Tax Obligations Associated with Investment in Panama
This news brief has been prepared for anyone interested in investing in Panama. It provides an overview of relevant tax aspects to consider when making investments, without addressing specific cases or delving into every detail.
Investment Vehicles in Panama
To start a business operation in Panama, the company must be registered with the Public Registry of Panama and obtain the respective operating permit. Foreign investors can register their foreign company in Panama as a “Branch,” which extends the legal personality of the foreign company to Panama, or register a new company in Panama as a “Subsidiary,” which involves the creation of a new local entity that may be owned by the foreign company but with a different legal status. The choice between these options depends on the specific intention behind the company’s creation. For subsidiaries, it is advisable to consider the additional protection provided by creating a new entity that limits liability, as well as potential tax optimization benefits. Whether dealing with branches or subsidiaries, separate accounting records must be maintained for operations in Panama to support tax payments.
All legal entities registered in the Republic of Panama are subject to a fixed annual fee of US$300.00, payable by all corporations.
The following taxes directly affect foreign investment and business activities conducted in Panama:
National Taxes
According to the Panamanian tax code, national taxes include:
Import Tax
Income Tax
Property Tax
Ship/Vessel Tax
Stamp Tax
Operating Notice Tax
Banking, Financial, and Currency Exchange Taxes
Fuel and Oil Derivatives Tax
Tax on the Transfer of Movable Goods and Provision of Services
Selective Consumption Tax on certain goods and services
Real Estate Transfer Tax
Taxes Affecting Local Companies Initially
Income Tax for Individuals
Individuals in Panama pay income tax according to the following brackets:
From 0 to 11,000.00: Not subject to tax
From 11,000.01 to 50,000.00: 15% on the excess over 11,000
More than 50,000.01: 5,850.00 for the first 50,000.00 plus 25% on the excess
Income Tax for Companies
Legal entities must comply with Income Tax (ISR) regulations. Panama operates under a territorial tax system, meaning that only income generated within the country is subject to ISR. Both domestic and foreign companies must pay taxes on these taxable incomes.
Calculation of Taxable Income and ISR Rate
Taxable income is determined by subtracting foreign source income and exempt income from gross income. The standard ISR rate is 25%, applicable since 2011, although exceptions exist for companies where the government holds more than 40% of the shares, which are taxed at 30%. Reduced rates apply to specific sectors such as agriculture and small businesses.
Tax on the Transfer of Movable Goods and Services (ITBMS)
Legal entities must also comply with the Tax on the Transfer of Movable Goods and Services (ITBMS), generally set at 7%, with differentiated rates for certain products such as alcoholic beverages and tobacco.
Monthly Payments and Annual Declaration
Since 2011, all companies must make estimated monthly ISR payments, known as MITA. This tax is calculated at 1% of the taxable income accumulated from the previous month. At the end of the fiscal year, the company will determine the total ISR due, deducting MITA payments. If the advance payments exceed the amount due, the company may receive a tax credit. The annual ISR declaration must be submitted within three months after the end of the fiscal year, allowing for the use of a regular fiscal year or a different fiscal year upon request.
Tax on Payments to Foreign Entities
For payments made to foreign entities for services rendered in Panama or affecting Panama, a tax is applied based on the income tax rate applicable to 50% of the amount to be settled, which will be withheld by the payer. For dividend payments, the same 10% dividend tax is applied, withheld by the company in future payments.
When treaties are involved, the provisions of the treaty will apply.
Dividend Tax
Under Panamanian law, dividends refer to income received by shareholders of a corporation or members of a limited liability company. The dividend tax applies to any company with an operating notice in Panama and arises when these profits are distributed according to the proportion of each shareholder. The tax rate is 10% on Panamanian-source earnings, 5% on foreign-source earnings, and 20% when paid to bearer shareholders.
When treaties to avoid double taxation are in place, treaty provisions will prevail over general rules.
Supplementary Tax
Since Panamanian legislation does not require local companies to regularly distribute dividends, a supplementary tax is applied if dividends are not distributed or if less than 40% of the profits are distributed. The rate is 10% on the company’s profits after income tax payment.
Tax on the Transfer of Movable Goods and Services (ITBMS)
This is the general tax on the transfer of movable goods (including imports) and services provided (including leases and other acts) within the Republic of Panama. The tax is calculated and collected monthly through a declaration within 15 days following each month’s transactions, with a general rate of 7% on the net sale price.
Net Capital Tax or “Operating Notice”
Companies conducting local operations must have an Operating Notice to cover their sales and service activities. These companies must pay a tax known as “Operating Notice.” The rate of this tax is 2% of the company’s capital. For this purpose, capital is understood as net assets at the end of the fiscal year. Net assets are the difference between total assets and total liabilities, excluding amounts owed by a branch or subsidiary to a foreign parent or subsidiary.
Income Tax on the Transfer of Shares
When a shareholder of a company with financial interest in Panama wishes to transfer shares to a buyer, the buyer must withhold 5% of the purchase value of the shares and pay this amount as tax to the General Directorate of Income, with both the seller and buyer being jointly responsible for this payment.
Real Estate Transfer Tax
When transferring real estate registered in the Republic of Panama, the owner must pay a 2% tax on the property’s appraised value or the sale value, whichever is higher.
Income Tax on Real Estate Transfer
In addition to the 2% mentioned above, an additional 3% income tax is required upon completion of a property sale. This tax is also calculated on the appraised value of the property or the additional value obtained, whichever is higher. Once the sale is completed, it is possible to verify if the 3% payment was higher than the income tax due. If the amount paid exceeds what was calculated, a refund of the excess can be obtained. Alternatively, the taxpayer may opt to keep the originally made payments.
Municipal Tax
Establishing any business, company, or activity subject to taxes in the districts of the Republic of Panama requires a proper understanding of tax implications. This guide provides an overview of key taxes, including income tax, transfer taxes, and other obligations. Understanding these aspects is essential for compliance and optimizing tax benefits in a favorable investment environment. For personalized advice, consulting experts in the field is recommended.
Written by Moisés Alvarado N., Attorney and Member of PANAMA LEGAL BUSINESS (PANLEB). Specialized in corporate and commercial law, with experience in the formation of onshore and offshore companies in Panama and various jurisdictions.
