Panama: Business Environment

Company Tax

25% (the rate may vary if the company is subject to an alternative minimum tax (CAIR))

Tax Rate For Foreign Companies

The Republic of Panama adheres to the territorial tax system: as much as all the income generated in Panama is taxed indiscriminately, be it of a Panamanian or foreign physical or corporate body, income generated from "offshore" activities of people or companies is not taxed (which is a significant exception to the general principles of international taxation).
A company is considered as a tax resident when it has been incorporated in the country and if Panama is regarded as the place where the central management is located.
Branches located within the country's territory must pay dividend tax through a definitive withholding tax of 10% of net taxable income generated by the branch, less all income taxes paid by the same corporation in Panama.

Capital Gains Taxation

Capital gains arising from the sale of securities and negotiable instruments are taxed at 10%. The buyer must retain 5% of the sales price as a tax advance and pay the amount to the tax authorities.
Real estate gains are taxed at the standard corporate tax rate if the transaction giving rise to capital gains is part of the taxpayer's main business activity, otherwise, a reduced rate of 10% applies. However, in such cases, the buyer must retain 3% of the sale price or the taxable value of the property (whichever is higher) and pay this amount as a tax advance.

Main Allowable Deductions and Tax Credits

Costs and expenses that are related to non-taxable income are deductible. Companies are therefore encouraged to separate their costs and expenses generating taxable income from others. Deductions are available for depreciation (including goodwill when the transferring party declares it as income). Start-up expenses are also deductible, through amortization over a maximum of five years.

Bad debts as well as national and municipal taxes on any taxable activity are deductible. Fines are not deductible while the deduction for donations to charities is limited to 1% of taxable income. Since the tax is territorial in Panama, there are no unilateral tax credits for taxes paid abroad.

The calculation of the tax base is different for companies with taxable income above USD 1.5 million. These companies may be subject to the ordinary corporate tax rate or pay 4.67% of gross taxable income as an alternative minimum tax. Many tax exemptions are available to companies investing in the Panama-Pacifico Special Economic Zone and manufacturing companies (in the form of VAT exemption for imports).

Tax losses of up to 20% per annum can be carried forward over five years. Losses cannot exceed 50% of taxable income in a tax year. The carryback of losses is not permitted.

Other Corporate Taxes

Employers pay social security contributions of 12.25% of the total remuneration of the employee and are required to pay an education insurance tax (1.5% of salary). Workplace accident insurance premiums are also payable by the employer at rates ranging from 0.56% to 5.67% depending on the risk associated with the employee's occupation.

The property tax varies between 0% and 1% for commercial or industrial real estate and land. A property transfer tax of 2% of the purchase price or the cadastral value (the highest value being used) is levied on sales of real estate. Stamp duties vary typically between PAB 0.10 and PAB 100 and apply to certain commercial contracts.

Companies that have not declared their dividends are subject to a tax on retained earnings ranging from 10% to 40% of their after-tax income (2% for companies in the free-trade zones, subject to conditions). All companies are also subject to a franchise tax of USD 300 per annum and an operations notice tax (2% of the company's capital, minimum amount of USD 100 and maximum of USD 60,000 per year).

Municipalities reserve the right to levy taxes at the local level, usually ranging from USD 10 to USD 2,000 per month.

Other Domestic Resources

Tax Collection Directorate

Consult Doing Business Website, to obtain a summary of the taxes and mandatory contributions.

Tax Rate

Allowable Deductions and Tax Credits

Interest paid on mortgage loans for homes (except for preferential interest for new homes) or for home improvements on residences located in Panama is deductible, capped at USD 15,000 annually.
All medical expenses incurred in Panama are deductible, while educational expenses are deductible up to USD 3,600 per student.
The contributions to retirement funds are considered deductible up to USD 15,000 (capped at 10% of gross income).
Donations to local educational and charitable institutions are deductible up to a maximum of USD 50,000 per year. Deductions for political contributions are capped at USD 10,000.
Married individuals can enjoy a personal exemption of USD 800.

Special Expatriate Tax Regime

Citizens and residents are taxed on income earned from Panamanian sources. Non-residents are taxed only on income from Panamanian sources. Non-resident individuals hired by or otherwise rendering services to Panamanian residents for periods of less than 183 days in a calendar year are subject to withholding tax at source at a rate of 15% of their gross income.

An individual is considered resident in Panama if he/she is in the country for more than 183 days in a calendar year or has established permanent residence in Panama.