Panama Corporate Tax Guide

Panama

Panama GMT -5

EY

+507 370-1100

Fax: +507 214-4300 P.O. Box 0832-1575 WTC

Mail address:

www.ey.com/centroamerica Panama Republic of Panama

Street address: Building 3855, 2nd Floor, Office #210

Panama Pacifico Boulevard, International Business Park Panama Pacífico Republic of Panama

Principal Tax Contact

 Rafael Sayagués

+506 2208-9880 (resident in San José,

New York: +1 (212) 773-4761 Costa Rica)

Costa Rica Mobile: +506 8830-5043

US Mobile: +1 (646) 283-3979

Efax: +1 (866) 366-7167

Email: rafael.sayagues@cr.ey.com

Business Tax Services

Lisa María Gattulli

+506 2208-9861 (resident in San José, Mobile: +506 8844-6778 Costa Rica)

Email: lisa.gattulli@cr.ey.com

Luis Eduardo Ocando B. +507 208-0144

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300

Email: luis.ocando@pa.ey.com

International Tax and Transaction Services – International Corporate Tax Advisory

Luis Eduardo Ocando B. +507 208-0144

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300

Email: luis.ocando@pa.ey.com

Juan Carlos Chavarría

+506 2208-9844 (resident in San José, Mobile: +506 8913-6686 Costa Rica)

International Mobile: +1 (239) 961-5947

Email: juan-carlos.chavarria@cr.ey.com

International Tax and Transaction Services – Transfer Pricing

María José Luna +507 208-0147

Fax: +507 214-4301

Email: maria.luna@pa.ey.com

Paul de Haan (resident in +506 2208-9800 San José, Costa Rica)

Email: paul.dehaan@cr.ey.com

Business Tax Advisory

Luis Eduardo Ocando B. +507 208-0144

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300

Email: luis.ocando@pa.ey.com

International Tax and Transaction Services – Transaction Tax Advisory

Antonio Ruiz

+506 2208-9822 (resident in San José, Mobile: +506 8890-9391 Costa Rica)

International Mobile: +1 (239) 298-6372 Email: antonio.ruiz@cr.ey.com

Luis Eduardo Ocando B. +507 208-0144

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300 Email: luis.ocando@pa.ey.com

Rafael Sayagués

+506 2208-9880 (resident in San José, New York: +1 (212) 773-4761 Costa Rica)

Costa Rica Mobile: +506 8830-5043

US Mobile: +1 (646) 283-3979 Efax: +1 (866) 366-7167 Email: rafael.sayagues@cr.ey.com

People Advisory Services

Luis Eduardo Ocando B.

+507 208-0144

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300

Email: luis.ocando@pa.ey.com

Patricia Crespo Domingo +507 208-0153

Email: patricia.crespo@pa.ey.com

A. At a glance

Corporate Income Tax Rate (%) 25 (a)

Capital Gains Tax Rate (%) 10 Branch Tax Rate (%) 25 (a)

Withholding Tax (%) (b) Dividends (a)

On Nominative Shares 10 On Bearer Shares 20 Interest 12.5 (c)

Royalties from Patents, Know-how, etc. 12.5 Payments on Leases 12.5

Payments for Professional Services 12.5 Branch Remittance Tax 10

Net Operating Losses (Years)

Carryback 0

Carryforward 5 (d)

(a) See Section B for details concerning deemed dividend tax. (b) The withholding taxes apply only to nonresidents. Nonresident companies are entities not incorporated in Panama. (c) Certain interest is exempt from tax. See Section B. (d) For details, see Section C.

B. Taxes on corporate income and gains

Corporate income tax. Corporations, partnerships, branches of foreign corporations, limited liability companies and any other entity considered a legal entity by law are subject to income tax on any profits or income generated in or derived from Panama. Income that does not arise in Panama or is not derived from Panama is not subject to tax in Panama. However, dividends aris ing from foreign income that are distributed by Panamanian companies holding a Notice of Operation (formerly Commercial License) are subject to tax (for further details, see Dividends)

Corporate income tax rates. Income tax is assessed at a flat rate of 25% on net taxable income. For details regarding net taxable income, see Section C.

Taxpayers with annual taxable income greater than PAB1,500,000 are required by law to calculate the tax using two methods and pay the higher of the amounts calculated under these methods. This calculation must be included in their annual taxable income tax return. The following are the two methods:

• Applying the corresponding tax rate to the net taxable income

• Applying the corresponding tax rate to 4.67% of the total income

Headquarters Law. The Headquarters Law contains a special taxincentive regime for multinational companies that establish their headquarters in Panama (Multinational Headquarters [MHQ] regime).

Under the Headquarters Law, a headquarters is the office that renders services to its related parties.

