Do you want to reduce your tax bill in Panama? Are you interested in getting benefits from Panama’s tax-exempt regulations?
Panama is famous for its favorable low tax policies across the World, along with its strategic, cultural, and geographical importance.
Panama operates under a territorial tax system where only country-based income is taxed, exempting foreign-source income. This means zero tax for overseas income.
Panama offers various options for individuals and businesses seeking ways to reduce their tax liabilities. This article highlights the key features of Panama’s tax system and strategies for paying less taxes in Panama.
What is Panama’s Tax System?
Panama operates a territorial tax system, meaning that only income generated within the country is subject to taxation.
This principle attracts expatriates and international businesses, as foreign-sourced income is not taxed by the Panamanian government.
This framework, combined with extensive legislation regulating offshore jurisdictions and financial services, positions Panama as a prominent tax haven in the Caribbean.
Key Features of Panama’s Tax System
- Territorial Taxation: Income earned outside Panama is exempt from taxation. Other countries in the region like Costa Rica have also implemented this tax system.
- No exit tax or Controlled Foreign Company Rules: These anti-abuse clauses are not applicable in Panama, making it an attractive jurisdiction for tax planning.
- No Capital Gains Tax on Foreign Investments: Investments made outside Panama are not subject to capital gains tax (even cryptocurrencies).
- No Estate or Inheritance Tax: Panama does not impose taxes on estates or inheritances, making it attractive for wealth management and succession planning.
- Tax Incentives for Retirees: Special programs offer tax benefits to retirees, including exemptions and discounts.
Additional Features of Panama’s Tax System
1. Corporate Income Tax Rates
Panama has a competitive corporate tax rate of 25%, which is relatively low compared to many other jurisdictions. This rate applies to income generated within Panama, and there are various deductions and incentives available to reduce the effective tax rate for businesses.
2. Personal Income Tax Rates
Regarding taxation, Panama residents are required to pay income tax on income generated within the country. Still, it’s estimated that around 90% of residents there do not pay any direct taxes because the first $11,000 of income is entirely exempt from taxation.
| Income Range (Annual) | Resident Tax Rate | Non-Resident Tax Rate |
|---|---|---|
|
$0 - $11,000 |
No income tax |
15% flat rate on Panama-sourced income + 2.75% educational tax |
|
$11,001 - $50,000 |
15% |
15% flat rate on Panama-sourced income + 2.75% educational tax |
|
Over $50,000 |
25% |
15% flat rate on Panama-sourced income + 2.75% educational tax |
3. No Withholding Tax on Foreign Payments
Payments made to foreign entities or individuals for services provided outside of Panama are not subject to withholding tax. This feature is particularly beneficial for multinational companies and foreign contractors working with Panamanian businesses, as it reduces the overall tax burden on cross-border transactions.
4. Special Economic Zones
Panama has established several Special Economic Zones (SEZs), such as the Colon Free Trade Zone and Panama Pacifico. These zones offer significant tax incentives, including exemptions from import duties, VAT, and income tax for businesses operating within them.
Benefits of SEZs:
- Tax Exemptions: Businesses in SEZs enjoy exemptions from various taxes, enhancing profitability.
- Simplified Regulations: Streamlined customs and regulatory processes make it easier to conduct business.
- Strategic Location: SEZs are strategically located to facilitate international trade and logistics.
5. Reduced VAT on Certain Goods and Services
Panama’s Value Added Tax (VAT), known locally as ITBMS, is set at 7%, which is lower than the global average. Certain goods and services, such as food, medicines, and educational materials, are either exempt from VAT or subject to a reduced rate.
6. Tax Incentives for Specific Industries
Panama provides targeted tax incentives for various industries to encourage investment and development. These industries include tourism, agriculture, and renewable energy, among others.
Examples of Industry-Specific Incentives:
- Tourism: Tax exemptions for income derived from tourism-related activities, import tax exemptions on tourism infrastructure, and reduced property taxes.
- Agriculture: Exemptions on income from agricultural production, reduced import duties on agricultural machinery and inputs, and preferential loans.
- Renewable Energy: Tax holidays for renewable energy projects, exemptions from import duties on renewable energy equipment, and accelerated depreciation for renewable energy investments.
7. Double Taxation Treaties
Panama has entered into Double Taxation Treaties (DTTs) with several countries to avoid the issue of income being taxed twice. These treaties provide mechanisms for the reduction or elimination of double taxation on various types of income, including dividends, interest, and royalties.
