Panama Individual Tax Guide

Panama

Panama GMT -5

EY Street address:

Mail address: International Business Park, P.O. Box 0832-1575 Edificio 3855, Piso 2

World Trade Center

Oficina #210

Panama City Panama Pacifico Boulevard Republic of Panama Panama City Republic of Panama

Executive and immigration contacts

Luis Ocando +507 208-0100

Email: luis.ocando@pa.ey.com

Rafael Sayagués +506 2208-9880 (resident in San José, Fax: +506 2208-9999 Costa Rica)

Email: rafael.sayagues@cr.ey.com

Immigration contacts

Fernando Vargas +506 2505-0900 (resident in San José, Fax: +506 2208-9999 Costa Rica)

Email: fernando.vargas.winiker@cr.ey.com

Ana Josefina Clement +507 208-0100 Fax: +507 214-4301

Email: ana.clement@pa.ey.com

A. Income tax

Who is liable. 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 noncontinuous days in the calendar year or in the immediate preced ing 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 busi ness, 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 gov ernment 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 institu tions 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 enti ties 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% withhold ing 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 tax payer 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

• School expenses up to USD3,600 for each dependent

• 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 ter mination 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 exemp tions.

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

15

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 subse quent tax years. However, the deduction is limited to 50% of taxable income in each subsequent tax year, and any nondeduct ible amount may not be carried forward.

B. 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 proper ties are subject to tax at progressive rates, which are shown below.

The following are the tax rates if the property is considered a Tributary Family Patrimony (Patrimonio Familiar Tributario) or a Primary Residence (Vivienda Principal).

Tax base

Exceeding Not exceeding Rate USD USD % 0 120,000 0 120,000 700,000 0.5 700,000 0.7

A Tributary Family Patrimony is a property that is destined for permanent family habitation use by its owner(s), in accordance with the Article 476 of the Family Code.

A Primary Residence is a property that is destined for permanent residential habitation use by its owner (whether it is a natural person or juridical person) and that does not constitute a Tributary Family Patrimony.

The following are the tax rates for Secondary Residences and commercial and industrial properties.

Tax base

Exceeding Not exceeding Rate USD USD %

0 30,000

0.60 250,000

0.8 500,000 1

Horizontal Properties that have an existing property tax exemp tion will continue to receive the benefits of that exemption.

However, if the owner files the form requesting Primary Residence status, the remaining years of property tax exemption are lost. The owner is then subject to the normal Primary Residence property tax rates.

All new residential construction that is the purchasers’ first resi dence and is considered a Tributary Family Patrimony or Primary Residence and that has a registered cadastral value of between USD120,000 and USD300,000 is exempt from property tax for a period of three years, as of the date of the issuance of the occupa tion permit or the date of inscription in the Public Registry, whichever occurs first.

Properties under the Horizontal Property Regime that are exempt for their improvements are subject to tax at a rate of 1% of the value of the land until the expiration of the exemption for the improvements. After the exemption for improvements expires, the regular 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.

C. Social security

Social security contributions are levied on salaries, at a rate of 12.25% for the employer and 9.75% for the employee. Contribu tions 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.

D. 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 tax able 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 0.79% 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.

E. Double tax relief and tax treaties

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

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 con cerned.

• 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.

F. 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 indi viduals 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.

To enter Panama as a tourist, the following is required:

• Ticket to the individual’s home country or next destination

• Demonstration of economic solvency, which is not less than USD500 or the equivalent in credit cards, bank references, work letters or travelers’ checks

• Passport or travel document valid for at least six months

• Authorized tourism card or visa, if applicable according to the nationality of the tourist

• Proof of payment from the hotel where the individual will be staying, if applicable

Foreigners may stay in Panama as tourists for up to 180 days. Foreigners from certain countries are only allowed to stay in Panama for 90 days with a tourist visa.

G. Work visas (and/or permits)

The government of Panama grants work permits to foreign employees who have special knowledge or experience in a certain field and whose country of origin maintains economic, profes sional and friendly ties with the Republic of Panama. The grant ing 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 and Employment Development grants the work permit after the foreigner obtains the residence permit granted by the National Immigration Service.

Foreign nationals may work in Panama only if they have obtained a permanent or temporary residence permit and the work permit that allows them to work. Depending on the category, a visa may be valid for one year and may be renewed for the same period, up to five additional years. Certain types of visas are issued indefinitely, and others are issued for up to five years and are renewable for the same time period.

Residence and temporary work permit in the capacity of person nel hired as executives of international companies, whose func tions take effect abroad. 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 visa who receive a monthly salary of at least USD2,000 that comes from a foreign source for transactions or services executed or having effects abroad are not subject to income tax, educational tax and or social security tax in Panama.

Residence permit for permanent employee hired by Multinational Company Headquarters. Under the Multinational Company Headquarters (MHQ) Law (Law No. 41 of 27 August 2007; known as SEM for its acronym in Spanish), foreign personnel and their dependents may obtain an MHQ Permanent Personnel Visa or a Dependent of MHQ Permanent Personnel Visa. Under Article 26 of the Law 41 of 2007 and its amendments, salary and other labor remuneration, including salary in kind, received by employees who hold an MHQ Permanent Personnel Visa are exempt from income tax, social security contributions and educational insurance tax, provided that such salary and other labor remunerations are assumed, paid and recognized as payroll expenses in the MHQ company’s accounting.

Migratory and labor options for a company hiring a foreigner. The migratory and labor options for a company hiring a foreigner include, among others, the following: • 10% of the ordinary personnel (10% category).

• 15% of the specialized personnel (15% category).

• Marrakesh Agreement. The residence and work permit under this agreement applies to foreigners who enter the country to work in a company with less than 10 Panamanian employees.