Under the law, a headquarters may provide only specified ser vices, including the following:

• Technical, financial and/or administrative assistance

• Financial and accounting services

• Logistics or warehousing services to the multinational group

• Marketing and publicity

• Plot or construction design

Under the Headquarters Law, the headquarters must belong to a multinational company with either regional or international opera tions or significant operations in the country of origin. To operate under the Headquarters Law, a license granted by the Commission of Licenses of the Multinational Companies of the Ministry of Commerce and Industry must be obtained.

Law No. 57, published on 24 October 2018, amended the MHQ regime. Companies granted a license must pay income tax in Panama on the net taxable income derived from the services provided at a rate of 5%. Panamanian taxpayers benefiting from services or acts rendered by MHQ companies must withhold 5% from the total sum to be paid if these services or acts were related to the generation of local income or the conservation of its source and if the payment is considered a deductible expense for the taxpayer.

Also, MHQ companies can claim a tax credit for the amounts withheld by the Panamanian taxpayers, as well as the tax effectively paid abroad for services rendered to nonresidents. However, the company must pay at least 2% of the net taxable income generated in Panama as a minimum income tax.

Likewise, MHQ companies must withhold 5% on 50% of the payments remitted abroad for services and acts received by non residents. The company also must withhold 5% on 50% of the interest, commissions and other charges generated by loans granted by a nonresident and used in Panama.

In addition to obtaining an MHQ license, companies must main tain an adequate number of full-time employees and incur an adequate amount of annual operational expenses, both of which

must be adequate with respect to the type of business carried out by the companies, in order to apply the corporate income tax incentive. Companies granted a license to operate under this regime are exempt from value-added tax (VAT). However, the VAT exemption applies only to the export of services. The VAT exemption does not apply to imports made by the headquarters or the sale or purchase of goods or services rendered in Panama.

The Headquarters Law also includes immigration aspects. For example, it clarifies that the salary received by an employee with an MHQ Permanent Personnel Visa is exempt from income tax, social security contributions and educational insurance in Panama. Employees with an MHQ Permanent Personnel Visa can opt for a permanent residence in Panama and keep working for a company with an MHQ license. However, these employees would be subject to income tax, social security contributions and educa tional insurance on the salary received by them.

Transfer-pricing rules apply under the regime.

Panama-Pacifico regime. Panama has established certain freetrade zones, which provide for an exemption from the general income tax (with the exception of certain rental income), as well as other imposts and duties, such as sales taxes, import duties, export taxes, and selective consumption taxes related to royalties on exports and re-export activities.

Law No. 41 of 2004 created the Panama-Pacifico (PP) Special Economic Zone. The law’s purpose was to create a special legal, tax, customs, labor, immigration and business regime, designed to encourage and ensure the free flow and movement of goods, services and funds in order to attract and promote investments and the generation of jobs and to make Panama more competitive in the global economy.

Law No. 66 of 2018 included relevant amendments to the PP regime by adding requirements for the recognition of income tax benefits for some activities. Also, companies under the PP regime dedicated to the categories listed below must comply with the following substance requirements:

• They must maintain an adequate number of full-time employees.

• They must incur an adequate amount of annual operational expenses.

The following are the categories referred to in the preceding paragraph:

• Radio, television, audio, video and data signal linking

• Office administrative services

• Call centers

• Capturing, processing, storage, switching, transmitting and retransmitting data and digital information

• Logistic and multimodal services

• Research and development of resources and digital applications for use in networks

Both of these requirements must be adequate with respect to the type of business carried out by the companies.

Companies that provide office administration services are sub ject to a 5% income tax rate on the related net taxable income, as

long as they comply with the substance requirements mentioned above. Panamanian recipients benefiting from these services must withhold 5% from the total service payment if these ser vices were related to the generation of local income or the con servation of its source and if the payment is considered a deductible expense by the recipient.

An amendment to the Panamanian Fiscal Code provides that transfer-pricing rules apply to individuals or companies established under a preferential tax regime (which includes the PP regime) for their operations with related parties that are in Panama or that are under any other preferential tax regime in Panama or abroad.

Special Regime for the Establishment and Operation of Multinational Enterprises that Render Manufacturing Services. On 1 September 2020, Panama enacted Law 159 of 2020 to establish the Special Regime for the Establishment and Operation of Multinational Enterprises that Render Manufacturing Services (EMMA for its Spanish acronym). The law took effect on 1 December 2020. The EMMA regime seeks to promote foreign investment, create new job opportunities for both locals and foreigners, and contribute to the transfer of technology knowledge in Panama. To be eligible to EMMA regime, the companies should perform services relat ed to the following:

• The manufacturing of products, machinery and equipment

• The assembly of products, machinery and equipment

• The maintenance and repair of products, machinery and equip ment

• The remanufacturing of products, machinery and equipment

• The conditioning of products

• Product or existing process development, investigation or inno vation

• Analysis, lab work, tests or other activities related to manufac turing services

• Logistics, such as storage, deployment and distribution of com ponents or parts, required for the supply of manufacturing ser vices

Entities can only provide these services to the multinational group to which they belong.

