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D e l o i t t e & T o u c h e LLP
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PANAMA
Taxation of Nonresident Entities
Taxation of Groups of Companies
Corporate Assessment and Payments
Personal Assessments and Payments
The restoration of democracy in the Republic of Panama, coupled with financial institutions' renewed confidence in the government's economic plans, has attracted the interest of many overseas investors. Based in Panama City, Deloitte & Touche, the Deloitte Touche Tohmatsu International firm in Panama, has four partners and a professional staff of 40. Deloitte & Touche is a leader in serving the banking, food processing, insurance, manufacturing, retail, and wholesale sectors.
International Services: Antonio R. Burón, Panama City
Audit, Banking, and Insurance Services: Miguel Heras, Panama City
Tax, Audit, Banking, and Manufacturing Services: Cesar A. Chong, Panama City
Telephone: +507 63-9900
Telecopier: +507 69-2386
Forms of Business Organization. The principal forms of business in the Republic of Panama are the corporation (sociedad anónima), limited liability company (sociedad de responsabilidad limitada), general or limited partnership (sociedad general o limitada), partnership limited by shares (sociedad limitada por acciones), sole proprietorship (propie tario), and branch of a nonresident company (sucursal). Any of these business forms may be used to establish an agency (agencia), which would represent the investing entity in Panama. Most Panamanian and foreign investors choose to form corporations. Apart from the sole proprietorship, which is subject to personal income tax, all of the above forms are subject to corporate income tax.
Exchange Controls. There are no exchange controls in Panama. The unit of currency, the
balboa (international symbol -- PAB), is at par with the US dollar. Because Panama does
not issue paper currency, the US dollar is the currency that circulates.
Local Participation or Management Requirements. With few exceptions, foreign
investors may wholly own Panamanian enterprises. All foreigners working in Panama are
required to obtain labor permits from the Ministry of Labor.
Investment Incentives. Panama offers many incentives for investment.
Free zones. Panama has established a shipping and processing center on the Atlantic
Ocean, known as the Colon Free Zone, which caters to companies whose principal
business activity consists of the reexportation of merchandise from the center. Companies
located in the zone are exempt from a number of taxes, including commercial license tax.
Exemption from tax on dividends is given when the dividends derive from income earned
in the zone.
Companies operating in the zone are granted special tax treatment on their earnings from
exports. The rates of tax on such earnings range from 2.5% on the first PAB 15,000 to 8.5%
on the excess over PAB 100,000.
Companies operating in a free zone for oil-related activities are subject to favorable tax
treatment similar to companies operating in the Colon Free Zone.
Tourist activities. Tax incentives for investments in tourist activities apply to investments
in the construction and rehabilitation of hotels, convention centers, tourist attraction
facilities, transportation of passengers, and production of motion pictures in Panama.
Principal tax incentives offered based on the tourist activity include
* Exemption from import duties and sales taxes on equipment and materials used in
construction or rehabilitation
* Exemption from real estate taxes on new structures
* Accelerated depreciation for major construction projects
* A special system for loss carryforward
Investments in tourist areas designated as Special Tourist Zones will receive exemption
from real estate taxes, import duties on materials and equipment, and income taxes for a
period not exceeding twenty years.
Incentive laws allow for the concession of islands and other government land for a period
of up to twenty years. The period can be increased to forty years, depending on the
project's potential labor and economic impact.
To qualify for the incentives, investors must invest the required amount, which depends on
the type of tourist activity, and initiate the construction or rehabilitation within six months.
The tourist activities must also begin within a specified time frame.
International maritime commerce. The income from international maritime commerce of
merchant ships registered under Panamanian law is not subject to income tax in Panama
even if the transportation contracts are executed there. The owner of a ship registered in a
foreign country is not liable for tax on income from Panamanian sources, provided that the
country in which the ship is registered grants reciprocal treatment for income earned in that
country by ships of the Panamanian merchant marine. The exemption in Panama extends to a
foreign individual or company deriving income from Panamanian sources through the
operation of a foreign-registered ship, provided that the country of nationality of the
individual or incorporation of the company grants reciprocal treatment for income earned
by an individual of Panamanian nationality or company incorporated in Panama.
