This post was prepared by Richard Spicer a fellow of the IAB and IFA living and working in Panama with over 30 years experience in the accounting profession. Panama is best known as an offshore financial centre and for the canal. Both provide significant revenue for the Panamanian government. Taxation for local businesses and individuals is generally light, for example the standard rate of VAT is 7%. The currency is nominally the Balboa although the US Dollar is the currency used for all cash (there are no Balboa notes and only 50 cent and 1 Balboa coins) and most financial transactions, the exchange rate is fixed at PAB 1.00 to USD 1.00.
All businesses carrying on a business in Panama are subject to taxation. Business entities can be corporations, limited liability companies, limited liability partnership, general partnership, joint ventures or foreign companies with a branch in Panama. A business with their headquarters in Panama offering support to other companies would be subject to taxation.
Commercial Permit Tax
All persons and entities with business activities in Panama must obtain a Commercial Operation Permit which is issued by the Ministry of Commerce and Industry. The annual tax for the permit equals 2% of the company’s net worth with a maximum payment of US 60,000. Companies located in special economic or development zones or within free trade zones pay a rate of 1% with a maximum payment of USD50,000.
Financial statements are prepared in accordance with IFRS, companies are required to keep audited accounts on their premises. There is no requirement to file the accounts as in the UK. The standard tax rate is 25%, there are many exceptions to this principally for agricultural and small businesses. Tax is paid monthly on account (known as the Monthly Income Tax Advance or MITA) at 1% of the taxable income. At the end of the tax year a balancing payment is made.
Panama has a territorial tax system; tax is paid on income earned in Panama for residents and non-residents. Investment income, interest, dividends and royalty payments from outside Panama are not subject to taxation in Panama. This is one reason why Panama is a popular retirement location, there is no tax paid on a foreign pension in Panama.
An individual is resident in panama if they are in the country for more than 183 days in a calendar year or has established permanent residence in Panama.
Income tax is charged on salaries, from carrying on a commercial or an agricultural business and investment income.
Rates of income tax for 2016 are:-
first USD 11000 – Tax free
Next USD 39000 – 15%
Income above USD 50000 – 25%
Allowances and Deductions against Income
Individuals are entitled to a basic deduction of USD 800 on a joint tax return. Other allowances are on:-
Mortgage Interest – Up to USD 15000 per year.
Donations to a not for profit organisation – Up to USD 50000 per year.
Political Contributions – Up to USD 10000 per year.
Individual Retirement Plans – Up to USD 15000 per year that do not exceed 10% of gross income.
Health Insurance – On full cost.
Medical expenses incurred in Panama that were not covered by insurance – On full cost.
An employee must pay 9.75% of their remuneration as a social security contribution.
Self-employed must contribute 13.5% of their fees as a social security contribution.
Capital Gains Tax
Capital gains tax from the sale of securities and negotiable instruments is charged at 10%. Gains on the sale of property are considered capital gains. If the transaction giving rise to the gain is not part of ordinary business activities, the gains are charged at a rate of 10%. However the purchaser should withhold 3% of the higher of the purchase price or the rateable value of the property as an advanced payment of tax. Currently the Panamanian tax office will accept the 3% withheld as the capital gains tax payable. If the 3% is more than the 10% tax due on the gain the taxpayer can make a claim for a refund. A property transfer tax of 2% is also charged on the sale price of all property transfers.
Non-resident individuals or businesses have tax withheld. Dividends paid to non-residents are subject to a 5% or 10% withholding tax. Interest paid to a non-resident is subject to a 12.5% withholding tax. Royalty payments to a non-resident is subject to a 12.5% withholding tax. Technical service fees are subject to a 12.5% withholding tax. A branch of a foreign company must pay 10% of its after tax income as a dividend tax in addition to the corporation tax.
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