Understanding Panama's Taxes
Monday, August 07 2006 @ 09:55 PM UTC
Contributed by: Don Winner
INCOME TAX: Panama's personal income tax is based on a sliding scale, ranging from a minimum of 2% after the first $3,000 to a maximum rate of 30% over $200,000. The income tax only applies to Panamanian-sourced income. This is irregardless of whether you are a Panamanian citizen or a temporary resident. Taxable income includes wages, salaries, business profits, pensions & bonuses, income from copyrights, trademarks, sales of stocks, bonds, and other securities.
Deductions can be made for all medical expenses incurred in Panama, charitable donations, home mortgage interest, education expenses, and loans for home improvements.
Foreigners Temporarily Working in Panama: Foreigners who remain in Panama for 180 days or more in a calendar year are considered residents for income tax purposes, irregardless of their immigration status. They must pay income taxes. If the individual remains in Panama less than 180 days in a calendar year, they are taxed at a flat 15% rate, plus pay an education tax at a 2.75% rate.
RENTAL INCOME TAX
If you receive rental income on your property, you will be liable for income tax up to a maximum of 27% (on rental income greater than $30,000).
Exception: However, if you invest in one of the special "tourism zones," you may be exempt from income tax for 15 years.
TOURISM ZONE EXEMPTION
Income from the operation of a tourism project, approved by the IPAT (Panamanian Institute for Tourism) and located in a "Tourism Development Zone of National Interest" are granted a 15 year exemption from income taxes.
This does not apply to housing projects. It does apply to a hotel, golf course, tennis courts, restaurants and discotheques attached to a hotel.
TOURISM INVESTMENT LAW
In 1994, Panama passed Law No. 8 the most modern and comprehensive law for the promotion of tourism investment in Latin America and the Caribbean. The law regulates public lodgings, receptive tourism agencies, tourist transport services of passengers, tourist restaurants, discos, nightclubs, specialized tourism centers, recreational parks, theme parks, zoos, convention centers, marine complexes, tourist development zones of national interest, etc.
Since the law was enacted, dozens of the world’s largest hotel chains have swept in to take advantage, including the Marriott, the Radisson, Holiday Inn, the Sheraton, and the Intercontinental.
But Panama’s attractive tourism investment laws are not just for big business.
With a minimum investment of $50,000 anywhere in Panama’s interior you can benefit from:
• A 20-year exemption of any import taxes due on
materials, furniture, equipment, and vehicles.
• A 20-year exemption on real estate taxes for all assets
of the enterprise.
• Exemption from any tax levied for the use of airports
• Accelerated depreciation for real estate assets (except
the land) of 10% per year.
The investment amount does not include the price of the land. For projects in the metropolitan area, the minimum investment requirement is $300,000.
Process to Qualify: Once an interested party or corporation has completed the necessary forms, they must be submitted to IPAT (Panama Tourism Institute), where they will be reviewed by IPAT's Board of Directors. This board meets once a month, at which the Minister of Commerce serves as the Chair person. Upon approval, the benefits are granted to the developer.
INHERITANCE & GIFT TAXES
Inheritance taxes in Panama have been completely abolished.
However, taxes on gifts (inter vivos) of properties located in Panama are in effect, and the rate varies from 4% - 33% depending on the degree of relationship between the donor and the donee. This does not apply to property owned anywhere outside of Panama.
REAL PROPERTY TRANSFER TAX
Sellers pay a real estate transfer tax when title is transferred to the purchaser.
The tax rate is 2% of either the updated registered property value or the sales price --- whichever is higher.
The updated registered property value is the original purchase price (or value submitted to the Public Registry) plus 5% per annum of ownership.
Tip: If the property is owned by a corporation, the corporation's shares can be sold (instead of the property), eliminating the need to pay the transfer tax.
Offset: The Real Estate Transfer Tax can be offset as a direct credit against the income tax levied on the sale's Capital Gains.
(1) The taxpayer may select between paying the 2% real
estate transfer tax over the sales price, increased by 5%
per year of ownership, or
(2) Paying income taxes at a 5% rate of the purchase value
of the property, increased by 10% for each year of
If the taxpayer selects the 2nd option, no further taxes on the Capital Gains will be levied.
Properties with a registered value of $30,000 or less do not pay property taxes.
Properties of a higher value will pay property taxes as follows:
1.75% from $30,000 to $50,000;
1.95% from $50,000 to $75,000; and
2.1% for any property valued above $75,000.
Alternative Property Tax Calculation: Under a 2005 amendment to the law, there is an alternative calculation:
0.70% over the amount exceeding $30,000 to $50,000
0.90% from $50,000 to $75,000
1% of the amount exceeding $75,000.
This amounts to an approximate savings of 50% compared to the Regular Tax Rate.
Availability: The Alternative Property Tax calculation is only available to properties which are up to date with their property tax payments and the taxpayer presents a sworn declaration of the property's estimated value countersigned by an appraiser within one year of this law coming into effect (by June 30, 2006). The Tax Department (Cadastre) may or may not accept the proposed value. If it does, the Cadastre Department cannot change the value for at least 5 years.
Exemptions: There is a 20 year exemption applicable to buildings (both residential and commercial) but not for the land. This exemption is limited to projects that have a construction permit before September 1, 2005 and have an occupation permit before August 31, 2006.
After those dates, the following exemptions will apply:
• Value up to $100,000: 15-year exemption
• Value from $100,000 to $250,000: 10-year exemption
• Value over $250,000: 5-year exemption
For Commercial Buildings:
Any value of the building: 10-year exemption
The exemption is transferable during the exemption period to any new buyer.
The land itself is not exempted and will continue to incur property taxes if its value is above $30,000.
CAPITAL GAINS TAX
Panama has Capital Gains taxes. The rates differ between individuals, real estate dealers, and corporations.
Individuals: Individuals who are not real estate dealers (not in the business of buying & selling) will pay a flat 10% Capital Gains tax rate. You are allowed to sell real estate on an occasional basis without being classified as a professional real estate dealer who pays the higher rate.
Real Estate Dealers: Individuals who are in the business of buying & selling real estate are considered "real estate dealers". Dealers will include the Capital Gain as normal income in their annual tax return and pay whatever level s-he is being assessed as income taxes. This could be up to a 27% maximum rate.
Corporations: Corporations who sell real estate will pay a flat 30% Capital Gains tax rate.
Taxable Base: Capital Gains taxes are determined by using a formula called "Taxable Base". The costs incurred with purchasing and making improvements on your property are called "Cost Basis". You determine Cost Basis by adding the purchase price + costs of improvements + Closing costs (purchase & sale). If you acquired the property by inheritance or as a gift, the Cost Basis is the official Public Record of land value + value of the permanent structures on the day title transferred to you.
Here's another way of putting it: Capital Gains are determined by the difference between the sales price and the property's Basis + sales expenses.
Payment: If you qualify for the flat 10% rate, you must pay it before the title transfer is registered with the Public Registry.
Tip: If the property is owned by a corporation, the corporation's shares can be sold (instead of the property), eliminating the need to pay the Capital Gains tax.
CAPITAL GAINS TAX ON THE SALE OF CORPORATE SHARES
In spite of misconceptions that there are no Capital Gains Taxes in Panama, the sale of a corporation’s shares is taxable income.
Section 701(e) of the Panama Tax Code states that profits derived from the sale of corporate shares and personal property are taxable income.
On June 20, 2006, sub-section (e) changed in the following manner:
Except for publicly traded securities that are exempt from capital gains & income taxes, all profits earned from the sale of bonds, shares, participation quotas, and all other securities issued by legal persons, or derived from the sale of personal property, are taxable income in Panama. The taxpayer will be subject to Capital Gains tax at a fixed rate of 10%.
The buyer is obligated to withhold 5% of the total value of the sale from the seller as a prepayment of the seller’s Income Tax from Capital Gains. The buyer shall remit this amount to the Panama Tax Department within 10 days of the sale’s Closing. If the buyer fails to do so, s-he is jointly responsible for the unpaid taxes.
The taxpayer has the option to declare the amount withheld by the buyer as the income tax due on the capital gain. However, if the withheld amount is greater than 10% of the capital gain, the taxpayer can present a special affidavit claiming the excess as a Tax Credit against taxes owed during that tax year.
Any sale of shares, bonds, or other securities outside of Panama derived from a company producing income in Panama, are taxable income in Panama.
BUSINESS INCOME TAXES
Taxation in Panama is governed by the Fiscal Code which provides that only those incomes derived from business carried on in Panama itself are subject to taxation.
Capital Gains are counted as normal income after allowed deductions.
