Taxes in Panama
Relocating to Panama offers many benefits, with its territorial tax structure being a notable difference. The tax obligations in Panama can be complex but manageable with the right guidance. This article aims to give a good summary and overview of the most important factors to be considered when thinking about taxes in Panama.
Territorial Tax System
Panama uses a territorial tax system. This means individuals and corporations are taxed only on income earned within Panama. Foreign-source income remains untaxed, making Panama attractive for expatriates and multinational corporations.
Tax Residency
Definition of Tax Residency
- Individuals (must meet one criteria of the following):
- Physical presence test: Must spend more than 183 days in Panama within a calendar year.
- Economic Substance test: Must have a permanent residency in Panama. This can be achieved through owning property, running a business, or having employment that generates income in Panama.
- Companies:
- Must be incorporated in Panama.
- Management must be located in Panama. No specific percentage is put into a general law.
Personal Taxes in Panama: An Overview
Income Tax
Income tax in Panama applies to various forms of income, including:
- Employment income (salaries, bonuses, benefits)
- Income from commercial or agricultural businesses
- Investment income
The tax rates are progressive:
| Income Range | Tax Rate |
|---|---|
| $0 to $11,000 | 0% |
| $11,001 to $50,000 | 15% |
| Above $50,000 | 25% on amount above $50,000 plus $5,850 |
There are several deductions available, such as for health insurance and mortgage interests. Additionally, foreign income taxes paid can qualify for deductions under certain conditions.
Capital Gain Taxes
Capital gains tax applies to income from the sale of shares, securities, dividends, and real estate.
- Sale of securities and negotiable instruments: 0%
- Real estate:
- 2% real estate transfer tax
- 3% gain tax advance payment on the gross transaction amount or cadastral value (whichever is greater)
If the 3% advanced payment is higher than 10% of the gain, the seller can request a reimbursement for the difference or accept the 3% as the definite tax.
Property Taxes
Property taxes in Panama are progressive based on the cadastral value of the property. Many new developments or specific parts of the country or city have property tax exceptions.
| Value Range | Tax Rate |
|---|---|
| Up to $30,000 | 0.0% |
| $30,001 to $250,000 | 0.6% |
| $250,001 to $500,000 | 0.8% |
| Above $500,000 | 1.0% |
Corporate Taxes
Corporate Income Tax
Corporations in Panama are subject to a 25% income tax on their earnings sourced within Panama. Foreign earnings are exempt. The corporate tax is structured to benefit multinational corporations operating globally but headquartered in Panama. They can negotiate their own tax breaks through the Multinational Headquarters (SEM) Regime, established by Law 41 of 2007.
Value Added Tax (VAT)
Panama applies a Value Added Tax (VAT), known locally as ITBMS (Impuesto de Transferencia de Bienes Corporales Muebles y la Prestación de Servicios):
- Standard rate: 7%
- Specific goods: alcohol 10%, tobacco 15%
- Exception rate: 0%
- Most groceries and foodstuffs
- Medical and pharmaceutical products
- Educational materials
- Agricultural supplies such as fertilizers, insecticides, and fungicides
Dividends Tax
Dividends distributed from Panamanian sources are subject to tax rates as follows:
- 5% for Non-bearer shares
- 10% for Bearer shares
- 20% for certain entities in Free Zones
Social Security Contributions
Both employers and employees must contribute to Panama’s social security system.
- Employer Contribution: Approximately 12.25%
- Employee Contribution: Approximately 9.75%
These contributions go towards healthcare, pensions, and other social benefits.
Inheritance and Gift Taxes
Panama has no inheritance or gift taxes, adding to its attractiveness for individuals looking to preserve wealth across generations.
Double Taxation Agreements (DTAs)
Panama has signed several Double Taxation Agreements (DTAs) with other countries to prevent double taxation on the same income. Notable countries include:
- Mexico
- Spain
- Singapore
- United Arab Emirates
- France
These agreements can significantly reduce tax liabilities for expatriates and international businesses.
Conclusion
Panama’s tax system provides significant benefits, whether you are an individual or a corporation. This guide offers a first overview, get in touch with us to discuss your specific situation and goals.
References
For further detailed guidance, consult the following resources:
