Panama

Country Name: Panama
Currency: Panamanian Balboa (PAB), United States Dollar (USD)
Primary Tax Authority: Dirección General de Ingresos (DGI) – General Directorate of Revenue
Key Legislation:

Fiscal Code (Código Fiscal)
Income Tax Law (Ley de Impuesto sobre la Renta)
Value Added Tax Law (Ley del Impuesto a las Transferencias de Bienes Corporales Muebles y la Prestación de Servicios – ITBMS)
International Banking Center Law

Fiscal Authority Allocation

Centralized Fiscal System:
Panama operates a centralized tax system, with the General Directorate of Revenue (DGI) responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), and value-added tax (VAT). Local governments have limited taxing authority, primarily collecting property taxes and municipal fees.

Corporate Income Tax (CIT)

Standard Rate: 25%
Panama applies a corporate income tax rate of 25% on net taxable income for resident companies. Non-resident companies are taxed on Panama-sourced income only.

Corporate Forms and Taxation:

Corporation (Sociedad Anónima – SA): The most common corporate form, subject to the 25% CIT rate. This structure is frequently used by both local and foreign businesses.
Limited Liability Company (Sociedad de Responsabilidad Limitada – SRL): Used by smaller businesses, taxed at the standard 25% CIT rate.
Branches of Foreign Companies: Subject to the same CIT rate as resident companies on Panama-sourced income.

Exemptions and Incentives:

Panama Free Zones: Companies operating in Panama’s free zones enjoy exemptions from CIT, VAT, and customs duties. These zones are particularly focused on promoting international trade and logistics.
Multinational Headquarters (MHQ) Regime: This regime allows multinational companies to set up regional headquarters in Panama, benefiting from reduced CIT rates, dividend tax exemptions, and immigration incentives.

Goods and Services Tax (GST) / Value-Added Tax (VAT)

Standard Rate: 7%
Panama applies a VAT rate of 7% (ITBMS) on most goods and services. A higher rate of 10% applies to certain goods, such as alcoholic beverages and hotel accommodations, while a 15% rate applies to tobacco products.

Exemptions:
Certain goods and services, such as medicines, educational services, healthcare, and exports, are exempt from VAT. Exports are zero-rated, allowing companies to recover VAT on input costs associated with exported goods.

Personal Income Tax (PIT)

Progressive Rates:
Panama applies progressive personal income tax rates to residents and non-residents earning Panama-sourced income:

Up to PAB 11,000: 0%
PAB 11,001 to PAB 50,000: 15%
Above PAB 50,000: 25%

Dividends:
Dividends paid to both residents and non-residents are subject to withholding tax:

Residents: 10%
Non-residents: 20% (for dividends paid from foreign-source income).

Additional Mandatory Contributions

Social Security Contributions:
Both employers and employees must contribute to Panama’s social security system, which provides pensions, healthcare, and other welfare benefits.

Employer Contribution: 12.25% of gross salary.
Employee Contribution: 9.75% of gross salary.

Withholding Taxes

Dividends: 10% for residents, 20% for non-residents.
Interest: 12.5% for non-residents (may be reduced under tax treaties).
Royalties: 12.5% for non-residents (may be reduced under tax treaties).

Transfer Pricing Rules

Panama adheres to OECD transfer pricing guidelines. Related-party transactions must comply with the arm’s-length principle, and companies are required to maintain detailed documentation for cross-border related-party transactions.

Special Tax Regimes

Panama Free Zones: Businesses operating in free zones benefit from a complete exemption on corporate income tax, VAT, and import/export duties for a specified period. Free zones are designed to promote trade, manufacturing, and logistics.
Multinational Headquarters (MHQ): Companies that qualify as multinational headquarters enjoy a reduced tax rate of 5% on taxable income and exemptions on withholding taxes for dividends, interest, and royalties.
Colon Free Zone (Zona Libre de Colón): One of the largest free trade zones in the world, offering tax incentives for warehousing, re-exporting goods, and international trade.

Other Taxes

Real Estate Tax: Property taxes are levied on properties valued above PAB 30,000. The rate varies from 0.5% to 1% depending on the property’s assessed value.
Capital Gains Tax: Capital gains from the sale of real estate are taxed at a rate of 10%. Gains from the sale of shares in Panamanian companies are taxed at 10%, with a 5% withholding tax at the time of the sale.
Excise Duties: Excise taxes apply to certain products, such as alcohol, tobacco, and fuel.

Double Taxation Agreements (DTAs)

Panama has signed over 20 double taxation agreements with countries such as Spain, Mexico, and the Netherlands. These agreements reduce withholding tax rates on dividends, interest, and royalties and provide relief from double taxation of cross-border income.

Local Taxes

Local municipalities in Panama collect property taxes and certain municipal fees. However, the General Directorate of Revenue (DGI) administers and collects income taxes and VAT at the national level.

Compliance and Reporting

Annual Filing:
Corporate tax returns must be filed by March 31st of the following year. Personal income tax returns are due by the same date. The tax year in Panama follows the calendar year.

Penalties for Late Filing:
Penalties for non-compliance or late filing include interest on overdue taxes and fines. Interest on unpaid taxes is generally charged at 1.5% per month, with additional penalties for non-compliance.

Recent Developments

Tax Modernization:
Panama has implemented various tax modernization measures to increase transparency and combat tax evasion. This includes introducing electronic invoicing, updating transfer pricing rules, and tightening regulations on offshore companies.

Substance Requirements:
In line with international standards, Panama introduced economic substance rules for companies, particularly those in the financial and service sectors. Companies engaged in certain activities must demonstrate substantial business operations in Panama to benefit from tax exemptions or reduced rates.

Digital Economy Tax:
Panama is considering implementing a digital services tax aimed at taxing foreign companies that provide digital services to Panama-based consumers, such as streaming and e-commerce platforms.

Subscribe to my free newsletter for regular updates on law, taxation and business worldwide.