by both individuals and legal entities that engage in business.
  
  These taxes are paid directly to the municipal authorities on a monthly basis. However, they can also be paid in full and if done so within the month of January the taxpayer is afforded a 10% discount .

2. Registration duties for business entitles relating to their formation:

• Registration duties are computed on the basis of the authorized capital upon the formation of a corporation, as follows:
  
  

  CAPITAL	DUTIES
  First US$ 10,000.00	US$ 50.00
  US$ 10,001.00 – US$ 100,000.00	US$ 62.20 for the first $10,000 and 0.90 for each $1,000 or additional fraction thereof up to $100,000.
  US$ 100,000.00 – US$ 1,000,000	US$ 131.00 for the first $100,000 and 060 for each $1,000 or additional fraction thereof up to $100,000.
  Over US$ 1,000,000	US$ 671.00 for the first million and 0.12 for each $1,000 or additional fraction thereof in excess of $1,000,000.

  
  
• Registration duties due upon an increase in capital: same as indicated above.
• Registration duties upon the transfer of the companies shares:  there are no registration duties upon the transfer of the companies shares since shareholding is not a matter of public record.
• Registration duties upon a transfer of corporate assets: US$0.50 for each US$100 or fraction of the value of acts and contracts transferring real property up to a maximum of US$1,000 of said value. Any value exceeding US$1,000, shall pay US$5.00 for the first US$1,000 and US$2.50 for each additional US$1.000 or fraction thereof.
• Any other registration duties due:  US$ 40.00 for each corporate minutes filed at the Public Registry.
• Where and to whom the duties must be paid: registration duties must be paid to the Public Registry Office at the time of the filing of the documents.

3. Inheritance and Gift taxes:

• There is no inheritance tax -> but there is a gift tax.
• What triggers the requirement for the tax in accordance with the fiscal code -> the gift tax is due at the time the gift is made.
• Where, when and with whom must tax returns be filed -> the tax must be paid at the office of the DGR in Panama city or at any of the regional offices located in the principal cities in the interior of the country. The tax is paid using special forms provided for by the DGR for these cases.
• When must taxes be paid -> when the gift is made.
• The tax rate -> gift taxes are levied at graduated rates ranging from 4% to 33.75%, depending on the value of the assets transferred. However, gifts made to certain relations are tax exempt.

OTHER MATTERS

1. Tax incentives granted for matters such as research and development, investment in certain areas, and others

Panama offers many incentives for investment.  Traditionally the mechanism in Panama for granting incentives was by registration of the venture with the Official National Industry Registry which was eliminated by Law Nº28 of 1995 that adopted measures for the universalization of tax incentives.

2. Construction

Starting in 1990, profits resulting from the sale of real estate that are invested in the construction of new dwellings are exempt from income tax as long as the value of the new building is equivalent to four times the amount of the profits realized in each case. In those cases where the cost of the new building is below that amount, the taxpayer has the right to deduct from the corresponding taxes up to 20% of the cost of the construction.

3. Reinsurance

Pursuant to Law Nº63 of 1996, provisions were established regulating reinsurance operations in Panama and confirming the existence of the National Reinsurance Commission, empowered to oversee the reinsurance industry and to guarantee high professional standards. Insurance and reinsurance companies established in Panama may underwrite or place reinsurance with other insurers or reinsures located in Panama or elsewhere. The system provides for special treatment by which premiums originating from reinsurance activities on foreign risks are exempted from specific insurance taxes in Panama, and profits arising from reinsurance on foreign risks are exempted from income tax. To compute taxable income, the following items are deductible:

• Technical reserves allowed by law.
• Reserves for losses, the payments of which are being negotiated or processed.
• Reserves for catastrophic risks or contingency authorized by the National Reinsurance Commission.
• Other reserves authorized by the National Reinsurance Commission.

THE COLON FREE TRADE ZONE

Located near the northern entrance of the Panama Canal, the Colon Free Zone offers free movement of goods and complete exemption from taxation on imports and exports. The Free Trade Zone, is a major factor in facilitating the supply of goods from large industrialized countries to the consumer markets in Latin America. Firms located in the zone are exempt from import duties as well as from guarantees, licensing and other requirements and limitations on imports. There are no taxes on the export of capital or the payment of dividends.

SPECIAL INCENTIVES FOR EXPORT PROCESSING ZONES

Pursuant to Law Nº25 of 1992, a simplified integrated special system was adopted for the creation and operation of Export Processing Zones, which amount to nothing more than “private free zones, that allow for import and re-export operations with total exemption from duties.

a. Enterprises that can participate in the Zones

Natural or juridical persons that establish:

• Manufacturing Enterprises
• Assembly Enterprises (maquila)
• Finished or semi-elaborated products processing Enterprises
• Services Export Enterprises
• General Services Enterprises

b. Kind of Export Process Zones

• Private
• State owned
• Mix – State/Investors

c. Persons charged with establishing and operating the Zones

• The Promoter of the Zones in charge of carrying out the project of establishing the zones.
• The Operator of the Zones (who can also be the Promoter) and who is in charge of the operation of the Zones.

d. Main tax incentives for promoters

• The enterprise, as well as its activities, are exempt from all local direct or indirect taxes, contributions, assessments, rights, and charges. Nevertheless, there is some discussion on whether income tax exemption will be granted to those foreign enterprises whose countries permit the deduction or crediting of taxes paid in Panama.
• Duty free importation of machinery, equipment, raw materials, tools, accessories, lubricants, and all goods and services required for operation.
• Exemption from license tax.