Several changes have taken effect regarding Panama Property Tax. The outline of the reforms is:

1. Law 66 of 2017 reduced the Panama Property Tax rates.

2. Law 66 of 2017 created the Taxable Family Estate (TFE) or Main House (MH), for a family house and primary residence. As per the law, the properties registered as TFE or MH will be exempt from paying property taxes on the first USD 120,000 and will be subject to a special property tax rate.

3. By mean of Executive Decree 362 of November 29, 2018, and Decree 47 of May 2019, banks and other lenders institutions are allowed to withhold the property taxes on mortgages debtors. However, withholding will not apply to properties registered as TFE or MH

4. Property tax exemptions are maintained.

At Lill Martínez' Law and Real Estate Office, we can assist you in tax-related processes, such as obtaining property tax and water clearance, paying property taxes, processing taxpayer id and password, recording your property as a Family Taxable Estate or Main House, registration of your tax exemption, and others.

1. Property tax rates for secondary residence, commercial property, industrial property, or properties not recorded as TFE or MH (Art. 766-A of the Fiscal Code).

The property taxes rate is yet calculated based in a "Progressive Combined Tax, as follow:

For instances:

Mr. X bought a USD 859,000 land. Taxes to be paid will be as follow:

Mr. X and Y own a USD 498,000 apartment. Taxes will be calculated as follow:

2. Taxable family estate (TFE) and main housing (MH)

Article 476 of the Family Code of Panama defines TFE as a property, which purpose is permanent residential family use by its owner(s). The owner could be a natural or a legal entity if the final beneficiaries belong to the family group. A TFE 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 two married couples can only use the USD 120,000 exoneration for the same property.

MH is the property intended for permanent residential habitation use by its owner and the property does not constitute a TFE. MH applies only to unmarried or widowed natural persons and without children. For instance, if you are single and owner of a house, the property may qualify for MH.

TFE or MH Property Tax Rate

Properties with a cadastral value that does not exceed USD 120,000 (including land and construction improvements), and registered as TFE or MH, will be exempt from property taxes. (Art. 764-A).

Properties registered as TFE or MH will be taxable as per Art. 766 of the Fiscal Code as follow:

For instance, Mr. J bought a USD 200,000 house, which he registered as an MH, property taxes will be calculated as follow:

For example, Mr. A has a property register as an MH, which value is USD 500,000. The taxes to pay will be calculated as follow:

TFE or MH and Existing Property Tax Exemption

Horizontal Properties (PH) or apartments, which have an existing property tax exemption will continue to receive the benefits of that exemption. However, if the owner files the form requesting TFE or MH status, the remaining years of property tax exemption will be canceled. The owner will then be subject to the standard TFE property tax rates.

Property Tax Exemptions for New Construction registered as FTE or MH

New residential construction acquired as a first purchase, which is registered as TFE or MH and whose cadastral value is between USD 120,000 to USD 300,000 shall be exempt from property taxes for a period of 3 years from the date of issuance of the occupancy permit or the date of registration in the Public Registry, whichever happens first. (Art. 4, Law 66-2017)

Future Assessment of the Property

Upon filing for TFE or MH, it is not required to update the property's value. Nonetheless, property tax is based upon the higher value between what is recorded in the DGI and the Public Registry by looking at the property recording history.

Sham TFE of MH

The owners who fraction or divide the cadastral value of a property or pretend to be in the category of Taxable Family Estate or Main Housing, without complying with the requirements established for these purposes, will be sanctioned with a fine of B /. 1,000.00 to B /. 10,000.00 without prejudice to the provisions of article 797 of the Tax Code on tax fraud of property tax.

Requirements for registering TFE or MH as per Executive Decree 363 of December 4, 2018

The following documentation must be submitted at the Directorate of Tax Revenue, also known as DGI to register a property as TFE as a natural person:

1. Copy of the public deed or Public Registry certificate of the property.
2. Copy of the owner identity card or passport.
3. If the owner is married, the marriage certificate issued by the Civil Registry of Panama. If the marriage was concluded abroad, marriage certificate issued at the place of celebration with proper authentication.
4. In the case of single parents, the birth certificate of their children.

The following documentation must be attached to register a property as a TFE as a legal entity:

1. Copy of the public deed or Public Registry certificate of the property.
2. Public Registry certificate.
3. Copy of the legal representative identity card.
4. Certification of Authorized Public Accountant, indicating that family members are the beneficiaries of the legal entity.

The following documentation must be submitted to register a property as a MH:

1. Copy of the public deed or Public Registry certificate of the property.
2. Copy of the owner identity card.
3. In case of widowers/widows, marriage's certificate, copy of the asset's adjudication or heirs' declaration.
4. In the case of taxpayers without children, they must present a certificate of no children issued by the Civil Registry of Panama.

Processing Time: If there is no response from the DGI within three months from filing the form, it is understood that the petition was approved. However, if the DGI later determines the request was fraudulent, the status may be revoked.