EMMA companies that are granted a license pay income tax in Panama on their net taxable income at a rate of 5%, as long as they comply with substance requirements. Net taxable income is calculated by deducting from taxable income special discounts granted by certain investment promotion regimes and carryfor wards of legally authorized net operating losses. Panamanian taxpayers benefiting from services rendered by EMMA compa nies must withhold 5% from the total amount to be paid if these services or acts are related to the generation of local income or the conservation of its source and if the payment is considered a deductible expense for the taxpayer.

Also, EMMA companies can claim a tax credit for the amounts withheld by the Panamanian taxpayers, as well as the tax effec tively paid abroad. However, a company must pay at least 2% of the net taxable income generated in Panama as a minimum income tax.

Capital gains

Shares and quotas. Under Section 701(e) of the Panamanian Fiscal Code, capital gains derived from the transfer of shares or quotas are subject to capital gains tax if the shares or quotas were issued by a company that has operations or assets located in Panama. The tax applies regardless of the place where the trans action takes place. Capital gains are taxed in accordance with the following rules:

• Capital gains derived from the transfer of shares in Panama that constitute taxable income are subject to income tax at a rate of 10%.

• The buyer must withhold 5% from the purchase price as an advance income tax payment and remit the withholding tax to the tax authorities within 10 days following the date on which the payment was made according to the transaction documents. For a failure to comply with this obligation, both the buyer and the issuer of the shares become jointly liable to the Panamanian tax authorities.

• The 5% tax withheld by the buyer can be credited against the final 10% capital gain tax. However, the seller may elect to consider the 5% tax to be the final income tax payment.

• If the 5% tax withheld by the buyer is higher than the 10% in come tax on the capital gain, the taxpayer may claim a cash refund or credit the excess against other tax liabilities. The tax credit may also be transferred to another taxpayer.

• Income derived from capital gains is not included in the seller’s ordinary income for the fiscal year, because the tax due is paid through withholding.

• The amount of the capital gain equals the purchase price minus the value of the investment made by the seller at the moment the shares were acquired. The costs related to the transaction (for example, lawyer’s fees, commissions, notary fees and bro ker fees) are taken into account.

Indirect transfers of shares “economically invested in Panama” are also subject to Panamanian capital gains tax, even if the seller and buyer are nonresidents. Specific rules apply to compute the gain if one or several entities that are being transferred generate both Panamanian-source income and foreign-source income. In this case, the tax base is the proportion of Panamanian-source income determined by using the greater amount resulting from the following two methods:

• The equity amount of the entities that earn taxable income in Panama divided by the total equity of the transaction

• The proportion of assets economically invested in Panama divided by the total assets of the transaction

The above result is subject to a 5% withholding tax, which is an advance income tax payment.

Movable assets. Capital gains derived from transfers of movable assets are subject to income tax at a reduced rate of 10%.

Real estate transfer tax. The sale of real estate located in Panama is subject to a 2% property transfer tax. The 2% property transfer tax rate is applied to the higher of the following amounts:

• Sales price set forth in the public deed of transfer

• The cadastral value of the property on the date of the acquisi tion, plus any increase in value derived from improvements, plus 5% per year computed on the sum of the cadastral value and the improvements

To execute the deed of transfer before a Notary Public, the seller of real estate must submit evidence to demonstrate that the corresponding transfer tax and capital gains tax have been paid.

The real estate transfer tax is not imposed on the first transfer of new houses and commercial establishments if the transfer occurs within the two-year period after the occupation permit is issued.

Sales of homes and business premises by taxpayers engaged in real estate business. For the sale of home properties by taxpayers in the real estate business, the following rates are applied to the higher of the total value of the transfer or the land value.

Higher of Rate transfer or land value %

PAB0 to PAB35,000 0.5

PAB35,000 to PAB80,000 1.5

Over PAB80,000 2.5

The rate imposed on taxpayers in the real estate business for sales of new business premises is 4.5%.

The above rates apply if building permits are issued on or after 1 January 2010.

Ordinary taxpayers that are not engaged in the trade or business of the purchase and sale of real estate. For ordinary taxpayers that are not engaged in the trade or business of the purchase and sale of real estate, tax is calculated at a rate of 10% on taxable income. This income is not taken into account in determining the taxpayer’s taxable income, and the taxpayer may not deduct the transfer tax or transfer fees incurred.

Advance income tax of 3% must be paid on the greater of the total value of the transfer or cadastral value.

The above tax can be considered as final payment or the surplus can be reimbursed if the amount of the tax exceeds 10% of tax able income.

Administration. The calendar year is the fiscal year. However, under certain circumstances, a special fiscal year may be re quested from the Panamanian tax authorities. Businesses earning income subject to Panamanian tax must file annual income tax returns even if the net result for the period is a loss. Corporations having no Panamanian taxable income or loss are not required to file income tax returns. Tax returns are due 90 days after the end of the fiscal year. The regulations provide for an extension of time of up to one month to file an income tax return if the corpo ration pays the estimated tax due. A penalty of PAB500,000 is imposed for the late filing of an income tax return.

Monthly interest is charged for late payments. The interest charges are calculated based on rates established periodically by the tax authorities. These rates equal the local reference banking annual interest rate for commercial financing as defined by the

Panamanian Banking Superintendence plus two percentage points. If an extension is obtained, any tax that is due when the return is filed is subject to the abovementioned interest rate. Late payments of taxes made after 1 January 2015 are subject to a 10% surcharge. This 10% surcharge is imposed in addition to the late payment interest.

Tax returns must be filed on electronic forms provided by the Panamanian tax authorities. The taxpayer must file an estimated tax return for the following year together with the income tax return. The total amount of estimated tax for the following year, which normally cannot be lower than the income declared in the current-year return, must be paid in full or in three equal install ments by 30 June, 30 September and 31 December. Late payment of this estimated tax generates a 10% surcharge (calculated on the unpaid amount) plus applicable interest.

Dividends. All companies that have a Notice of Operations or Commercial License (the prior name of the Notice of Operations) or that generate taxable income in Panama must pay dividend tax at a fixed rate of 10% for nominative shares and 20% for bearer shares. Dividends distributed from foreign-source income, export operations and certain types of exempt income are subject to a final 5% withholding tax. Subsequent distributions of these divi dends are not taxed if they arise from dividends that already have been subject to the abovementioned withholding.

Dividends distributed by Real Estate Investment Companies (Sociedades de Inversión Inmobiliaria) are subject to a 10% with holding tax.

Dividends distributed by entities in free-trade zones from localsource income, foreign-source income, export activities and cer tain types of exempt income are subject to a final 5% withholding tax.

The following are exempt dividends:

• Dividends distributed by Panamanian companies that do not require a Notice of Operations or Commercial License and that do not produce any taxable income in Panama

• Dividends distributed by entities under the tax-incentive system for multinational companies that establish headquarters in Panama (MHQ regime; see Headquarters Law)

Dividends distributed to individuals or legal entities from states included in the List of States that Discriminate against the Republic of Panama (this list has not yet been issued by the Republic of Panama) are subject to the following withholding tax rates:

• 20% for nominative shares

• 40% for bearer shares

Exemptions from withholding tax granted by special laws on dividend distributions from Panamanian entities to entities or individuals located abroad apply only if the recipients cannot claim a tax credit in their country of residence for such dividend distributions. To prove that that no tax credit is available in the recipient’s country of residence for a dividend, the beneficial owner must submit a formal tax opinion issued by an independent

tax expert of such country, which indicates that a tax credit cannot be claimed.

If a tax treaty applies, the treaty measures prevail over the domes tic rules.

Withholding taxes. The effective withholding tax rate is 12.5% for interest and royalties paid to nonresident companies.

Payments to nonresidents for professional services rendered in Panama or from abroad are subject to a withholding tax at an effective rate of 12.5% if certain requirements are met. In prin ciple, the withholding obligation applies if the following require ments are met:

• The payments made to nonresident beneficiaries must be related to the generation of Panamanian-source income for the payer.

• The payment made to the nonresident beneficiaries must be considered and reported as deductible expenses by the Panamanian payer (except in case of interest).

However, a tax reform established several exceptions to these re quirements. As a result, payments made by public entities (entities that are not income taxpayers) and taxpayers with losses are sub ject to the withholding tax at an effective rate of 12.5% even if those entities have not deducted the payments as expenses. In addition, taxpayers that have several sources of income are re quired to apply an effective 12.5% withholding tax rate if they are in a loss situation even though they did not claim a deduction for the payments.

No withholding tax obligation applies to entities that generate foreign-source income only and entities or individuals exempt from income tax in accordance with an international treaty or special law.

In addition, exemptions granted by special laws from withholding taxes on interest, royalties, professional fees and similar payments from Panamanian entities or individuals to entities or individuals located abroad apply only if the recipient cannot claim a tax credit in their country of residence for withholding taxes on such income. To prove that no tax credit is available in the recipient’s country of residence for such withholding taxes, the beneficial owner must submit a formal tax opinion issued by an independent tax expert of such country, which indicates that the tax paid in Panama would not be credited such country.

Interest, royalties, commissions and fees paid to nonresidents from states included in the List of States that Discriminate against the Republic of Panama (this list has not yet been issued by the Republic of Panama) are subject to a 25% withholding tax.

The tax must be withheld by the Panamanian enterprise that receives the benefits of the loans, leases or professional services, and must be remitted to the government within 10 days after the tax is withheld or the account is credited, whichever occurs first.

Interest income derived from the following investments is exempt from withholding tax:

• Savings and time deposits held in Panamanian banks

• Panamanian government securities

• Securities issued by companies registered with the National Securities Commission, if the securities were acquired through a securities exchange established to operate in Panama

• Interest and commissions paid by banking institutions in Panama to international banks or financial institutions established abroad, in connection with loans, bankers’ acceptances and other debt instruments

• Interest paid to official or semiofficial institutions of interna tional bodies or foreign governments

• Interest paid to foreign investors, if the capital on which such interest is paid is exclusively intended for housing projects for people of low income

For a loan granted by a domestic bank or related Panamanian party, no withholding tax is applicable, because the financial ser vices payment is taxed in the lender’s annual income tax return.

Except in the case of financing, if a local company does not take a deduction for an expense, no withholding tax applies.

Foreign tax relief. Because Panama taxes only income sourced in Panama, regardless of where payment is received or the residence of the taxpayer, no credit or deduction is available for any foreign taxes paid, except in international transport activities.

C. Determination of trading income

General. Taxable income or revenue includes all income derived from business activities in Panama less expenses incurred wholly and exclusively in the production of taxable income or the con servation of its source.

Net taxable income is the difference or balance that results on deducting the following from gross income or general earnings:

• Foreign income

• Exempt income

• Deductible costs and expenses

Revenues must be recognized in the year in which they are earned. Construction companies may recognize long-term contract reve nues either by the percentage-of-completion method, percentageof-invoicing method or the completed-contract method. The installment-sales method of recognizing revenue is not permitted by the Panamanian Fiscal Code.

Earnings derived from the following activities are not considered to be Panamanian source:

• Invoicing by an office established in Panama for sales of merchandise or goods for amounts greater than cost, provided the merchandise never enters Panama

• Directing by an office established in Panama of transactions that are completed, consummated or take effect outside Panama

• Distributing dividends or profits derived from income not gen erated in Panama, including income derived from the two activities noted above, to the extent that the company distributing dividends does not hold a Notice of Operation

All expenses incurred wholly and exclusively in the production of taxable income or in the conservation of its source are allowed as deductions for income tax purposes, regardless of where the

expense is incurred, provided that the corresponding tax is withheld (if applicable). Expenses of one tax year may not be deducted the following year, except those which, by their nature, cannot be determined precisely in the current tax year.

Interest is a deductible expense if it is incurred on loans or credits necessary for the production of taxable income. If non-taxable interest income from savings accounts or certificates of deposit is earned, the only interest deductible is the excess of the interest expense over the non-taxable interest income. Royalties are de ductible, except for those paid abroad by free-zone companies.

Inventories. Inventories may be valued by using the first-in, firstout (FIFO), last-in, first-out (LIFO) or average-cost methods. However, the Panamanian tax authorities may allow other meth ods. After a system of valuation is adopted, it may not be changed for five years.

Provisions. The only deductible reserves are those for deprecia tion, bad debts (1% of credit sales, up to 10% of total receivables) of entities other than banks and financial institutions and certain fringe benefits. Reserves for personal insurance and contingen cies are not deductible.

Tax depreciation and amortization allowances. Depreciation allow ances are permitted for capital expenditures incurred in the pro duction of taxable income. Depreciation may be computed by using the straight-line, declining-balance or sum-of-the-years’ digits methods. Depreciation is computed over the useful life of an asset. The minimum useful lives are 3 years for movable assets and 30 years for buildings.

Startup expenses may be amortized over a period of five years. Improvements to leased properties must be amortized over the period of the lease. Purchasers of intangible assets, such as patents and goodwill, may claim straight-line amortization deductions for such assets when they derive income from such assets.

Relief for losses. Tax-loss carrybacks are not recognized under Panamanian law. Carryforwards of net operating losses are allowed. Taxpayers can deduct net operating losses over a period of five years following the year in which the loss is incurred. The maximum annual deduction is 20% of the relevant loss, but the amount of the deduction may not exceed 50% of the taxable income for the year.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax; tax on the sale or transfer of any chattel, services and imports of goods; certain goods and services are specifically exempt, such as medical services and fixed telephony that is not for commercial use

Notice of Operation (formerly Commercial and Industrial Licenses); paid annually on corporate capital (up to a maximum amount of PAB60,000)

Nature of tax Rate (%)

Notice of Operation for companies operating under a free-trade zone regime; paid annually on corporate capital (up to a maximum tax of PAB50,000) 0.5

Municipal tax; based on the nature of the business activity and the amount of sales (up to a maximum tax of PAB3,000 a month) Various Social security contributions and education tax, based on wages or salaries; paid by Employer 12.5 Employee 9.75 Excise taxes

Imports and sales of alcoholic beverages 10 Imports and sales of tobacco and cigarettes 15 Imports of jewels, cars, motorcycles, jet skis, boats (including sailboats), noncommercial airplanes, cable and microwave television services and mobile phones Various Public accommodations and lodging services 10

E. Miscellaneous matters

Foreign-exchange controls. Panama does not impose foreignexchange controls.

