TAXATION IN PANAMA

Resident and non-resident have to pay taxes in Panama-sourced income. Thus, offshore income (from activities outside the Panamanian territory) is not taxed as per Panamanian Law. Although, there are some exceptions.

Panamanian-source income is subject to taxation whether it is received by a resident or non-resident entity. According to Paragraph 2 of Article 694 of our Fiscal Code, the income derived from the following activities is not considered from Panamanian source:

1. Bill, from an office established in Panama, the sale of goods or products for a greater amount than that for which said goods or products have been invoiced against the office established in Panama provided that said goods or products move only abroad.
2. To direct, from an office established in Panama, transactions that have effects abroad.
3. Distribute dividends or shares of legal persons, when such dividends or shares comes from incomes not produced within the territory of the Republic of Panama, including incomes from activities mentioned in literals a and b of this paragraph.

Accounting Principles and Financial Statements: IFRS is required. Banks. Companies operating in the Colon Free Trade Zone and other Free Trade Zone, and companies in general are required to maintain audited financial statements on their premises.

Taxable income: The taxable income includes all Panamanian-source income less expenses incurred wholly and exclusively in the production of assessable income or the conservation of its source. Panamanian source income could be salaries, compensations for personal services, income from investments, income from commercial, industrial or agricultural activities, and expenses paid by an employer on behalf of an employee (e.g. educational expenses, rental payments and entertainment expenses). Citizens, residents, and non-residents are not taxed on exempt income (i.e. interest on Panamanian government securities, interest on savings accounts, and time deposits maintained with banks established in Panama).

Interest Income: The following manifestations of interest earned are not subject to income tax:

1. Savings and time deposits with banks
2. Panamanian government securities
3. Securities issued by companies registered with the National Securities
4. Commission, provided the securities were acquired through a securities exchange duly established to operate in Panama
5. Loans granted to the agricultural and agro-industrial sectors
6. Loans granted to the tourism sector.

Natural Person Income Tax Rates: Individuals with only one salary as their source of income are not required to file an income tax return. Individuals with more than one salary or that generate other taxable income not subject to income tax withholding must file a tax return.

Tax rates for individuals are as follow:

1. Natural persons who earn less than $11,000 per year pay no income tax.
2. Natural Persons earning between $11,000 and $50,000 pay a 15% income tax
3. Natural Persons earning $50,000 or more pay a 25% income tax.

Income Tax Deductions Include:

1. Mortgage interest paid on the tax payer primary home can be deducted up to $15,000 yearly.
2. Student loans interest payments for the taxpayer's or dependents' education in Panama is fully deductible.
3. Health insurance premiums are deductible.
4. Married couples can present a joint income statement and will have right to a $800 USD tax deduction.
5. Contributions to private pension plans not exceeding 10% of the individual's gross yearly income to a maximum of $15,000 USD yearly are deductible.

Tax applied to Foreign: 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. According to Article 762-N "They are considered fiscal residents of the Republic of Panama natural persons who remain in the national territory for more than 183 calendar days or alternates in a fiscal year or the year immediately preceding. Likewise, they shall be considered fiscal residents of the Republic of Panama, those natural persons who have established their Permanent residence in the territory of the Republic of Panama. They are also considered fiscal residents of the Republic of Panama, legal entities incorporated under the laws of the Republic of Panama and have material means of Direction and administration within the Panamanian territory. Likewise, legal persons constituted abroad who have material means of management and administration within Panamanian territory and who are duly registered in the Public Registry are considered to be fiscal residents of the Republic of Panama."

Tax Residence Certificate: Resolution Number 201-0354 of 13 of January of 2016, in regards to the attainment of the Tax Residence Certificate set the requirements to obtain a Tax Residence Certificate. You must provide evidence that the foreigner has economic or family ties to Panama, thus providing a utility bill, groceries receipts, rental agreement, among others will help to access this certificate. Some use the certificate to prove to their bank, that they are tax resident in Panama, thus not to share your financial information with your previous country of residence.

Legal Entities Taxes: A company is deemed to be tax resident in Panama if it is incorporated in Panama or its principal business is carried out in Panama. The following factors are taken into account in whether a legal entity is resident in Panama are as follow:

• Whether meetings of the board of directors, in which decisions that affect the direction or management of the company are made, are carried out in Panama
• Whether the business activities or activities to support other companies are carried out from a headquarters located in Panama, regardless of the source of income.

