Panama Personal Income Tax

Resident and nonresident individuals are taxed on their Panamanian-source income regardless of the nationality of the individual and the location of the payment of the income. For tax purposes, the nationality of the individual is irrelevant. Individuals are considered resident for tax purposes if they reside or remain in Panama for more than 183 continuous or non-continuous days in the calendar year or in the immediate preceding year or if they have established their permanent resi­dence in Panama.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Taxable income includes wages, salaries (including salaries in kind), bonuses, pensions, directors’ fees, profit sharing, severance payments, seniority premium payments and other remuneration for personal services.

Education allowances are considered to be taxable salary and, consequently, they are subject to income tax and social security contributions.

Amounts received by the taxpayer for representation expenses are subject to a flat 10% withholding tax rate on amounts up to PAB25,000. Representation expenses in excess of PAB25,000 are subject to withholding tax at a rate of 10% on the first PAB25,000 and 15% on the excess. All representation expenses are subject to social security contributions.

Self-employment and business income. Profits derived from busi­ness, commercial and agricultural activities in Panama are sub­ject to tax. Farming income is exempt from tax if gross sales are less than PAB300,000.

If self-employment and business income is received in addition to employment income, the total income is taxed at the rates listed in Rates.

Investment income. Panamanian-source dividends earned by resi­dents and nonresidents are subject to a final 10% withholding tax. The tax rate is 20% for dividends paid on bearer shares. A final 5% withholding tax applies to dividends distributed by companies oper­ating in free-trade zones in Panama and to foreign-source dividends distributed by companies with local operations. Foreign-source dividends distributed by Panamanian companies that do not require a Notice of Operations, that are not established in a Free Zone and that do not produce taxable income in Panama are exempt from dividend tax.

Dividends distributed from interest and gains on the sale of gov­ernment securities and other interest from deposits with Panamanian banks are subject to a final 5% withholding tax. Other interest income and royalties derived from Panamanian sources are subject to tax under the common regime for resident taxpayers and for nonresident taxpayers. This tax is withheld at 50% of the ordinary tax rate on a gross basis.

However, interest is exempt from tax if it is earned with respect to any of the following:

  • Savings or time-deposit accounts maintained in banking institu­tions established in Panama
  • Government securities

Foreign-source interest and royalties are exempt from tax. Royalties received or earned by foreign persons from businesses established in the Colon Free Zone (a duty-free zone) are exempt from tax and are not deductible for the payers of the royalties.

Stock option plans. In principle, the benefit derived from stock option plans granted by the employer is subject to tax at the time of sale of the shares. However, gains derived from sales of shares issued by companies registered on the Panama Stock Exchange and negotiated through the stock exchange are exempt from tax.

Capital gains and losses: Net capital gains derived from the sale of bonds, shares, quotas and other securities issued by legal enti­ties are subject to income tax at a rate of 10%.

Capital gains derived from the sale of shares (or other forms of equity participation) of a Panamanian company are considered Panamanian-source income, regardless of where the transaction takes place, if the company has operations in Panama or has assets located in Panama.

The buyer must withhold and deposit 5% of the gross purchase price paid to the seller with the tax authorities. The 5% withhold­ing tax must be remitted to the tax authorities within 10 days after the date on which the withholding obligation arose. The 5% with­holding tax may be considered the final capital gain tax due.

If the 5% withholding tax is greater than 10% of the net capital gain, the taxpayer may credit the 5% withholding tax against the 10% capital gain tax that is finally determined. The excess amount may be refunded, credited against other tax liabilities or transferred to other taxpayers.

Indirect transfers of shares “economically invested in Panama” are also subject to Panamanian capital gains tax, even if the seller and buyer are nonresidents.

In addition, gains derived from the sale of real estate are subject to tax at a rate of 10%. The tax base equals the sales price minus the sum of the original cost of the property and expenses incurred on the sale. However, if the sale is made in the ordinary course of trade or business of the taxpayer, the general income tax rates apply.

For purposes of capital gains on real estate taxed at the 10% rate, the seller must pay 3% of the sales price or the recorded value of the property, whichever is greater, as a capital gains tax advance. The 3% tax may be considered the final capital gain tax due. If the 3% tax is greater than 10% of the net capital gain, the taxpayer may credit the 3% tax against the 10% capital gain tax that is finally determined. The excess amount may be refunded, credited against other tax liabilities or transferred to other taxpayers. The transfer of real estate is also subject to an additional tax of 2%.

Deductions

Deductible expenses. Individuals may deduct the following from gross taxable income:

  • Mortgage interest related to loans for a principal residence, up to PAB15,000 a year
  • Interest paid on educational loans
  • Donations up to USD50,000 if made to charitable organizations recognized by the tax authorities
  • Medical expenses incurred in Panama and not reimbursed by insurance
  • Medical and hospitalization insurance premiums (excluding payments or withholdings for social security)
  • Certain investments in tourism
  • Contributions up to 10% of gross salary or up to PAB15,000 to pension plans

Personal deductions and allowances. Individuals are entitled to a PAB800 deduction when filing jointly with the spouse.