Transfer pricing. Cross-border intercompany transactions con ducted by Panamanian taxpayers are subject to transfer-pricing obligations if the transactions result in income, costs or expenses that are taken into account in the determination of taxable income.

The transfer-pricing rules are based on the arm’s-length principle established in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

An annual statement of transactions (Form 930) with related par ties must be submitted to the tax authorities within six months after the end of the fiscal year (if the fiscal year coincides with the calendar year, the deadline is 30 June). In addition, taxpayers must prepare a transfer-pricing study and make it available to the tax authorities.

Resolution No. 201-1937 of 2 April 2018 modified Form 930, “Transfer Pricing Information Return” (Version 1.0). The new form is Form 930, Version 2.0.

The changes include the following:

• The addition of new cells in the main tab of Form 930 related to the adjustments made in the related-party transactions analyses

• The addition of an “Intangible Annex” for reporting intangible transactions

• The addition of a “Comparable Companies Annex” for reporting the name, type, location and country of the comparables, as well as the selected profit level indicator and the financial information for each one of them

• A new section with “Questions related to the taxpayer” and “Questions related to the multinational enterprise,” in which some of the questions are related to the information required by Article 11 of Executive Decree 390, published on 24 October 2016

If Form 930 is not filed, a 1% fine capped at PAB1 million applies to the gross amount of the transactions with related parties.

Law No. 57 of 2018 contains provisions regarding the application of the transfer-pricing rules to transactions conducted by entities with an MHQ license. The law establishes that the transferpricing rules apply, starting with the 2019 tax year, to any relatedparty transaction that an individual or entity conducts with an MHQ license.

The transfer-pricing rules also apply to transactions conducted by companies with related parties that meet the following conditions:

• They are established in Panama.

• They are tax residents of other jurisdictions.

• They are established in the Colón Free Zone.

In addition, the transfer-pricing rules apply if the related parties operate in or under any of the following:

• The Oil Free Zone under Cabinet Decree 36 of 2003

• The PP Special Economic Zone

• The MHQ regime

• The City of Knowledge regime

• Any other current or future free zones or special-economic areas

Law No. 52 of 2018 contains provisions on the activities that individuals or entities with a call center concession may conduct. The law also includes provisions on applying transfer-pricing rules to transactions conducted by those entities.

The law establishes that, starting with the 2019 tax year, the transfer-pricing rules apply to any related-party transactions conducted by individuals or entities with individuals or entities that have a concession to provide call center services.

Although individuals and entities with a concession to provide call center services are exempt from income tax, the transferpricing rules also apply to transactions conducted by those individuals or entities with related parties that meet the following conditions:

• They are established in Panama.

• They are tax residents of other jurisdictions.

• They are established in the Colón Free Zone.

In addition, the transfer-pricing rules apply if the related parties operate in or under any of the following:

• The Oil Free Zone under Cabinet Decree 36 of 2003

• The PP Special Economic Zone

• The MHQ regime

• The City of Knowledge regime

• Any other current or future free zones or special economic areas

Also, an amendment to the Panamanian Fiscal Code established that transfer-pricing rules apply to individuals or companies

established under a preferential tax regime, for their operations with related parties that are in Panama or that are under any other preferential tax regime in Panama or abroad.

Law 159 of 2020 establishes that entities under the EMMA regime (see Special Regime for the Establishment and Operation of Multinational Enterprises that Render Manufacturing Services in Section B) must apply the transfer pricing principle established in the Panamanian Fiscal Code to all transactions carried out with related parties in Panama, those that are tax residents abroad and those that are registered under the Panama Pacific Regime, MHQ regime, Colón Free Zone, Fuel Free Zone, City of Knowledge regime or any other free zone or special-economic area regime currently existing or that may be created in the future.

In all cases, the application of the transfer-pricing rules must be in accordance with the provisions of the Fiscal Code, except for the provisions of Article 762-D of the Fiscal Code.

Multilateral Competent Authority Agreement for Country-byCountry Reporting. On 24 January 2019, Panama’s tax authori ties signed the Multilateral Competent Authority Agreement for Country-by-Country (CbC) Reporting, which is a multilateral framework agreement that provides a standardized and efficient mechanism to facilitate the bilateral automatic exchange of CbC reporting, is one of the four minimum standards of the OECD/G20 Base Erosion and Profit Shifting Project.

On 27 May 2019, Panama’s government published in the Official Gazette Executive Decree No. 46, which addresses the disclosure of information in the CbC report by tax resident companies in Panama for purposes of the automatic exchange of information.

Any ultimate parent entity of a multinational group must file the CbC report on an annual basis if it has consolidated revenues that are higher than EUR750 million or its equivalent in balboas at the exchange rate as of January 2015 during a tax year and if it is tax resident in Panama.

A reporting entity is any entity of a group or multinational group that must file the CbC report in its tax jurisdiction on behalf of the multinational group. The reporting entity is the ultimate par ent entity.