FILING DEADLINE: The tax year is the calendar year ending December 31st. Your tax return is due within 3 months (which can be extended to six months).
ESTIMATED TAXES: There are estimated tax payments made 3 times every year. Your previous year's tax return must be accompanied with a forecast of the current year's taxes. The three installments are then made after 6, 9 and 12 months. Any underpayments or over payments will be rectified when you file that year's tax return.
CORPORATE INCOME TAX
30% Flat Rate: Corporations pay a flat net income tax rate of 30%.
Dividends are taxed at a flat 10% rate.
Small Companies: The tax rate is different for corporations considered to be "small operation companies". Here the tax will be computed according to the rate for individuals up to the first net $100,000 plus 30% on the net income exceeding $100,000 up to $200,000. In addition small companies are exempt from the Complementary Tax and the Dividends Tax.
Small Companies are those that:
1. Are not the result of a sub-division of a large company;
2. Nor an affiliate, or a subsidiary controlled by another
3. The annual gross income does not exceed $200,000;
4. The shares are nominative; and
5. The shareholders are individuals.
NATIONAL INDUSTRIES & GOVERNMENT CONTRACTORS SPECIAL TAX RATE
The Income Tax Rate for Panama companies that are registered with the Official Registry of National Industry or that have government contracts is 30% of the net taxable income up to $100,000 rising to 42% on income over $500,000 after deductions.
Commercial License Tax
Panamanian companies (except Offshore companies and Free Zone companies) must pay an annual Commercial License Tax of 1% of the business' net worth (minimum $10 to a maximum of $20,000). Certain rural and/or small businesses are exempt from this tax. Municipalities may also levy an additional business license tax.
Social Security Taxes
Both employers and employees contribute to the social security of Panama.
The employer pays 10.75% of all salaries and wages, plus 1.5% education tax. The employer deducts the social security taxes from its income taxes.
The employee pays 7.25% (social security tax) plus 1.25% (education tax).
Self-employed and small business owners pay larger social security taxes.
The government of Panama offers several tax breaks for developers, depending on the type of project and the location. For example, in certain areas of Panama, the government offers tax exonerations on importation of construction materials, equipment, automobiles, and more. In addition, property taxes are exonerated for up to 20 years on new construction, offering buyers tax incentives.
Tax Benefits for Developers: Since the enactment of Cabinet Decree No. 109 (1970), successive legislation has been passed offering tax benefits to developers. As the nation's largest employment sector, the construction industry received these incentives to help bolster investment in this sector, which would in turn benefit the country's overall employment picture. It has been widely accepted that, as a result of these incentives, purchasers of real property have also benefited.
Cabinet Decree No. 44 (1990), and its implementation through Resolutions No. 201-1622 in December 12, 1990, enunciates that the purchaser of residential units, apartments or single homes, built within the time table set forth in the Decree, is exempt from property tax (improvements value) for up to 20 years from when construction began. It is important to note that this exemption does not include property tax on land, but refers to the dollar value on all improvements on new construction.
Like Kind Exchanges: The developer also benefits from an exemption of income tax, if the earnings obtained from the construction are reinvested into new construction projects within two years. Certain conditions apply. This tax incentive is similar in nature to those referred to in the United States as the 1031 exchange or "the like kind exchange".
As mentioned above, article 3 of Cabinet Decree No. 44 (February 17, 1990), states the following:
“Starting February 1, 1990, income obtained from selling real property, which is reinvested in new constructions, will be exempt from income tax, as long as the cost of the new construction is at least four times applicable in each case. If the cost of the new construction does not exceed the amount mentioned above, the tax payer will be authorized to deduct from the income originally obtained, at least twenty percent (20%)........”.
In other words, if you sell real property and purchase similar new construction real property (within 2 years)valued at four times your sales price, you will be exempt from paying Capital Gains taxes.
In Conclusion: Like many countries, Panama has too many taxes. We have provided you with a basic understanding of the types of taxes in Panama. We included certain exceptions, exemptions, and tax saving tips. However, this is only a layman's guide. You must use a qualified Panamanian tax lawyer or accountant before relying on this information or planning any tax saving strategies.
© COPYRIGHT 2006
ALL RIGHTS RESERVED
Steven A. Rich
Steven Rich is the Marketing Manager for Panama Offshore Legal Services. He can be reached at: firstname.lastname@example.org