The 10% category can be requested by foreigners who will be hired by private companies in Panama and who earn a monthly salary not less than USD850. Foreigners hired under the 10% category must hold ordinary positions, which do not denote hier archy, command or specialization within the company, and their hiring must not exceed the percentage established by the labor legislation in relation to national workers, according to the detail of the payroll reported to the Social Security Authority.

The 15% category may be requested by foreigners who will be hired by private companies in Panama and who earn a monthly salary not less than USD850. Foreigners hired in the 15% cate gory must hold a position of technician, expert or manager, and/ or be considered trustworthy personnel (as defined in Article 84 of the Labor Code) within the company, and their hiring must not exceed the percentage established by the labor legislation in rela tion to national workers, according to the detail of the payroll reported to the Social Security Authority.

After the term of two years of the provisional residence permit, the foreigner can apply for permanent residence.

H. Residence visas (and/or permits)

The government of Panama may grant a temporary residence permit or a permanent residence permit, depending on the cate gory in which the foreigner falls. All residence permits must be submitted to and processed by the National Immigration Service. The applicable requirements may vary depending on the for eigner’s immigration category. 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 if he or she obtains a work permit or may establish his or her own business, or both.

Friendly Countries Visa. Executive Decree No. 343 of 16 May 2012 created the immigration category of permanent resident for foreign nationals from specific jurisdictions who maintain friendly, professional, economic and investment relations with Panama. This Executive Decree has been modified by Executive Decree No. 197 of 7 May 2021, which provides that an applicant may acquire a temporary permit that will be granted for two years and then apply for a permanent residence permit and a work permit for three years, which is renewable for the same period in Panama. Citizens of the 50 jurisdictions considered “friendly” can move to Panama with their immediate family and acquire a permanent residence permit more quickly than citizens from other jurisdictions. To qualify, a citizen of a “friendly” jurisdic tion must have a work contract or a real estate investment (USD200,000).

Citizens of the following jurisdictions may obtain a permanent residence permit under the category of Friendly Countries Visa.

Andorra Greece Norway

Argentina Hong Kong SAR Paraguay

Australia Hungary Poland

Austria Ireland Portugal

Belgium Israel San Marino

Brazil Japan Serbia Canada Korea (South) Singapore

Chile Latvia

Costa Rica

Slovak Republic

Liechtenstein South Africa

Croatia Lithuania Spain

Cyprus Luxembourg Sweden

Czech Republic Malta Switzerland

Denmark Mexico United Estonia Monaco Kingdom

Finland Montenegro United States

France Netherlands Uruguay Germany New Zealand

Professional Foreigner. The residence permit of a Professional Foreigner is a migratory permit that grants a provisional resi dence for two years, and after the end of this period, gives the option of applying for permanent residence, based on the quality of a foreign professional graduate with the corresponding university degree, master’s degree or doctorate.

Through immigration reform published on 13 May 2015, the National Immigration Service established as a new requirement of homologation of diplomas or university degrees before the submissions of applications for residence and work permits.

In Panama, the institutions that make such Homologations are the University of Panama, the Technological University of Panama or the national authority that corresponds to the diploma or degree that is being presented.

A professional foreigner who applies for this permit must gradu ate in a profession that is not restricted to only Panamanians by law or the Constitution.

The list of professions reserved for Panamanian are the follow ing:

• Security agent

• Dental assistant

• Medical assistant

• Barber and cosmetology

• Agricultural sciences (agronomy, agricultural botany, forestry, edaphology, economy agriculture, agricultural vocational edu cation, entomology, agricultural extension, phytopathology, breeding, horticulture, agricultural engineering, agricultural chemistry, agricultural zoology, zootechnical and other sciences that are declared by the Technical Council National Agriculture)

• Accounting

• Law

• Education (history, geography and civics)

• Economics

Nursing

engineer, mechanical engi

industrial engineer,

Treaty of friendship, trade and navigation between Panama and Italy. Under a treaty between Panama and Italy, citizens of each of the contracting parties are allowed to enjoy in the territory of the other national treatment with respect to the admission to economic or professional activities of any kind and the exercise of such activities with the exception of the exercise of retail trade.

Based on the treaty, Panama has developed a special category of migration and labor for Italian nationals so that they can obtain a permanent residence permit, foreign certificate and indefinite work permit, if the Italian nationals fulfill the requirements for these items.

I. Family and personal considerations

Family members. By law, only family members or dependents in the following categories can apply as dependents of the applicant:

• Spouses (formally married).

• Children under 18. If the dependent is older than 18 but young er than 25, single and a student in an authorized academic institution in Panama, he or she can also apply as a dependent of the applicant.

• Parents of the applicant.

Only the applicant has the right to request a work permit. Consequently, if a dependent wishes to work in Panama, he or she must resign as a dependent and apply for an independent residence permit and work permit.

Marital property regime. Agreement regarding the matrimonial regime can be reached before the marriage ceremony. The agreements to establish the matrimonial regime are called matrimonial capitulations. The Family Code recognizes the following three matrimonial regimes:

Profit-sharing regime

Separation of property regime

Partnership regime

The spouses choose the matrimonial regime that will govern their marriage. In Panama, if the spouses do not expressly establish the matrimonial regime that will govern the marriage, the law indi cates that the profit-sharing regime applies automatically to all marriages entered into after 1995.

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, father and mother, collaterals, and brothers. 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. The Authority of Transit and Land Transport allows tourists (individuals who do not have an approved residence permit and are visiting Panama) to drive vehicles with their current license from their country of origin. Tourists are allowed to drive with the current license from their country of origin up to a period of 90 days. Once the foreigner changes his or her immigratory status that allows him or her to reside in Panama, he or she must apply to the Panamanian authorities for a local driver’s license.