A company that is part of a multinational group that is tax resi dent in Panama must notify the Panamanian tax administration of the identity and tax residence of the reporting entity, as well as the fiscal period used by the multinational group. The entity doing the reporting must submit the notification using the format and terms and conditions established by the Panamanian tax administration.

On 27 December 2019, Panama published in the Official Gazette Resolution No. 201-9117 of 2019, regulating the notification obligation included in Article 3 of Executive Decree 46 of 2019, which establishes the regulatory framework of the CbC report in Panama.

On 31 December 2019, Resolution No. 201-9411, issued by the Ministry of Economy and Finance for Panama, was published in the Official Gazette. The resolution extended the CbC reporting

deadline for multinational enterprise groups with a reporting fis cal year ending between 31 December 2018 and 31 January 2019 to 31 January 2020.

The resolution was effective from its date of publication.

F. Treaty withholding tax rates

Panama has entered into tax treaties 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. Panama has concluded treaty negotiations with Austria and Bahrain.

The following are withholding tax rates under Panama’s tax treaties.

Dividends Interest Royalties % % %

Barbados

7.5 (a) 0/5/7.5 (j)(k) 0/7.5 (t)

Czech Republic 10 0/5/10 (w)(x) 10

France 5/15 (b) 0/5 (l) 5

Ireland 5 0/5 (y) 5

Israel 5/15/20 (ee) 0/15 (ff) 15

Italy 5/10 0/5 10

Korea (South) 5/15 (c) 0/5 (m) 0/10 (u)

Luxembourg 5/15 (b) 0/5 (l) 5

Mexico 5/7.5 (c) 0/5/10 (n)(o) 10 Netherlands 0/15 (d) 0/5 (p) 5 Portugal 10/15 (e) 10 (q) 10 Qatar 6 (f) 6 (r) 6 Singapore 5 (g) 5 (s) 5

Spain 0/5/10 (h)(i) 5 (v) 5

United Arab Emirates 5 (aa) 0/5 (bb) 5

United Kingdom 0/15 (cc) 0/5 (dd) 5

Vietnam 5/7/12.5 0/10 10 Non-treaty

jurisdictions

10/20 (z) 12.5 (z) 12.5

(a) The rate equals 75% of the statutory nominal rate applicable at the time of dividend distribution. The rate is reduced to 5% if the beneficial owner of the dividends is a company that owns at least 25% of the capital of the payer of the dividends. The rates do not apply to dividends paid on bearer shares.

(b) The rate is reduced to 5% if the beneficial owner of the dividends is a com pany (other than a partnership) that owns at least 10% of the capital of the payer of the dividends.

(c) The rate is reduced to 5% if the beneficial owner of the dividends is a com pany (other than a partnership) that owns at least 25% of the capital of the payer of the dividends.

(d) The rate is reduced to 0% if the beneficial owner of the dividends is a com pany that owns at least 15% of the capital of the payer of the dividends (ad ditional specific conditions apply).

(e) The rate is reduced to 10% if the beneficial owner of the dividends is a company that owns at least 10% of the capital of the payer of the dividends.

(f) The rate is reduced to 0% if the beneficial owner of the dividends is the other state, a political subdivision, a local authority or the central bank of the other state, a pension fund, an investment authority or any other institution or fund that is recognized as an integral part of the other state, political subdivision or local authority, as mutually agreed.

(g) The rate is reduced to 4% if the beneficial owner of the dividends is a com pany (other than a partnership) that owns at least 10% of the capital of the payer of the dividends.

(h)

The rate is reduced to 5% if the beneficial owner of the dividends is a com pany (other than a partnership) that owns at least 40% of the capital of the payer of the dividends.

(i) The rate is reduced to 0% if the beneficial owner of the dividends is a com pany that owns at least 80% of the capital of the payer of the dividends (ad ditional specific conditions apply).

(j) The rate is reduced to 5% if the interest is derived by a bank that is a resident of Barbados.

(k) The rate is reduced to 0% if the beneficial owner of the interest is a contract ing state, the central bank of a contracting state, or a political subdivision or local entity of the contracting state or if the interest is paid to another entity or body (including a financial institution) as a result of financing provided by such institution or body in connection with an agreement concluded between the governments of the states.

(l) The rate is reduced to 0% with respect to the following:

• Interest paid to or by the state, a local authority or central bank

• Interest paid on sales on credit

• Interest paid by a financial institution to another financial institution

• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states

(m) The rate is reduced to 0% with respect to the following:

• Interest paid to the state, a local authority, central bank or a public financial institution

• Interest paid on sales on credit

• Interest paid to entities (including financial institutions) as a result of financing provided in relation to an agreement between the governments of the states

(n) The rate is reduced to 5% if the interest is derived by a bank that is a resident of Mexico.

(o) The rate is reduced to 0% with respect to interest paid to the state, a political subdivision or local entity of the state, the central bank or specific credit institutions.

