PANAMA INFORMATION: BUSINESS, TAXATION/OFFSHORE/tax haven?

Taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself. The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation. See Offshore Legal and Tax Regime for details of the (minimal) taxation of companies which do not carry on business inside Panama, and companies in the Colon Free Zone.

In February, 2005, Panama’s unicameral legislature approved a major fiscal reform package in order to raise revenues from new business taxes, and reduce the country’s level of debt. The legislature voted 46 to 28 in favour of the measures, which included a 1.4% tax on companies’ gross revenues, and a 1% levy on firms operating in the Colon Free Trade Zone – the largest free port in the Americas.

In July, 2005, all firms which prior to 2005 were exempt from value added tax in Panama are affected by a new interpretation of the country’s Tax Code by the tax authorities. In a little publicised move, Panama’s Revenue Office circulated a series of opinions which stated that the recent tax reform has abolished all VAT exemptions and special treatment given prior to February 2005.

The new interpretation centered on paragraph 26, article 1057-V of Panama’s Tax Code which, although the wording is the same as the original draft passed in 1976, the Revenue Office has taken to be a new law after it was reproduced in the major reform approved in February 2005. Therefore, according to the Revenue, it is effectively a new law, which can be interpreted differently to the ‘old’ legislation.

Consequently output VAT could now be charged on clients previously exempted. Similarly, input VAT may also affect previously exempted taxpayers.

In addition to the taxes described below, employers pay social security contributions of 10.75% in respect of employees (see Personal Taxation).

Panama Scope of Income Tax
Income tax is payable on the income of a Panama or foreign corporation or other entity derived from business carried on within Panama; a corporation carrying on business both inside and outside Panama will pay tax on the proportion of its income that arises within the country. Capital gains are counted as income after deduction of allowances.

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Panama Rates of Income Tax
The rate of income tax in Panama was reduced to 27.5% from 30% as a result of a fiscal bill passed in the first months of 2010. The lower rate applies from January 1, 2010. In 2012, the corporate tax rate will fall to 25%. However, companies in the energy, telecoms, financial, insurance, banking and mining industries will continue to pay corporate tax at 30% until 2012, then 27.5% until 2014, whereupon the rate for these companies will fall to 25%. Companies with turnover of less than PAB200,000 per year pay income tax at individual rates.

There is a withholding tax of 10% on dividends paid out of taxed income. If less than 40% of taxed income is distributed, then Undistributed Profits Tax of 10% becomes payable on the undistributed balance; this therefore amounts to a maximum of 4% tax. In effect this is an advance withholding tax, and it is creditable against the 10% tax on later distributions of the taxed profit.

The 2005 reform package introduced a ‘minimum income tax’ provision, under which the net taxable income of a legal entity will be the higher of the amount resulting from application of the ordinary Income Tax rules (gross income minus deductible expenses minus deductible allowances equals net taxable income), or 4.67% of gross income. Whenever the effective income tax rate exceeds 30% of the net taxable income earned by a taxpayer, a waiver may be obtained from the Tax Administration and no presumptive taxation will apply. The same will apply in the event of losses for taxable purposes. The waiver may be granted for a maximum period of 4 fiscal years (the year for which the waiver is granted and the 3 subsequent fiscal years).

A new alternative minimum tax is being introduced in 2010 for companies with revenues exceeding PAB1.5 million.

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Panama Calculation of Taxable Base
Taxable income is Panama-source income less allowable deductions. Transportation sector companies have been able to choose to calculate their taxable income as 3% of gross revenue; telecommunications companies have been able to pay tax on only 50% of their normally taxable income.

Dividends are not included in taxable income (either because, if Panama-sourced they will have been subject to withholding tax at 10%, or because, if they are foreign, they are exempt). Expenses associated with receipt of dividends are not deductible. Interest received from time-deposits in Panama banks or from Government securities is exempt.

Stocks are valued at cost, with several different bases being allowed, including FIFO and average cost. ‘Cost’ means purchase price including import duties, or the cost of manufacturing including direct overhead.

Allowable deductions include:

Expenses paid or incurred for the production of income or the maintenance of a source of income;
Depreciation of capital assets is mandatory, usually by the straight-line method. The life of assets is at the tax-payer’s discretion, subject to a minimum of 3 years (30 years for immovable property).
Interest on loans employed for the production of income, but not if they are made on the security of a term deposit;
Bad debt provisions are allowable up to 1% of sales, with a maximum reserve of 10% of receivables;
Losses can be employed over 5 years forward at 20% per year, but only to offset up to 50% of taxable income; any losses not so employed are lost. There is no group or consortium relief, although it is sometimes possible to assign tax credits between companies.

NB: This brief summary of some of the more important aspects of Panama income tax law is given for general information only; it should not be relied upon in actual situations, for which professional tax advice is necessary.

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Panama Filing Requirements and Payment of Tax
The tax year is the calendar year, ending 31st December, although a different year can be agreed with the tax authorities. A tax return is due within three months (can be extended to six). The previous year’s tax return must be accompanied by a forecast of the current year’s tax, which is then payable in three instalments after six, nine and twelve months after the end of the previous year.