Recipients of severance and seniority premium payments on ter­mination of employment are entitled to a deduction at a rate of 1% of the payments for each complete year of service with the same employer. In addition, PAB5,000 may be deducted from the payments.

Nonresidents may not claim any deductions or personal exemptions.

Business deductions. All costs and expenses that are necessary to generate taxable income and protect investments are deductible.

Rates. Employment income and self-employment income are taxable at the following rates.

Taxable income:                                                 Tax on lower               Rate on

Exceeding                      Not exceeding                amount                       excess

PAB                                           PAB                                  PAB                                 %

0 11,000 0 0
11,000 50,000 0 15
50,000 5,850 25

Withholding tax is levied on the income of nonresidents at a rate of 15% plus the educational tax at a rate of 2.75%.

Relief for losses. Self-employed individuals incurring a loss in a tax year may deduct 20% of the loss in each of the five subse­quent tax years. However, the deduction is limited to 50% of taxable income in each subsequent tax year, and any nondeduct­ible amount may not be carried forward.

Other taxes

Estate or gift taxes. Panama does not tax estates or gifts.

Real property tax. A real property tax applies to land, buildings and other permanent structures located in Panama. These proper­ties are subject to tax at the following progressive rates.

Tax base:

Exceeding              Not exceeding                                            Rate

USD                                USD                                                           %

0                                      30,000                                                           0

30,000                           50,000                                                           1.75

50,000                           75,000                                                           1.95

75,000                                —                                                               2.10

A reduced alternative progressive combined property tax rate may be applicable if the tax obligations of the taxpayer corre­sponding to the real estate are up to date and a reappraisal of the land is submitted and is accepted by the Ministry of Economy and Finance or the National Authority on Land Administration.

Tax base

Exceeding         Not exceeding                                            Rate

USD                          USD                                                            %

0                                 30,000                                                          0

30,000                      100,000                                                       0.75

100,000                         —                                                              1

Properties under the Horizontal Property Regime are not entitled to the exemption corresponding to the first USD30,000 during the time period in which the improvements on such properties are exempt from property tax. During that time, a 1% rate applies to the value of the land. After the exemption for improvements ends, the regular progressive rates or alternative progressive rates apply.

Education tax. Education tax is imposed on employers and employees. The rates are 1.5% for employers and 1.25% for employees.

Social security

Social security contributions are levied on salaries, at a rate of 12.25% for the employer and 9.75% for the employee. Contribu­tions are computed based on an employee’s gross compensation. No ceiling applies to the amount of remuneration subject to social security contributions. In addition, employers must pay workers’ compensation insurance, which covers work-related personal injuries and death and occupational diseases, at rates that vary from 0.056% to 5.67%, depending on the type of busi­ness and other risk factors.

Panama has not entered into any social security totalization agreements with other countries.

Tax filing and payment procedures

Employers are responsible for withholding income taxes and social security contributions from an employee’s salary on a monthly basis. Employees are not required to file an annual income tax return if their only source of income is employment compensation. Nonresidents are not required to file an annual income tax return if their income tax liability has been satisfied through withholding at source.

By 31 May of each year, employers must file an annual form providing all information on taxes withheld from employees. Individuals earning more than one salary or receiving other tax­able income not subject to withholding tax must file an annual income tax return. If individuals earn taxable income from their own business, they must file annual income tax returns, even if the net result for the period is a loss.

The ordinary tax year is the calendar year. Tax returns are due on 15 March of the year following the tax year. The regulations provide for an extension of up to one month to file an income tax return. The late payment of taxes is subject to a 10% surcharge and late payment interest, which is imposed at a rate of approxi­mately 0.81% to 1%. This interest rate equals the annual market interest rate determined by the Banking Supervisory Authority, plus two basis points for every month or fraction thereof that the tax payment is late. Tax returns are filed on electronic forms provided by the Ministry of Finance and Treasury.

Estimated tax, which is calculated in the annual income tax return of the preceding tax year, is due by 30 June or in equal installments on 30 June, 30 September and 31 December of the tax year. If the actual taxable income is lower than estimated income, any overpaid tax is applied toward the following year’s estimated income tax liability.

Married persons are taxed jointly or separately, at the taxpayers’ election, on all types of income.

Double tax relief and tax treaties

Panama has entered into double tax treaties (DTTs) with Barbados, the Czech Republic, France, Ireland, Israel, Korea (South), Luxembourg, Mexico, the Netherlands, Portugal, Qatar, Singapore, Spain, the United Arab Emirates and the United Kingdom.

In addition, Panama has signed a DTT with Italy, which is not currently in force.

