This document aims to provide a general overview of the most relevant tax matters and overall requirements to carry out commercial activities in the Republic of Panama. Depending on the type of business, it may be considered a regulated activity, and, therefore, requires special operating permits or licenses.
1. Income Tax (Impuesto sobre la Renta – ISR)
In Panama, the tax system is territorial in nature. In other words, and with a few specific exceptions, only proceeds originating from, or generated in, Panama are taxable.
Total taxable income results from subtracting exempt and/or non-taxable income plus foreign source revenues from total income.
Rate: Legal persons (companies) pay 25% ISR over the greater of the following:
Calculation: (i) net taxable income resulting from the subtraction of deductible outlays and expenses, credit deductions and carry-overs from taxable income; and (ii) net taxable income resulting from applying a 4.67% to the total taxable income.
The method indicated in point (ii) above does not apply to legal persons with annual taxable income less than $1.5 million.
Tax exemption: Interest from savings deposits or other accounts held in banking institutions established in Panama is not subject to ISR.
Affidavit filing: Income Tax Affidavits must be filed by 31 March of the following year. For most corporations, the fiscal year matches the ordinary calendar year; however, other arrangements may be made.
The statement must include dividends or shares distributed among shareholders or partners, as well as any interest paid out to creditors. This statement must also be accompanied by a declaration of the estimated income for the following year. In the event the affidavit is not filed on time, the company or corporation may be subject to a fine ranging between $100 and $1,000, along with late presentment fees and interest.
Taxes may be paid in one lump sum or divided in three (3) equal portions. In the latter case, the following due dates apply: a first payment within six (6) months from the end of the applicable fiscal year; a second payment nine (9) months later; and a third and last twelve (12) months later. Non-payment of the ISR within the prescribed periods is subject to late interest (per month or fraction thereof), which consists of two (2) basis points over the market reference rate indicated by the Bank Superintendency of Panama, plus a 10% surcharge.
2. Foreign Remittances
All income (i.e. remittances) earned by natural or legal persons established outside Panama for services rendered in Panama or abroad, and which benefits national or foreign natural or legal persons located in Panama and posted as a deductible expense, is considered taxable.
In such cases, the ISR is retained by the Panama-based natural or legal person at the time of making a payment abroad. The rate is the same as for legal persons (25%), but applies only to fifty (50%) percent of the sum to be transferred abroad.
This same treatment applies to interest and other charges related to loans or financing paid, or credited, to a foreign creditor when funds are for economic use in Panama.
3. Service and Property Transfer Tax (ITBMS)
The provision of services and the transfer of corporeal goods and personal property are subject to a seven (7%) tax, known as the ITBMS.
The ITBMS applies to transfers and services in Panamanian territory, regardless of the place where the contract was signed or the domicile, residence or nationality of the parties thereto.
For purposes of the ITBMS, the taxpayer is responsible, by law, to collect and/or retain from the other party, and/or report to the tax authorities, any taxes resulting from the taxed transaction.
Taxpayers with gross annual revenue under $36,000.00 are exempt from the ITBMS. The ITBMS must be settled and paid by taxpayers within fifteen (15) calendar days from the end of a given month, using a declaration-liquidation to report all operations impacted by the ITBMS.
For purposes of the tax declaration-liquidation, taxpayers may consider the following as tax credits: (i) the sum of the ITBMS included in the invoice for domestic purchases of goods and services in that same period, and (ii) the ITBMS paid in the period for the importation of goods.
4. Tax on Dividends
Taxes on dividends are paid as follows:
(i) Ten percent (10%) over distributed earnings of Panamanian origin; and
(ii) Five percent (5%) over distributed earnings resulting from the following ISR-exempt revenue flows:
1. Interest paid or credited for State-issued securities and earnings resulting from their disposal;
2. Interest recognized or paid for bank deposits held in Panama; and,
3. Foreign revenue or export-related revenue. For dividend pay-out, earnings of Panamanian origin are paid out first, followed by earnings from exempted, foreign or export-related operations.
Retained earnings: When a corporation does not distribute earnings or when the total amount distributed is less than forty percent (40%) of the net profit minus income tax paid (that is, net revenue after tax), a complementary tax applies and the corporation must retain, and then pay the tax authorities, the sum of ten (10%) percent of the difference. In other words, the corporation must always retain and pay taxes on dividends, whether or not distributed, for at least forty (40%) percent of its net income after taxes.
When retained taxes on dividends reach five percent (5%) and dividends are not distributed, or the sum distributed is less than twenty percent (20%) of the total net profit for the period, the remaining ten percent (10%) of the difference must be made up for.