Offshore companies. Panama taxes according to the territoriality principle (that is, it does
not tax foreign-source income). Investors can take advantage of this by establishing what
Panama treats as offshore companies: companies incorporated in Panama to do business
outside Panama. Such companies are generally exempt from tax on the following:
* Billing the sale of merchandise from an office established in Panama, provided that the
goods concerned do not physically enter Panamanian territory or, if they do, are in transit to
another country and under the control of the customs authorities.
* Conducting from an office established in Panama transactions perfected, finalized, or taking effect abroad. For example, income derived from international offshore activities by Panamanian-incorporated banks holding an international banking license is not subject to income tax.
* Distributing dividends or shares of profit when such dividends or shares originate from income not produced on Panamanian territory.
Other incentives. A number of other incentives are available to manufacturing operations
conducted in Panama, including accelerated depreciation, exemption from import taxes on
machinery and equipment, and exemption from income taxes on profits derived from
exports.
A company is resident if its principal business is conducted in Panama. Otherwise, it is nonresident. Only income from Panamanian sources is subject to corporate income tax (assuming that it is not exempt). Foreign-source income is not taxable. This is the case for nonresident companies as well as resident companies. Therefore, residence has only limited significance, mainly in relation to withholding taxes on payments to nonresidents.
Corporate Income Tax Rates. Click to see Corporate Income Tax Rates. Special tax rates
apply to the net earnings from exports derived by companies operating in the free zones.
Specified small businesses benefit from favorable tax rules contained in a regulation that
applies individual as well as corporate income tax rates. For example, companies with a
gross income not exceeding PAB 200,000 in a year may take advantage of the rates for
individuals for the first PAB 100,000 of taxable income and have only the balance of
taxable income charged in accordance with the tax rates.
Taxable Income. Income tax is levied on the net Panamanian-source income obtained in
the tax year. The net income is arrived at by deducting allowable expenses from the gross
business income, which is the company's total Panamanian-source income less exempt
income.
Inventory valuation. Inventories are valued on the basis of cost, which is determined on
the basis of the first-in, first-out method; last-in, first-out method; or average cost method.
Cost means either the purchase price of merchandise or, in the case of manufactured items,
the cost of production, including the associated direct overhead. Obsolete, damaged, and
slow-moving inventories may be written off and deducted, provided that a certified public
accountant confirms their condition.
Dividend income. Dividends are not included in income subject to corporate income tax.
Expenses incurred in obtaining dividend income are not deductible. Flat-rate Withholding
Taxes are levied. These taxes are charged on dividends in cash or in kind, including
dividends in the form of shares in the paying company.
Interest income. Interest paid on savings accounts, term deposits, and government
securities is exempt.
Foreign-source income. Since foreign-source income is not taxable, no tax is charged if
the transaction out of which income arises took effect or was performed outside Panama,
even when payment for any goods involved is made from Panama or received in Panama,
provided that the goods do not physically enter Panama or are in transit and under the
control of the customs authorities.
Exchange differences. Income, receipts, expenses, and charges in foreign currency are
generally valued according to the exchange rate on the day on which the transaction took
place. Realized exchange gains are taxable, and realized losses are deductible.
Capital gains. Capital gains from the sale of bonds, shares, and other securities are taxed
as ordinary income, although specified securities registered with the National Securities
Commission are exempt. Gains from transfers of other personal property are similarly
taxable. Capital gains from the transfer of immovable property are taxed under special
rules.
Deductions. As a rule, expenses paid or incurred for the production of income or for the
maintenance of its source are deductible.
Depreciation. Depreciation of depreciable business assets is mandatory. Depreciation
relating to the production of foreign or exempt income is distinguished from depreciation
relating to the production of Panamanian income by means of an apportionment based on
the time spent using the assets for these different purposes.
Depreciation is normally calculated by the straight-line method, although the declining
balance and the sum-of-the-digits methods are allowed. The taxpayer is allowed to
determine the service life of assets based on their use, quality of maintenance,
obsolescence, and other considerations. The minimum service lives permitted are three
years for movable assets and thirty years for immovable property.