Benefits of DTTs:
- Reduced Withholding Taxes: Lower withholding tax rates on cross-border payments of dividends, interest, and royalties.
- Tax Credits: Taxpayers can claim credits for taxes paid in the other treaty country.
- Tax Residency Rules: Clear guidelines on tax residency status and the allocation of taxing rights.
8. Simplified Tax Filing and Reporting
Panama offers a relatively straightforward tax filing and reporting system. For many taxpayers, the process of filing tax returns is less cumbersome compared to other countries. The government has implemented measures to simplify compliance and reduce the administrative burden on businesses and individuals.
9. Exemption on Reinvested Earnings
To promote business growth and reinvestment, Panama allows certain tax exemptions on earnings that are reinvested in the country. This policy encourages businesses to reinvest profits into expanding their operations and contributes to economic development.
10. Dividend Tax Exemptions
Dividends paid out by Panamanian companies from foreign-sourced income are not subject to Panamanian tax. This feature benefits shareholders, particularly those involved in international business, as it allows them to receive dividends free of local taxes.
11. No Currency Controls
Panama does not impose currency controls, allowing free movement of capital in and out of the country. This flexibility is advantageous for businesses and individuals dealing with international transactions, as it eliminates the complications and costs associated with currency restrictions.
Residency in Panama and Visa Types
To pay less tax in Panama, you first need to be a tax resident. You must meet two vital criteria – spend at least 183 days in a tax year in Panama and prove you have a permanent home there. You can become a resident in Panama through the below options.
Panama Friendly Nations Residency Program
This residency program is designed for citizens from more than 50 countries listed under Panama’s Friendly Nations program, it offers a clear route to obtaining permanent residency, employment, and investment opportunities in Panama.
Applicants initially receive a two-year temporary residency, which can be converted to permanent residency in the final month of this period.
However, the program has stricter eligibility criteria, requiring one of the following:
- A fixed-term deposit of at least $200,000 in a Panamanian national bank.
- An investment of $200,000 or more in Panamanian real estate.
- A job contract with a company operating in Panama with legitimate economic activity; alternatively, applicants can either establish a new business with the appropriate structure or acquire an existing one.
Panama Pensioner (Retirement) Visa
The primary requirement for this program is the ability to demonstrate a minimum lifetime income of $1,000 per month, which may come from sources such as Social Security, other government retirement funds, or private pension systems.
Beyond the inherent advantages of fiscal residency in Panama, this visa offers additional benefits, including:
- Discounts ranging from 25-30% on public services, airline tickets, and other forms of transportation.
- Discounts of 30-50% on accommodations, cinemas, and cultural or sporting events.
Panama Golden Visa
This program is an excellent choice for individuals who are either not eligible under Panama’s Friendly Nations list or those seeking a more direct route to permanent residency with a somewhat larger investment in the country.
You can qualify for this visa through one of the following options:
- Making a real estate investment of $500,000 (for a limited time, this amount is reduced to $300,000).
- Investing $500,000 in Panamanian bonds or shares.
- Placing a $750,000 deposit in a Panamanian bank.
Panama Digital Nomad Visa
To apply for a Panama Digital Nomad Visa, you must meet several requirements. These include:
- Having a valid passport with at least three months of validity from your arrival date.
- Proof of sufficient funds to support yourself during your stay and for returning home.
- Clean criminal record.
- Valid health insurance that covers you while in Panama.
- Affidavit stating you will not accept employment within the country.
- Proof of an annual income of at least $36,000 (or $3,000 per month).
In terms of paperwork, you will need to submit a completed application form, certified passport copies, and three passport-sized photos that meet specific dimensions. If you are employed by a foreign company, a letter from the company’s legal representative must outline your role, income, and work modality. Self-employed applicants must provide proof of their business’s existence outside Panama, along with a sworn declaration detailing their business activities, services, client base, and financial history.
The Panama digital nomad visa is valid for nine months and can be extended for an additional nine months.
Citizenship Requirements in Panama
Panama offers a pathway to citizenship through naturalization, typically after maintaining permanent residency for five years. This period can be reduced to three years for those married to a Panamanian citizen or through reciprocal agreements with certain Latin American countries and Spain.
While Panamanian citizenship was once considered a straightforward option for obtaining a second passport, the process has become increasingly challenging in recent years, with some applicants facing delays of over a decade. As a result, citizenship should not be viewed as a primary reason for choosing Panama, but rather as an additional benefit for those planning a long-term residency in the country.