5. Property Taxes
Property is assed an annual tax at a rate calculated with a progressive table as follows:
(i) 1.75% over the surplus tax base between $30,000 and $50,000.
(ii) 1.95% over the surplus tax base between $50,000 and $75,000.
(iii) 2.10% over the surplus tax base over $75,000.
Tax base is understood as the sum of the value of the property and any constructed improvements, if applicable.
However, for property that has been subject to a voluntary appraisal by its owner, the applicable combined progressive rate is as follows:
(i) 0.75% over the surplus tax base between $30,000 and $100,000.
(ii) 1% over the surplus tax base over $100,000.
6. Notice of Operation Tax
Commerce is subject to an annual tax known as the Notice of Operation Tax, calculated as a two percent (2%) of the company equity, with a minimum of $100 and a maximum of $60,000.
Equity is consists of the net assets at the end of the corresponding financial year. Net assets are the difference between total assets and total liabilities, understanding that total liabilities, for purposes of the tax, do not include the sums that a branch or subsidiary may owe an affiliated parent company established abroad.
This tax requires filing an Affidavit within the first three (3) months following the end of the financial year, and must be paid at the time of filing the Income Tax Affidavit.
7. Municipal Taxes
Municipalities assess taxes and contributions on all industrial, commercial or gainful activities carried out in the district. Therefore, natural or legal persons that establish a taxable business, company or gainful activity in the district must immediately inform the Municipal Treasury (Tesorería Municipal) to arrange for the corresponding classification and registration.
Municipal taxation is divided in fees and taxes. Fees are charged to natural or legal persons for the administrative services received. Taxes are charged to natural or legal persons for performing any industrial, commercial or gainful activity.
Taxes, contributions, rent and fees are fixed monthly by the Municipality and are calculated based on annual gross sales and the corresponding activity, and must be paid in the current month.
8. Stamp Tax
With a few exceptions, all documents that evidence an action subject to the Panamanian tax jurisdiction pay a stamp tax. Generally the rate is $0.10 per each $100, or fraction thereof, of the documented transaction value. However, this tax rarely applies to invoices and transactions subject to ITBMS.
9. Single Corporation Fee
With the exception of non-profit organizations, cooperatives and civil societies, all legal persons listed in the Public Registry of Panama, either national or foreign, pay a single annual fee of $300.00 to remain active.
Beginning on the second year, this single fee is paid according as follows:
(i) By 15 July each year for legal persons whose partnership agreement or document of incorporation was registered with the Public Registry of Panama in the months of January through June.
(ii) By 15 January each year for legal persons whose partnership agreement or document of incorporation was registered with the Public Registry of Panama in the months of July through December.
All payments after such dates will be subject to a surcharge of $50.00 per year in arrears, and an additional $300.00 for every three years in arrears.
10. Panamanian Invoicing System
Invoices are issued as evidence of an operation related to transfers, returns, and discounts, sale of goods and provision of services by residents in Panama. All invoices are issued using fiscal printers purchased from providers duly authorized by the Ministry of Economy and Finance (MEF). The software to manage and print such invoices is also approved by the Ministry of Economy and Finance.
Below is a list of invoice requirements:
1. Heading indicating the type of document, either invoice or receipt.
2. Unique consecutive number assigned to that point of billing.
3. Fiscal printer ID number.
4. Full name (natural or legal person), residence and Single Taxpayer Registry of invoice issuer.
5. Date (dd/mm/yyyy) of issuance of invoice or its equivalent.
6. Description of operation, indicating quantity and amount. Quantity may be omitted in operations where it cannot be expressed.
7. ITBMS separate from excise tax and any other applicable tax.
8. Individual value of transfer, goods sold or service provided, and total invoice amount.
9. Fiscal logotype.
10. Description and value of any additional charge, discount, rebate, reversal and/or other adjustment to an agreed price or remuneration.
11. Double Taxation Avoidance Treaties
The Republic of Panama has signed multiple International Double Taxation Avoidance Treaties which, in summary, aim to prevent assessing the same earnings in more than one State, crediting the income tax paid in Panama towards any income tax owed in another signatory State applicable to the same earning of Panamanian origin.
12. Tax Incentives
Certain industries receive tax incentives to foster investment, such as agriculture, tourism, mining, exports of non-traditional goods, power generation, building and operating government concessions, processing and storing oil derivatives, shipping, manufacturing and reforestation.
Special Economic Zones are strategically located throughout the county and enjoy migratory and labor fiscal benefits to promote the development of specific economic activities.