(p) The rate is reduced to 0% with respect to the following:

• Interest paid to the state, a local authority or the central bank

• Interest paid on sales on credit

• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states

• Interest paid to pension funds

(q) The rate is reduced to 0% with respect to interest paid to the state, a political subdivision or local entity, or the central bank.

(r) The rate is reduced to 0% with respect to the following:

• Interest paid to the state or a political subdivision or local authority of the state

• Interest paid to specific credit institutions

• Interest paid on sales on credit

• Interest paid by a financial institution to another financial institution

• Interest paid as a result of financing provided in relation to an agreement between the governments of the states

(s) The rate is reduced to 0% with respect to interest paid to the government or to banks.

(t) The rate is reduced to 0% with respect to royalties including royalties for scientific works related to biotechnology industry.

(u) The rate is reduced to 3% with respect to royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment.

(v) The rate is reduced to 0% with respect to the following:

• Interest paid to or by the state, a local authority or central bank

• Interest paid on sales on credit

• Interest paid by a financial institution to another financial institution

• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states

• Interest paid to pension funds

(w) The rate is 5% if the beneficial owner is a bank that is a resident of the other contracting state.

(x) The rate is reduced to 0% if any of the following circumstances exists:

• Interest arises in a contracting state and is paid to a resident of the other contracting state that is the beneficial owner thereof, and such interest is paid in connection with the sale on credit of merchandise or equipment.

• Interest is paid to the government of the other contracting state, including a political subdivision or local authority thereof, the central bank or a finan cial institution owned or controlled by such government.

• Interest is paid to a resident of the other state in connection with a loan or credit guaranteed by the government of the other state, including a political subdivision or local authority thereof, the central bank, or a financial insti tution owned or controlled by such government, if the loan or credit is granted for a period of not less than four years.

(y) The rate is reduced to 0% if any of the following circumstances exists:

• The beneficial owner of the interest is a contracting state, the central bank of a contracting state, or a political subdivision or local authority of such state.

• Interest is paid with respect to the sale on credit of merchandise or equip ment to an enterprise of a contracting state.

• Interest is paid to other entities or bodies (including financial institutions) as a result of financing provided by such institutions or bodies in connec tion with agreements concluded between the governments of the states.

• Interest is paid to a pension fund established in the other contracting state to provide benefits under pension arrangements recognized for tax purposes in that other contracting state.

(z) See Section A.

(aa) The rate is reduced to 5% if the beneficial owner of the dividends is a resident of the other contracting state.

(bb) The rate is reduced to 5% if the beneficial owner of the interest is a resident of the other contracting state. The rate is reduced at 0% if any of the following circumstances exists:

• The beneficial owner of the interest is the government, a political subdivi sion or a local authority of the other contracting state.

• The interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of a contracting state.

• The interest is paid to financial institutions and other bodies as a result of financing provided by such institutions or bodies in connection with agree ments concluded between the governments of the contracting states. (cc) The rate is 15% if the beneficial owner of the dividends is a resident of the other contracting state. The withholding tax rate is reduced to 0% if either of the following circumstances exists:

• The beneficial owner of the dividends is a company that is a resident of the other contracting state and that holds directly at least 15% of the capital of the entity paying the dividends, and other requirements are satisfied.

• The beneficial owner of the dividends is a contracting state, a political subdivision or local authority thereof, or a pension scheme. (dd) The rate is reduced to 5% if the beneficial owner of the interest is one of the following persons:

• An individual

• A company whose principal class of shares is regularly traded on a recog nized stock exchange

• A financial institution that is unrelated to, and dealing wholly indepen dently with, the payer

• A company other than those mentioned above, subject to conditions

The rate is also reduced to 5% if the beneficial owner of the interest is a resident of the other contracting state and any of the following circumstances exists:

• The interest is paid by a contracting state or a political subdivision or local authority thereof.

• The interest is paid by a bank in the ordinary course of its banking business.

• The interest is paid on a quoted Eurobond. The rate is reduced to 0% if any of the following circumstances exists:

• The beneficial owner of the interest is a central bank of the contracting state or any of its political subdivisions or local authorities.

• The interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of a contracting state.

• The interest is paid to other entities or bodies (including financial institu tions) as a result of financing provided by such entities or bodies in connec tion with agreements concluded between the governments of the contracting states.

• The beneficial owner of the interest is a pension scheme. (ee) The rate is reduced to 15% if the beneficial owner of the dividends is a resi dent of the other contracting state. The rate is reduced to 5% if the beneficial owner is a pension fund that is a resident of the other contracting state. A 20% withholding tax rate applies if dividends are distributed by a Real Estate Investment Company and if the beneficial owner holds less than 10% of the capital of the Real Estate Investment Company.

(ff) The standard rate is 15%. Interest payments to specific entities and interest paid on traded corporate bonds are exempt (0% rate).