Strategies for Paying Less Taxes in Panama
Incorporate a Foreign Corporation
Once you have become a resident in Panama through the available programs, one of the most effective strategies to reduce tax liability is to establish a corporation outside Panama. As long as the business activities and income generation occur outside Panama, the income remains tax-free under the territorial tax system.
Steps to Establish a Foreign Corporation
- Choose a Jurisdiction: Select a country with favorable corporate laws and tax treaties with Panama.
- Register the Corporation: Ensure compliance with local regulations in the chosen jurisdiction.
Conduct Business Abroad: Ensure that the corporation’s income is generated from activities outside Panama.
Offshore Banking
Panama’s growing offshore banking sector is another tool for tax optimization. Offshore accounts can help manage wealth, facilitate international transactions, and benefit from Panama’s tax policies.
Advantages of Offshore Banking
- Confidentiality: Panama offers strong privacy laws protecting account holders.
- Tax Efficiency: Earnings on deposits in offshore accounts are not taxed by Panama if they are from foreign sources.
- Access to Global Markets: Offshore banks in Panama provide access to international investment opportunities.
Legal and Compliance Considerations
While searching for tax reduction strategies, it is mandatory to remain compliant with both Panamanian laws and international regulations. Non-compliance can lead to penalties, legal issues, and damage to reputation.
Main Compliance Aspects
- Reporting Requirements: You have to make sure that all required financial information is accurately reported to the relevant authorities.
- Anti-Money Laundering (AML) Regulations: Adhere to strict AML laws to prevent illegal financial activities.
How Can We Help You?
Panama offers numerous opportunities for individuals and businesses to reduce their tax burdens legally. Panama is one of the best jurisdictions to incorporate an entity or become a tax resident due to its free-tax regulations.
To fully benefit from Panama’s tax-friendly policies, consult the tax experts at TaxMove.
Our specialized advisors in Panamanian tax law will help you maximize these benefits while ensuring full compliance with all regulations.
Approach us by submitting the form given below.
Submit the form to get tailored advice from our experts
What is Panama's territorial tax system and how does it work?
Panama’s territorial tax system means that only income generated within the country is subject to taxation. Foreign-sourced income is exempt from taxes, attracting expatriates and international businesses.
What are the key features of Panama's tax system?
Key features include exemption from taxes on foreign income, no capital gains tax on foreign investments, no estate or inheritance taxes, and special tax incentives for retirees and specific industries.
What is the cost of a company in Panama?
Setting up a business in Panama typically involves costs ranging from $1,000 to $2,500.
For annual maintenance, expenses generally fall between $1,500 and $3,000. This covers various administrative fees, accounting services, necessary audits, and license renewal costs.
What are the Visa types in Panama?
Panama offers various residency options tailored to different needs and goals:
- Friendly Nations Visa: Available to citizens from designated countries who wish to live in Panama, with eligibility based on either a $200,000 USD investment or employment with a Panamanian company.
- Retirement Visa: Targeted at retirees who have a minimum monthly income of $1,000 USD.
- Golden Visa: Intended for individuals seeking permanent residency through investment, with a minimum investment starting at $300,000 USD.
- Digital Nomad Visa: Suited for remote workers planning temporary stays, requiring proof of a minimum monthly income of $3,000 USD.
How to obtain Panamanian Passport?
You can obtain Panamanian citizenship through naturalization after five years of permanent residency, or three years if married to a Panamanian citizen or from a country with reciprocal agreements. However, the process has become more complex and may take over a decade, so it’s best considered a secondary benefit for long-term residents numquam, error, est. Ea, consequatur.
How can I legally reduce my taxes in Panama?
Strategies include becoming a tax resident, establishing a foreign corporation to generate income outside Panama, and utilizing Panama’s offshore banking sector.
Consulting with tax experts is essential to ensure compliance with regulations.
What are the benefits of Special Economic Zones (SEZs) in Panama?
SEZs like the Colon Free Trade Zone and Panama Pacifico offer significant tax exemptions, simplified customs and regulatory processes, and strategic locations to facilitate international trade and logistics.
What tax advantages does Panama offer for retirees?
Panama provides special programs for retirees that include tax exemptions and discounts on income derived from tourism-related activities, import tax exemptions on tourism infrastructure, and reduced property taxes.
