In the current global context, where the threat of tax spoliation lurks, Panama is an attractive proposal for a vital 180-degree change to radically optimise our tax contributions.
This small Central American country, well-known for its famous Canal, has a territorial tax system, based on the principle that only the income considered to be obtained within the Panamanian borders will be taxed, being exempt then in general terms, income obtained from foreign sources.
Panama is also known for being one of the most important financial centres in South and Central America, and enjoys an economic stability and legal certainty that is unusual in neighbouring countries.
In our article we will explain in depth the Panamanian tax system and the process of obtaining tax residency.
How to obtain tax residency in Panama
Panama, despite not belonging to the OECD, follows the tax residency scheme that can be observed in other countries that do form part of the Organisation.
For these purposes, a natural person can be considered a tax resident in Panama according to one of the following criteria:
- If more than 183 consecutive or alternate days in a given tax year are spent in Panamanian territory.
- If a permanent residence is established in Panamanian territory, having a centre of economic and family interests in Panama.
On the other hand, legal entities are considered tax residents if they comply with the following requirements:
- To have been incorporated in accordance with Panamanian commercial regulations and to have material means of management and administration within Panama.
- To have such means in Panamanian territory, being registered in the corresponding Public Registry of Panama, regardless of whether the entity in question has been incorporated in any other country.
However, as in other countries, it will be necessary to prove (in the case of natural persons, because for legal entities the criterion is objective) this tax residence by means of a tax residence certificate.
How to obtain a tax certificate in Panama?
To obtain such a certificate, a natural person must be able to prove the following:
- To prove a stay of more than 183 days it must be demonstrated that he/she has stayed in Panamanian territory, this being possible by means of a certification issued by the National Migration Service.
- Try to prove the centre of economic and family interests, for example, an employment contract or the development of economic activities in Panama will be accepted, in addition to having a homea available.
Finally, once these requirements have been met, a certificate of tax residence in Panama can be requested from the Directorate General of Revenue.
However, in order to be able to stay 183 days, it will first be necessary to obtain a visa that allows such a stay.
How to request a Visa?
Fortunately, there is a long list of countries considered “friendly nations” (including most EU territories) for whose nationals it is easier to obtain a Visa if they can prove they have professional or economic ties in Panama.
This would include having at least USD 5,000 in a Panamanian bank as proof of solvency.
However, if such financial or professional ties cannot be proven, a Visa to reside in Panama can be obtained through financial investment, similar to the Golden Visa programmes around Europe.
This Visa allows any person, whether or not a national of the aforementioned Friendly Nations, to obtain a Visa to reside in Panama through one of the following investments:
- Investment in reforestation projects: USD 80,000 (minimum purchase of five hectares).
- Investment in real estate: USD 300,000.
- Investment in financial vehicles: USD 500,000.
- Investment in bank deposits: USD 700,000.
What taxes do expats pay in Panama?
As already anticipated, one of the major advantages of being a tax resident in Panama is its concept of taxation according to a principle of territoriality.
In this regard, this means that no tax is paid on income earned abroad, and only income deemed to have been earned in Panama territory is taxed by the Panamanian tax authorities.
This is the major advantage of the Panamanian tax system. However, there are other features of the Panamanian tax regulations to be taken into account:
Direct taxes applicable to legal entities:
In Panama there are several direct taxes applicable to legal entities that are of relevance:
Corporate Income Tax
Equivalent to the Corporate Income Tax established in many jurisdictions, this tax is levied on the profits obtained by companies resident in Panama for tax purposes in that territory.
- The tax rate is 25%, except for certain state-owned entities (30%).
However, there is a minimum effective tax rate applicable to those entities with income in excess of USD 1.5 million. In such cases, the tax rate is multiplied by the higher of the following two amounts:
- The taxable income determined in accordance with the standard rules (i.e., deducting any applicable expenses)
- Multiplying the minimum rate (4.67%) by the income earned by the entity in question.
Annual Corporate Flat Tax
This tax is a single annual rate and is levied on a wide range of entities simply because they are incorporated in Panama. The amount to be paid by the entities is 300 US Dollars, except for private interest foundations, whose contribution will be 350 or 400 US Dollars.
This tax is an advance on the tax on dividends that must be paid by the shareholders who receive them. It will only apply to those entities that distribute, in general terms, less than 40% of their profits net of tax.
The applicable rate will be 10% of the difference between the undistributed net profit and this 40% per cent.
Direct taxes applicable to legal entities
There are three main taxes for those with activities in Panama:
- The Income Tax on Natural Persons.
- Tax on dividends
- Capital Gains Tax.
The Personal Income Tax is levied on the general income earned by individuals and is progressive in nature, with higher incomes being taxed at a higher rate
These are its brackets:
|From 0 to 11.000$||0%|
|From 11.000$ to 50.000$||15%|
Furthermore, the dividend tax is a withholding tax that individuals will have to pay on their shareholdings (remember that only Panamanian entities, the rest are not subject to taxation in Panama).
This tax will amount to:
- 10% of the distributed dividends if they are the result of profits whose source is Panamanian.
- Or 5% of such dividends if they are the result of profits from a foreign source.
Finally, capital gains tax is levied on sales of shares (with certain exceptions) and real estate.
Thus, the rate applicable to both the sale of non-exempt shares and the sale of real estate will be 10% of the profits obtained from the sale.
In short, Panama is a little known but tremendously attractive alternative for making investments in other countries given its territoriality criterion which, although it does not imply excessively low taxation on domestic income, does offer unbeatable conditions for international income.
How to take the first step?
If you wish to move your tax residence or take your company to Panama, do not hesitate to contact us at [email protected] or via the contact form, our team of lawyers in Panama will be happy to guide you through the process.
And if you are considering moving your tax domicile but have not yet decided on your ideal destination, we recommend you to download our free report “The three best tax destinations of the moment”, available below.