Dependent personal services clause. The DTTs follow the Organisation for Economic Co-operation and Development (OECD) Model Convention. Accordingly, salaries earned by a resident of the other state (non-Panamanian resident) from employment exercised within Panama should not be taxable in Panama if all of the following requirements are met:

  • The recipient of the salary is present in Panama for a period or periods not exceeding, in the aggregate, 183 days in any 12-month period commencing or ending in the tax year concerned.
  • The remuneration is paid by, or on behalf of, an employer who is not a Panamanian resident.
  • The remuneration is not borne by a permanent establishment in Panama.

Temporary visas

Depending on their country of citizenship, individuals may be required to apply for and obtain an entry visa before traveling to Panama. A Panamanian consulate overseas grants the visa. Because the rules indicating the countries of citizenship of indi­viduals who are required to obtain an entry visa before entering Panama and requirements for obtaining a visa often vary, it is necessary to check the entry visa requirements on a case-by-case basis.

Work visas (and/or permits)

The government of Panama grants work authorizations to foreign employees who have special knowledge or experience in a certain field and whose country of origin maintains economic, profes­sional and friendly ties with the Republic of Panama. The grant­ing of a work authorization is subject to certain rules that have to be checked on a case-by-case basis because these rules often vary. The Ministry of Labor grants work permits after the Department of Immigration and Naturalization migratory status procedures begin.

Foreign nationals may work in Panama only if they have obtained permanent or temporary resident visas that allow them to work. These visas must be requested directly from the Department of Immigration and Naturalization in Panama. Visas are valid for one year and are renewable for additional one-year periods. Certain types of visas are valid for five years and may be extend­ed an indefinite number of times for the same time period.

Special temporary visitors’ visas may be obtained by interna­tional executives of companies that have Panamanian operations and by press correspondents.

International executives with a special temporary visitor visa who receive income from abroad or from an office established in Panama for transactions or services executed or having effects abroad are not subject to income or social tax in Panama.

Under the Multinational Company Headquarters Law (Law No. 41 of 27 August 2007; known as SEM for its acronym in Spanish), foreign personnel and their dependents may obtain a Multinational Company Headquarters Permanent Personnel Visa or a Dependent of Multinational Company Headquarters Perm anent Personnel Visa. Foreign personnel granted these types of visas are granted the same tax treatment as the bearer of a special temporary visitor visa. For tax purposes, salaries and other similar remuneration received by foreign persons with a Multinational Company Headquarters Permanent Personnel Visa is considered foreign-source income, and accordingly, not subject to tax in Panama if the foreigner receives the payments from abroad. SEM visas also provide for an exemption from social contributions in Panama.

Employers must obtain an authorization from the Ministry of Labor and Social Welfare before hiring foreign nationals. Work permits are granted to foreign nationals only if the number of foreign national employees in a given company does not exceed 10% of Panamanian employees; for foreign experts and techni­cians, the percentage is 15%.

Residence visas (and/or permits)

The government of Panama may grant permanent residency to foreign nationals whose country of origin maintains economic, professional and friendly ties with the Republic of Panama. The request must be submitted to and processed by the Department of Immigration and Naturalization. The applicable requirements may vary from case to case. Consequently, it is necessary to check in advance the requirements in each case.

A foreign national with a residence visa may transfer his or her residence to Panama for an indefinite period of time. The foreign national may be employed as a professional by a Panamanian employer, may establish a business, or both, as of the date he or she obtains the visa. A work permit is also required.

Executive Decree No. 343 of 16 May 2012 published in the Official Gazette No. 27038 of 21 May 2012, created the status of Permanent Resident. This is a new immigration subcategory that allows individuals from a list of countries to obtain permanent residence.

Countries from which foreigners are eligible for permanent resi­dence include the following.

Argentina                          Finland                       Singapore

Australia                           France                        Slovak Republic

Austria                              Germany                    Spain

Belgium                            Ireland                        Sweden

Brazil                                Japan                          Switzerland

Canada                              Netherlands                United States

Chile                                 Norway                      Uruguay

Czech Republic

Family and personal considerations

Family members. Spouses of foreigners that are granted work per­mits in Panama do not automatically receive the right to work in Panama and must apply for an independent visa or work permit.

Marital property regime. Assets obtained by any means, except by donation, after the commencement of a marriage are considered marital property.

Forced heirship. If an individual dies without leaving a will, the beneficiaries of the individual’s assets and patrimony according to the law are descendants, ascendants, the spouse and collaterals. The priority order is set by the Civil Code, according to a series of different combinations. Amounts to pay maintenance and other obligations of the deceased are removed from the deceased’s estate before the estate is distributed among the beneficiaries.

Driver’s permits. Foreigners entering the country are authorized to drive vehicles with a current driver’s license from their country, subject to the reciprocity principle and provisions of international conventions and treaties ratified by Panama and subject to the validity of the authorization under which the visitor remains in Panama. When a foreigner obtains a migratory status that allows him or her to reside in Panama, he or she is required to obtain a local driver’s license.