Panama

Taxation in Panama, Panama

What are the tax rates in Panama, Panama? How are corporations taxed? Here’s Teleports overview of personal, corporate and other taxation topics in Panama, Panama.

Corporate taxation in Panama

Teleport city rankings for corporate income tax

Corporate taxation puts Panama in position 75 of all Teleport Cities.
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Basis

Panama operates a territorial tax system, under which residents and nonresidents are taxed only on Panama-source income. Income that does not arise in Panama or is not derived from Panama is not subject to tax in Panama.

Residence

A company is resident if it is incorporated under Panamanian law or if its central management and control is exercised in Panama.

Losses

Losses may be carried forward for five years, with a maximum of 20% of losses deducted per year. However, the deduction of losses may not exceed 50% of taxable income in any year. The carryback of losses is not permitted.

Incentives

Various investment incentives provide lower tax rates or exemptions. The Howard (Panama-Pacific) Special Economic Area regime provides for tax exemptions for offshore services; gains from the sale or transfer of shares of companies established within the area; income from the transfer of goods and services between companies within the area and other free zones; income from the sale of goods or services to visitors and passengers while in transit to other countries or to vessels crossing through the Panama Canal or aircraft using authorized ports to overseas destinations; income from aviation and airport services; income from the manufacture of high- tech products; and income logistics and call center services.

Rate

Tax liability is assessed at the greater of a 25% flat rate on net income or a 1.17% rate on gross taxable income; the latter is the alternative minimum tax (CAIR).

Alternative minimum tax

The CAIR 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. The tax

Foreign tax credit

Since Panama operates a territorial system of taxation, there is no unilateral foreign tax credit. A foreign tax credit may be granted, however, under Panama’s tax treaties.

Taxable income

Taxable income 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.

Capital gains

Capital gains 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.

Participation exemption

No, but see under “Taxation of dividends.”

Other taxes on corporations

Stamp duty

Stamp duty generally is 0.001 per PAB or fraction thereof, and is applicable to the issuance of certain documents.

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.

Other

All commercial and industrial businesses must have a notice of operations to engage in business, unless they are specifically exempt.

Transfer tax

Transfers of 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.

Real property tax

A real estate tax is levied on Panamanian-situs real property, at rates ranging from 1.75% to 2.1%.

Payroll tax

In addition to social security contributions (see under “Social security”), the employer must pay educational insurance tax at a rate of 1.5% of an employee’s remuneration. The employer also pays workers’ compensation insurance premiums at rates ranging from 0.56% to 5.67% of the remuneration (depending on the risk associated with the occupation).

Compliance for corporations

Penalties

Interest and surcharges are levied on late payments. Penalties may be imposed for late filing of the annual income tax return.

Basis

Both residents and nonresidents are taxed on their Panama- source income.

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. The center of economic and family interests is a relevant factor in determining residence status.

Filing status

Joint tax returns are permitted.

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. With the exception of companies operating in free zones, corporations with no Panamanian-source income are not required to file an income tax return.

Consolidated returns

Consolidated returns are not permitted; each company must file a separate tax return.

Rates

The first USD 11,000 is exempt; a 15% rate applies to income from USD 11,000 up to USD 50,000; and the rate is 25% on income exceeding USD 50,000.

Tax year

The calendar year generally is used, although the taxpayer can request a special 12-month fiscal year in certain cases.

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

Capital gains 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.

Deductions and allowances

Individuals are entitled to a basic deduction of USD 800 (on a joint tax return) and deductions for the following: mortgage interest (up to USD 15,000 per year); donations to a nonprofit organization (up to USD 50,000 per year) and political contributions (up to USD 10,000); individual contributions to individual retirement plans up to USD 15,000 per year that do not exceed 10% of gross income; payments made for medical and hospitalization insurance; and medical expenses incurred in Panama that were not covered by insurance.

Other taxation in Panama

Value added tax

Filing and payment

VAT returns must be filed monthly, except for professionals who may file quarterly returns.

Rates

The standard rate is 7%, with special rates of 10% for accommodations and alcohol and 15% for tobacco. Exemptions apply for food, medicine, medical services and crude oil.

Taxable Transactions

VAT (ITBMS) is levied on the invoice value of the sale, lease or transfer of goods or services, except for intangibles.

Anti-avoidance rules

Disclosure requirements

See under “Transfer pricing,” above.

Transfer pricing

Transactions between related companies must be valued according to the arm’s length principle, applying the standards in the OECD guidelines.

Investment basics

Foreign exchange control

The state-owned bank, Banco Nacional de Panamá, is responsible for supplying USD from the US Federal Reserve Bank of New York under a treaty signed in 1904. There are no restrictions on other banks importing USD into Panama.

Accounting principles/financial statements

IFRS is required. 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. Companies operating in the Colon Free Trade Zone and other free trade zones, and companies in general, are required to maintain (as opposed to file) audited financial statements on their premises.

Principal business entities

These are the corporation, limited liability company, limited liability partnership, general partnership, joint venture and branch of a foreign corporation.

Withholding tax

Royalties

Royalty payments made to a nonresident are subject to a 12.5% withholding tax (50% of the general 25% rate) if the payments

Dividends

Dividends paid to a nonresident 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.

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.

Other

All Panamanian-source income paid to nonresident entities or individuals or accrued by governmental entities, companies owned 51% or more by the Panamanian government, “noncontributing” entities (i.e. entities not subject to income tax) and taxpayers incurring losses, is taxable and subject to withholding tax.

Interest

Interest paid to a nonresident is subject to a 12.5% withholding tax (50% of the interest is subject to the general 25% corporate tax rate).

Technical service fees

Fees for technical services paid to a nonresident are subject to a 12.5% withholding tax (50% of the general 25% rate).