Panama's Tax Law
Due to Panama’s tax laws, this country is fast becoming the jurisdiction of choice for companies looking to relocate their business interests and regional headquarters. An efficient workforce, Spanish and English widely spoken and a strong, transparent tax system have all contributed to this growth. The tax law finds its origins in the territorial tax system and is based on well-established principles, with income tax being levied on income arising from domestic source only. The country operates a full imputation system: a system in which any income tax paid by a company is credited in part, or in full, to the shareholder upon a distribution of profits to avoid any double taxation of corporate profits.
Under the territorial tax system, Panama tax laws establish different considerations depending if the source of the income is generated within or outside Panamanian territory. Income produced from any source within the territory of the Republic of Panama is subject to income tax. The income tax of Panama is levied only upon net income derived from operations within the territory of the Republic of Panama. Foreign source income, in other words income generated outside the Panamanian jurisdiction, is 100% exempted. Specifically, income derived from the following activities is not considered as produced within the territory of the Republic of Panama, and therefore is tax exempt:
- Conducting operations in another country from an office established in Panama.
- Directing from an office established in Panama, transactions which are executed, completed or effected outside Panama.
- Distributing dividends or participations, when such are derived from income not produced within the jurisdictional territory of the Republic of Panama, including the activities producing income in parts a) and b) above.
In practical terms, a company with an office and employees based in Panama does not pay any income tax, if it only performs international operations from Panama.
Incentives – Various investment incentives provide lower tax rates or exemptions. The Howard (Panama-Pacifico Special Economic Area) regime provides for tax exemptions for offshore services; gains from the sale or transfer of shares of companies established within the area; income from the transfer of goods and services between companies within the area and other free zones; income from the sale of goods or services to visitors and passengers while in transit to other countries or to vessels crossing through the Panama Canal or aircraft using authorized ports to overseas destinations; income from aviation and airport services; income from the manufacture of high-tech products; and income logistics and call center services.
In-bond manufacturing companies may import equipment and raw materials on a duty-free basis and subsequently export 100% of production, receiving a tax-free benefit. Such companies do not have to pay VAT on imports.
Based on the territoriality principle, gains derived from “re-invoicing” operations are deemed not to be derived in Panama, provided the merchandise being re-invoiced does not enter the Panamanian territory.
Headquarters from multinationals are exempt from income tax on services provided to nonresident entities that do not derive Panama-source income, from dividend tax and from Panamanian VAT on export services provided to nonresidents that do not generate taxable income in Panama. Foreign employees working in Panama for an MHQ are exempt from income tax on their wages and other remuneration that is not paid by the MHQ.
A variety of tax incentives are granted to encourage investment in new projects and activities relating to tourist facilities, including an exemption from income tax, property tax, import taxes and other taxes, depending on the amount of investment and location. The incentives will expire between 2016 and 2020. Incentives also are available in the Petroleum Free Trade Zones, Colon Free Trade Zone, etc.
Double Taxation Treaties
Panama-based entities are also allowed to benefit from the country’s wide network of double taxation treaties as well as tax information exchange agreements.
Tax Information Exchange Agreements in force
Double Taxation Treaties in force
The Faroes Islands
A more detailed chapter on Taxation including all taxes payable for companies generating income within the territory of Panama can be found in our FREE Guide to Doing Business in Panama.
The BusinessPanama Group together provides a convenient One Stop Shop offering you the following services:
- Setting up or acquiring the business
- Incorporating a company, llc, partnership or branch
- Locating office and living premises in Panama City for the company and its executives
- Legal services for setting up all operations, contracts, permits, etc.
- Accessing special tax incentives
- Applying for visas, work and residence permits for expats
- Relocation services
The Business Panama Group provides you our well-known One Stop Shop services to assist you in all your business needs. For more information contact us.