Interest. Interest is generally deductible when the borrowed funds are used in the
production of income.
Directors' and management remuneration. Directors fees' and management remuneration
are deductible, provided that they have been paid in the year of deduction or the recipient
has the same accounting system (such as the accrued basis system).
Taxes. All taxes actually paid in the year are deductible, excluding income tax itself and
any taxes related to foreign income. Penalties imposed for the violation of tax or other laws
are not deductible.
Royalties. Royalties are generally deductible for corporate income tax purposes, except in
the case of entities established in the Colon Free Zone. Royalties remitted abroad are
subject to withholding tax.
Professional and technical fees. Professional and technical fees are deductible if the
service has been effectively rendered by appropriate certified professionals and a relation
exists between the benefit received and the value of the services rendered.
Other payments. Up to 1% of credit sales may be deducted each year for bad debts,
subject to a limit on the total reserve equal to 10% of all receivables. For banks and other
financial institutions (financieras), only loan losses from write-offs are considered
deductible.
Entertainment expenses are considered deductible.
Treatment of Losses. Losses may be carried forward for five years at the rate of 20% per
year, although the deduction in any particular year must not exceed 50% of the taxable
income for that year. An amount not used because of this limitation may not be used in a
later year and is unrelieved. Loss carrybacks are not permitted. Manufacturing firms
fulfilling a number of conditions may carry forward losses to any of the three years
immediately succeeding the year in which the losses arise.
Taxation of Nonresident Entities
Nonresident, as well as resident entities are liable for corporate income tax only on income derived from Panamanian sources. Thus, a nonresident company with a Panamanian branch is liable for corporate income tax on the Panamanian income of the branch. Nonresidents are also subject to withholding taxes.
Taxation of Groups of Companies
Panama has no rules providing for the filing of consolidated returns, and tax-free transfers of assets between group companies are not recognized.
Tax is not levied on dividends paid to Panamanian holding companies.
Transfers of losses between members of a group are not permitted for tax purposes.
Taxpayers are, however, allowed to assign tax credits to another taxpayer, including
creditable withholding taxes and an excess of estimated tax payments over actual
liabilities.
The arm's-length principle applies to all transactions. The tax authorities may use this
principle to challenge prices charged within a group, although Panama has no specific
transfer-pricing provisions.
The same tax rates apply to branches and subsidiaries, but branches of nonresident companies must withhold 10% (20% if the home office has bearer shares) of their taxable Panamanian income after deducting Panamanian income tax payable on that income. Payment is due when the tax return is due. The after-tax profits of branches, unlike the profits of subsidiaries, are thus treated as having been distributed as dividends.
Panama has no specific provisions governing the conversion of a branch into a subsidiary.
The income tax consequences are the same as in a merger or other form of reorganization,
in that the entity may be exempted from income and other taxes if several requirements are
met.
Mergers of companies in Panama may be subject to several exemptions in the following cases:
* When one or more companies are absorbed by another company.
* When a new company results from the merger of one or more companies.
Exemptions available to companies undergoing such a merger include exemptions from
* Value added tax on the transfer of movable assets.
* Income taxes on the transfer of real estate.
* Income taxes, dividends taxes, and complementary taxes to the shareholders, provided they receive only shares of the new company.
The merger must comply with articles 4 and 5 of Law 32 related to corporations, and the
surviving company should declare the total revenues, costs, and expenses of the former
companies beginning in the year of the merger. Under the law, the cost basis of the fixed
assets would not be affected by the merger. In addition, the new entity should use,
whenever several accounting systems were used by the former companies to record their
inventories, the appropriate accounting system depending on the business activity of the
company.
Corporate Assessments and Payments
The tax year is normally the calendar year, but the tax authorities may approve a different period. Companies must file returns within the three months following the end of the tax year. The tax authorities may grant an extension of up to three months on application, but the taxpayer must first estimate and pay the tax for the year concerned. Companies in liquidation must file a return within thirty days following the cessation of business.