Income Tax Rates: Is 25% flat rate on net taxable income or a 1.17% rate on gross taxable income, the latter is the alternative minimum tax (CAIR). The CAIR is assessed at a general rate1.17% on gross taxable income. A taxpayer can request to the Panamanian Revenue Agency (Dirección General de Ingresos or DGI) the CAIR not to be applicable when it has net operation losses or where the effective tax rate is higher than the standard 25% rate. The tax authorities have discretion to grant an exemption from the CAIR for the period requested and three subsequent years. The DGI has a six-month period within which to reach a decision on such requests; otherwise, the petition will be considered as granted. Companies whose taxable revenue is less than $ 1.5 million USD are not required to calculate the CAIR.

Panama corporations with taxable income exceeding $1.5 Million USD use a different tax bases as follow:

• net taxable income calculated on the normal basis or
• 4.67% of the gross taxable income (excluding exempted and non-taxable income and foreign-source income); this is called the alternate calculation of income tax (Calculo Alternativo del Impuesto sobre la Renta or CAIR).

If the government owns 40% or more of a company's capital that company will pay the 30% rate. Companies involved in agriculture and small businesses have a special income tax rates.

Losses can be carried forward 5 years as long as the loss doesn't exceed 20% of the total loss in any year. However, the deduction of losses may not exceed 50% of taxable income in any year. Certain regulated industries have special loss schedules, i.e.: mining.

Local municipal tax: Lucrative activities in any municipality shall pay local tax upon gross income, calculated according to the companies' category and activity. In most cases, it cannot exceed $2,000 USD per month for each activity performed. An Annual Municipal Tax Return for the District of Panama must be filed before the Municipal Authorities in the first 90 calendar days after the ending of the fiscal year. In case the taxpayer does not file the return before the deadline, a $500 USD penalty will be applicable.

Prepaid Dividend Tax (Impuesto Complementario): A complementary tax applies each tax year that the company do not distribute dividends or that the entity distributes less than 40% (income from Panamanian sources) or 20% (income from foreigner source) of the net profits after income tax. Is an advance payment of the dividend tax, calculated on the difference of the distributed dividends and 40% of the net profits after income tax, and applies the corresponding tax rate. In other words, if no dividend distribution is made, the company must pay a 4% Prepaid Dividend Tax in advance. This 4% will be applied to dividend tax when dividends are declared. Once the dividend is distributed, the additional 6% would be payable. If dividends are not paid or dividends paid are less than 20% of income from a foreign source or specific income exempt, there is a 10% tax for the difference between 20% and what was paid. If complementary tax is paid, then the entity may offset the paid complementary tax with the dividend tax when the corresponding dividend is decreed.

• Local Source 4% (40% x 10%)
• Foreigner Source 2% (20% x 10%)
• External Source of the ISR 2% (20% x 10%)

Filing Period of Income Tax Return: Natural Persons must file their annual income statement before March 15th but this deadline may be extended by one month upon request. Interest and surcharge are charged on the late filling and late payment of tax. Companies must file their income tax returns within 3 months after the fiscal year ends.

Monthly Income Tax Advance" or "MITA": Companies and entities pay their estimated income tax by the 15th of every month equal to 1% of the total taxable income accumulated the prior month. 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. Please notes that companies engaged in gasoline, oil products, pharmaceuticals, food, and medical products pay a different MITA.

Other Taxes

Panamanian Commercial License Tax: If you are planning to engage in business activities within the Panamanian territory you may need a Panamanian Aviso de Operaciones, formerly known as Commercial License, unless you are the activity is specifically exempt. This permit is issued by the Ministry of Commerce and Industry and the cost will depend of the activity that you will carry on. There is an annual tax for this permit equivalent to 2% of the company's net worth with a minimum of $100 USD and a maximum of $60,000.00 USD. Companies located in special economic or development zones or within free trade zones pay a rate of 1% with a minimum of US$100 and a maximum of $50,000.00 USD.

Panama Sales Tax (ITBMS or IVA or VAT): Panama Sales Tax is levied on the imported goods, transfer of goods, lease or services rendered in Panama. Law No. 8 of March 15th, 2010 established the ITBMS in 7%. However, the rates is higher for the sale of alcoholic beverages and accommodation (10%), tobacco (15%), and specific services that are charged with a 10%. Free trade zone transactions, power generation & distribution services, cargo and passenger transportation by sea, air, or land are exempted to pay this tax. Registration is mandatory for businesses with monthly turnover of US$3,000 or annual turnover of US$36,000. This tax must be filing monthly, except for professional who may file quarterly returns.

Inheritance/ Estate Tax: Panama does not have inheritance tax. Despite this, taxes, on gifts (inter vivos) of properties located in Panama are in effect.