Executive Decree 363 is available at this link: https://www.gacetaoficial.gob.pa/pdfTemp/28667_C/GacetaNo_28667c_20181204.pdf

3. Withholding by banks and other mortgage lenders

Banks may withhold property taxes, and other mortgage lenders will set aside part of the monthly mortgage payments for the withholding of property taxes. If the taxpayer has a second property and also has a mortgage under that property, the lender can withhold the funds. The law excluded from withholding, the principal family residence and other house exempted from property taxes. In other words, the real properties subject to the retention of property taxes include:

1. Second homes;
2. Raw land;
3. Commercial properties; and
4. Industrial properties.

Executive Decree 362 makes the mortgage loan debtor responsible for paying the property tax even if the debtor does not own the property. By concluding a loan agreement to pay for the property, the debtor bears sole responsibility.

If you want to read Decree 47, click on the following link:

https://www.gacetaoficial.gob.pa/pdfTemp/28782_A/GacetaNo_28782a_20190527.pdf

Lender Reporting Duties

Every withholding agent must file information with the Directorate General of Revenue (DGI), regarding all financing for the real properties subject to the withholding and Staring January 1, 2019 banks and lenders will report on new loans, canceled loans and loans transferred to another lender.

Lenders shall inform the DGI if debtors do not have a designated account for loan payments with the bank or lender. The DGI may ask the debtor to make the payments directly if withholding cannot be performed because there is no designated account. If that fails, the DGI can proceed with the recovery process.

Information the Debtor Receive from the Lender

The lender will inform 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.

Withholding Dates

Lenders can withhold in either 1, 3, or 12 installments per year as agreed upon with their customers. This match with the current payment dates, i.e., the first payment by April 30, the second by August 31, and the final by December 31. 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.

Claims

DGI has the authority to resolve any disputes and complaints regarding the property tax assessment. The lender has no jurisdiction to settle any claims.

Lender's Costs and Fee

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.

4. Property Tax Exemptions

The Fiscal Code establishes several exemptions. For instance:

1. Farms used in agricultural activities; whose cadastral value does not exceed USD 350,000 are exempt from paying property taxes. (Art. 764.9)
2. Properties will a cadastral value of USD 30,000 or less:
3. The properties that constitute the primary and permanent housing where a person with a disability lives, which disability prevents their labor insertion, the exercise of handicrafts, professionals or of any trade, or that having reduced mobility cannot work on a regular basis, and the title of property is in the name of a person with a disability, whose cadastral value does not exceed the sum of B /. 250,000.00

Property Tax Exemption

For construction permits issued from 1990 to 2009

Panama had a very popular 20-year property tax exemption for new construction of houses and apartments from 1990 to 2009. It is possible to benefit for this exemption If the buyer bought a property covered by the exemption. However, the buyer may have to pay property taxes on its increasing value. For instance: Mr. A purchased an apartment from Mr. C in USD 350,000. Mr. C got a tax exoneration in 2008 over the registered cadastral value of USD 250,000. Mr. A shall pay taxes for the remaining USD 100,000

Property Tax Exemption

For constructions permit issued after July 2009

If the construction permit was issued after July 2009, the following new construction property tax exemptions apply:

For other types of construction such as commercial and industrial, the law recognized a benefit of a ten-year tax exemption on the improvement value not on the registered land value.

Property Tax Exemption

For constructions permits issued from 2012 to 2018

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

Other improvement regardless of their value

Land Value: Improvements are the constructions over the land. Th property tax exemption is on new construction only. The land itself is not exempted. The buyer shall pay property tax on the land if its value is more than the exemption threshold.

Horizontal Property (PH) Land Value: Apartments land value will pay a 1% property tax fee.

Transfer of Exemption: The property tax exemption belongs to the property, not the owner. In other words, the property tax exemption transfers to all subsequent buyers during the exemption time frame.

Registration of Tax Exemption: Registration at Tax Exemption Department at the DGI is required for the exclusion to apply.

Property Tax Discount: The taxpayer who pays the property tax within the first two months of the first quarter of the fiscal year, that is to say, the latest day of February will receive a 10% discount (Art. 786).

5. Property taxes rate system before the reform

If you want to calculate taxes due to the government or check that the government was collecting the taxes accordingly, you must use the following rate:

For houses and other lands

For instance: Mr. A owed a 250,000 house, taxes to be paid will be:

For apartments' improvement

For instance: Mr. A bought a USD 250,000 apartment, the fee to be paid will be:

Noted: that the land will pay 1% taxes.

This brochure is not to be considered legal advice. The information herein contained is accurate to the best of our knowledge at the time of the drafting of this document. We are not responsible for any changes that may occur or good faith inaccuracies. Furthermore, the information contained herein may not apply to all cases. You must seek a personal consultation before you make any decisions based on the data of this brochure. We cannot give legal advice on jurisdictions other than Panama.