Income tax is generally payable in advance. Accordingly, taxpayers must file with their
returns of income for the previous year declarations showing an estimate of the current
year's income. The estimated income must not be lower than the previous year's actual
income, and tax on it must be paid in three equal installments within six months, nine
months, and twelve months of the end of the previous year. Any tax remaining unpaid after
these three installments have been accounted for must be paid when the return is filed.
For additional assessments, a statute of limitations period operates, which runs for three
years following the date on which a return is filed. If the taxpayer failed to file a return, the
period is seven years after the last day of the year for which the tax was due. In the case of
withholding taxes, the period is fifteen years from the date on which the tax should have
been withheld.
The territorial concept of income applies also to individuals. Income tax (impuesto sobre la renta a personas naturales) is charged on income derived from Panamanian sources. However, some income is exempt.
As in the case of companies, the extent of income tax liability does not primarily depend on
residence, although residence is of importance in relation to withholding taxes. There are
no statutory residence rules, but individuals are considered resident for tax purposes if they
are physically present in Panama for 180 days in any tax year. The government must
authorize residence.
Treatment of Families.A married couple is regarded as a single unit and taxed on joint
income, unless both spouses elect to file separate returns. An election can be advantageous
when both spouses earn income, because the tax rates are graduated. The income of
children is taxed separately.
Income Tax Rates. Click to see the Progressive Income Tax Rates for Individuals.
Taxable Income. Taxable income is the aggregate of income from Panamanian sources
after the deduction of allowable expenses and losses and the exclusion of exempt income.
Included are income from employment and from rendering independent personal services,
income from business activities, and investment income.
Employment income. Indemnities for the termination of employment, as well as some
other types of income, are taxed separately at reduced rates. Employees are taxed on
remuneration earned for work done in Panama regardless of where payment is made or
received.
Dividend income. Dividends are not included in taxable income but are subject to a final
withholding tax.
Capital gains. Gains on the sale of real estate are regarded as taxable income. Special tax
regulations allow the taxpayer a choice between methods of computing the tax. Gains on the
sale of shares and other securities issued by companies doing business in Panama or
owning capital assets located in Panama are subject to income tax as ordinary income.
However, gains on sales of securities of companies listed with the National Securities
Commission are exempt. Gains on sales of other personal property are subject to income
tax as ordinary income.
Exempt income. As well as foreign-source income, interest on savings accounts, term
deposits, and government securities is exempt from income tax.
Deductions and Reliefs. In arriving at taxable income, an individual may deduct a
personal exemption of PAB 800 (PAB 1,600 when a joint return is filed). An additional
exemption of PAB 250 is granted for each dependent.
An individual may deduct the interest paid on a mortgage loan relating to his or her
principal private residence, subject to a maximum deduction of PAB 15,000 per year.
Interest paid on loans used to cover education expenses is also deductible if properly
documented. Medical expenses are deductible if they were incurred in Panama and are
fully documented. Other deductible expenses include specified charitable donations and
health insurance premiums. No credits are allowed for foreign tax paid, since
foreign-source income is not subject to tax.
Personal Assessments and Payments
Individuals must prepare and file tax returns for the calendar year. Individuals are basically subject to the same rules as companies as regards the filing of returns, making of assessments, and payment of tax; however, income from employment is subject to deduction of tax at source. In some cases, employees need not file returns.
Panama has not entered into any comprehensive double tax treaties that would provide lower rates. As income from foreign sources is not taxable, no relief is allowed by way of either credit or a deduction for taxes paid abroad on foreign-source income.
Salaries and other remuneration paid to employees and deductions paid to nonresident
entities or individuals subject to income tax withholdings are not deductible if the
withholdings are not effected or remitted within the fiscal year of deduction.
Dividends. Dividends on nominative shares paid out of income derived from activities
conducted within Panama are subject to a withholding tax of 10% (20% for bearer shares),
which is a final tax in the case of both resident and nonresident recipients. Dividends paid
from foreign-source income are not subject to the withholding tax, and dividends paid out
of income derived from the Colon Free Zone operations or specified small businesses are
exempt. Exempt income from current and prior years may be distributed, provided the
company distributes at least 40% of earnings subject to dividend taxes in any given year.