Employees Taxes

Panama Social Security Tax: These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the worker social security system and retirement benefits at the national level. Employers and employees pay social security taxes when the employee receives his payment. Employers pay 12.25% and the employee pays 9.75%. XII Month, employer paid 10.75% and employee 7.25%

Educational Tax: A 1.25% of an employee's wages are withheld as an "educational tax" while the employer pays 1.5%.

Professional Risk: 0.98% to 5.6% of the remuneration paid by the employer and depend on the activity and the risk that this activity involved. Source: Decree 68 of 1970 and Art. 36 and Annex of Agreement No. 2 on Professional Risk.

Employment Income Tax: Is taxed by withholding.

Non-Residents: Non-residents are taxed only on income from Panamanian sources, and the payer must withhold the tax on any type of income paid to a non-resident. Nonresident individuals hired or otherwise rendering services to Panamanian residents for periods of less than 180 days in a calendar year are subject to withholding tax at source at a rate of 12.5% of their gross income.

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 50% of the total amount paid subject to the withholding tax. The employer is required to pay the withheld amounts within 10 days following the payment to the Panama tax authorities.

Withholding: 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, fines, 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.

Withholding Tax: Services and fees paid or accrued to individuals and to resident corporations are not subject to income tax withholding, except payments on dividends distributed from retained earnings arising from Panamanian-source income. Services and fees, interests, commissions, royalties or technical assistance fees, etc., paid or accrued to foreign recipients are subject to withholding tax only if the local payer will take it as a deductible expense. In other words, income received by persons or companies domiciled outside of Panama will be considered from a Panamanian source if it arises from services or actions that benefit persons or companies located in Panama. The income tax withholding is at the regular rates for individuals or corporations but only on 50% of the amount of income received by the recipient.

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

Royalties: Royalties paid to a non-resident is subject to a 12.5% withholding tax (50% of the royalty is subject to the general 25% corporate tax rate) if the payment benefits a Panamanian resident or if the expense has been considered as deductible in Panama.

Technical Services Fee: Technical Services Fee paid to a non-resident is subject to a 12.5% withholding tax (50% of the technical services is subject to the general 25% corporate tax rate)

Dividends: The Corporation declaring the dividend must withhold a 10% tax on all dividends declared from income earned within the Republic of Panama. Dividends declared by domestic subsidiaries on income earned within the Panamanian territory are subject to the 10% tax as well. However, dividends on bearer shares are subject to a 20% dividend tax. Companies requiring a commercial operating license must withhold a 5% tax on dividends declared from income obtained on exports or from foreign source. Companies established in a Free Zone must withhold a 5% tax on dividends, regardless of the source of income. Loans and advances to shareholders are subject to 10% dividend tax, except for bearer's shares which is subject to 20% tax withholding. Capital shares can be reduced only if the total retained earnings have been distributed and the dividend tax paid.

Tax Incentives

The following incentives are available to these qualifying industries and corporations:

1. Companies operating in the Colon Free Zone, or any other Free Zone in the country, are tax-exempt on profit derived from sales from Free Zone to foreign countries.
2. Companies operating in "Ciudad del Saber" (City of Knowledge), are exempt of income tax, import duties and VAT. Dividend tax of 10% or 5% applies when dividends are declared.
3. "Small business" companies, except those requiring a commercial operating license, are exempt from dividend and complementary taxes. Income tax is calculated over a combination of the personal tax rate and corporate tax rate.

Companies would be considered small as long as they:

• are not related or affiliated to other companies
• are not a result of the fractionalization of other corporations
• have an annual gross income of less than US$200,000, and
• its shareholders are individual persons.

Agreement for Tax Cooperation and Exchange Information: The Republic of Panama has 17 tax treaties and nine tax information exchange agreements. Some of the countries which Panama has those agreements for tax cooperation and the exchange of information relating to taxes are: Canada, Denmark, Finland, Greenland, Iceland, Norway, Sweden, United States of America. These agreements apply to taxes of every kind imposed on the contracting parties.

Tax Authorities and Source of Tax Law: Ministry of Economy and Finance, Revenue General Office, Cadastral General Office, Customs General Office. The source of tax law can be find in the Fiscal Code and complementary Laws, Decrees and Resolutions.

Disclaimer

This contain general information only, and Lill Martinez Law and Real Estate Office, www.kerycruz.com, none of her workers, associate, affiliates, employees or subsidiaries is by means of this information, rendering professional advise or services. Before making any decision or taking any action that may affect your finances or your business, you should consult the Fiscal Codes of Panama and related Laws, Decrees and Resolutions issued by the Tax Authorities and a qualified professional adviser. Lill Martinez and the aforementioned shall not be responsible for any loss whatsoever sustained by any person who relies on this information.