Any under-payment of tax must be paid along with submission of the previous year’s return.

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Panama Withholding Tax
Dividends paid out by Panamanian companies are subject to 10% withholding tax; the rate is 20% for dividends on bearer shares. Companies located in free zones must withhold tax on dividends at 5%.

If less than 40% of taxed income is distributed, then Undistributed Profits Tax of 10% becomes payable on the undistributed balance; this therefore amounts to a maximum of 4% tax. In effect this is an advance withholding tax, and it is creditable against the 10% tax on later distributions of the taxed income.

Branches of foreign corporations pay the 10% ‘deemed dividend tax’ on their full taxed income (making their effective taxation rate equal to 37%); but they are not subject to withholding tax on eventual distributions.

Interest paid or credited to the account of a foreign lender is subject to a 6% withholding tax. Interest on bonds, notes and other registered securities is subject to a flat 5% withholding tax unless traded on a registered exchange in Panama. There is no withholding tax on domestic royalty payments, although there is a 15% withholding tax on royalties for non-treaty countries.

The fiscal reform package introduced in 2005 includes a rule (Paragraph 1-B of article 694 of the Fiscal Code) that all payments remitted abroad to beneficiaries not resident in the Republic of Panama shall be subject to withholding if the payments are related to the generation of income within Panamanian territory or the conservation of a source of income located within Panamanian territory and are considered to be deductible expenses by the payer operating from Panama. As examples, a non-exhaustive list of payments subject to the new rule has been inserted, including fees and income relating to intellectual property rights, royalties, know-how, technological or scientific knowledge and the like.

The taxable base for application of the withholding tax (at income tax rates) is 50% of the payment involved.

Individuals or legal entities engaged in “international business activities” and carrying out operations outside Panamanian territory are however exempted from the tax, ie payments caught by the law are not considered to be Panamanian source income, although the definition of ‘international business activities’ was not made clear.

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Panama Real Estate Taxes (Capital Gains Tax)
There are annual taxes on the value of real estate, plus capital gains tax on profits from the sale of real estate, and a transfer tax arising on sale.

The annual tax, under Article 766 of the Fiscal Code, is based on official valuations, and is levied on a sliding scale, previously:

1.75% from $30,000 (lowered to $20,000 in 2005) to $50,000; plus
1.95% from $50,000 to $75,000; and
2.10% on values above $75,000
Valuations under the ‘cadastral’ system were updated in 2005, and from 2006 the tax was based on the new values at the following rates:

0.70% on any value exceeding US$30,000 up to US$50,000;
0.90% on any value exceeding US$50,000 up to US$75,000; and
1.00 % on any value in excess of US$75,000.
The real estate tax was extended to certain properties not previously covered as a result of a fiscal reform package approved in 2009.

The 2009 package also changed the way in which Capital Gains Tax is levied on real estate gains under Article 701 of the Fiscal Code and Articles 89 and 90 of the Income Tax Regulations. The rate of tax was 30% on the taxable gain after deductions, but the calculation basis was quite complex, at least for persons not otherwise paying much tax. Under Law 49 of 2009, a 3% tax must be withheld as an advance payment towards capital gains tax, either on the sale price or the property’s value, whichever is higher.

The tax on the transfer of real estate (not new homes) is 2%, payable by the seller, which is credited against capital gains tax.

Incentives introduced in 2004 to encourage development gave savings on a $200,000 home over 20 years of $69,250 – or about one-third of the purchase price of a high-quality home. But they were finally withdrawn on August 31, 2005, with existing projects needing to be completed within a year.

Not all was lost after September, however. Residences with construction permits issued after September 1, 2005 benefit from the following exemptions:

Value up to $100,000: 15 years
Value from $100,000 to $250,000: 10 years
Value over $250,000: 5 years
Land is not exempt and property tax would continue to be paid on it if its value is above $30,000.

These incentives were continued with some changes by 2008 legislation: improvements to real property authorized by construction permits issued after July 1, 2009, are exempt from real estate taxes for a period of 10 to 15 years.

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Panama Stamp Duty
Most official and public documents in Panama require stamping, including sales invoices, receipts, legal submissions and contracts. Fiscal stamps are on sale in various denominations; pre-stamped paper can be bought at PAB 4 the sheet.

It is possible to account for stamp duty on a quarterly or half-yearly basis to the tax authorities.

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Panama Commercial License Tax
Companies carrying on business in Panama (not Free Zone companies or offshore companies) need to pay an annual Commercial License Tax of 2% of the net worth of the business up to a maximum of PAB60,000). Free Zone companies are subject to an annual License Tax of 1% on the capital of the company (minimum PAB100, maximum PAB50,000). Licensed multinational headquarter companies and companies operating under special regimes relating to international contracts for Special Economic Zones such as the Howard Special Economic Area are excluded from the License Tax. Certain rural and/or small business are also exempt from the tax. In addition to the national business license tax, municipalities also levy similar taxes on businesses.

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