Interest. Interest payments not exempted are subject to withholding tax at source when
made to nonresident companies and individuals. The rate is 6%, and the tax is final.
Royalties. Only 50% of royalties paid to nonresidents is subject to withholding tax.
Corporate income tax rates are charged in the case of corporate recipients and personal
income tax rates are charged in the case of individuals. Recipients must file a return at the
end of the year for final assessment. If no return is filed, the withholding tax is final.
Other Payments. Withholding tax applies at ordinary income tax rates to 50% of total
remittances of rent, indefinite income, and other types of income; 100% of total remittances
of commission and compensation for services on a dependency basis; and 10% of total
remittances made by transportation and communication companies (3% for airlines), if the
companies elect this taxation method.
Value Added Tax. Value added tax or general turnover tax (impuesto a la transferencia de bienes corporales muebles), referred to here as VAT, is a consumer tax imposed on the transfer of personal property by sale and purchase, exchange, contribution to a company, cession, or any other act transferring control over the property. Imports of personal property are also chargeable. The tax base is the price of the transaction, including ancillary costs, or -- in the case of imports -- the value for customs purposes plus the customs fees levied.
Tax is computed as the difference between the liability on chargeable transactions and the
tax allowed as a credit (tax paid on purchases or imports). Credits that exceed the tax
liability may be carried forward. VAT is paid on a monthly basis or every three months,
depending on the taxpayer's gross receipts.
The standard rate of VAT is 5%, but a 10% rate applies to imports and sales of liquor and
cigarettes. Exemptions include inheritances, legacies, gifts, transfers of shares, exports, and
exemptions related to transfers in free zones, food, medicines, and fuel.
Social Security Contributions. Employers and employees must make social security
contributions (contribuciones al seguro social) totaling 10.75% and 7.25%, respectively,
of salaries and wages. In addition, employers must contribute 1.5% and employees 1.25%
of salaries and wages to educational programs.
Real Estate Tax. Immovable property located in Panama, whether urban or rural, is
subject to a real estate tax (impuesto de inmuebles). Owners pay tax according to a
progressive scale that ranges from 1.4% on the excess over PAB10,000 to 2.1% on the
excess over PAB 75,000. The tax base is the assessed value determined by the Land
Commission. Various exemptions are available, including buildings and improvements
used by non-profit-making organizations or government entities and those with a value of
less than PAB 10,000.
Municipal Taxes. Municipalities levy various taxes, including municipal business license
taxes (impuestos municipales sobre la operación comercial), which are usually based on
gross sales, production, or paid-in capital and must be paid by both individuals and
companies that carry on a business.
Commercial License Tax. Commercial or industrial enterprises are required to obtain a
license to carry on their activities. An annual business and industrial license tax (patentes
comerciales e industriales) is levied at the rate of 1% on the net worth of the company
concerned, which is increased by amounts owed to any parent company or head office.
A commercial license is not required in the case of certain activities such as agriculture,
cattle raising, beekeeping, poultry raising, manual industries not requiring more than five
employees, and commercial or industrial activities with an invested capital not exceeding
PAB 10,000.
Import Taxes. Import taxes are payable on the total value of goods imported at rates that
vary with the type of goods involved. Excise taxes are levied on various goods.
Gift Taxes. Gift taxes are levied at graduated rates ranging from 4% to 33.75%, depending
on the value of the assets transferred and the relationship between donor and recipient.
Miscellaneous Taxes. Banks and exchange houses are subject to annual flat-rate taxes of
PAB 15,000 in the case of banks with international licenses, PAB 25,000 in the case of
banks with general licenses, PAB 600 in the case of exchange houses. Loan-making
financial institutions (financieras) must pay an annual tax of 2.5% of their paid-in capital;
this tax may not exceed PAB 12,500. Stamps are required for a wide range of documents;
their cost is based on the value of the document concerned.
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