Panama

Alvaro Aguilar Alfu

Lombardi Aguilar Group
Panama City, Panama

Tax Regime and Classification as No-Tax or Low-Tax Jurisdiction

In General

The Republic of Panama is a centralised state, having secceded on 3 November 1903.

The President, elected by universal vote for a five-year period, is the head of state.
The main political parties are the center-right Cambio Democratico, Arnulfista and
Liberal-Republican-Nationalist (MOLIRENA) parties and the center-left Partido
Revolucionario Democrático. The legislative power is comprised of legislators
nominated by the parties and elected concurrently with the President by universal vote
for the same five-year period. The President appoints the Supreme Court Justices for
10-year periods, subject to approval by the legislature.
Panama is a member of several international organisations, being a founding member
of the Organisation of American States and the United Nations. Latin American
regional offices of several organisations, such as the United Nations Development
Programme, the United Nations Children Fund, and the International Committee of
the Red Cross, take advantage of the central location of Panama by having their
offices there.
$V D UHVXOW RI WKH  8QLWHG 6WDWHV±3anama Monetary Convention, the Panama
currency has an official parity with the United States dollar, making the country fully
dollarised. The Constitution forbids enactment of any currency as compulsory tender,
thereby allowing free use of euros and other foreign currencies by individuals without
intermediation by a central bank.
The economy has a GDP of US $42 billion. Approximately 91 banks with US $64
billion in assets are located in Panama, employing nearly 13,000 persons. Regulations
requiring increased capital reserves and banking supervision are being implemented
in order to strengthen the banking system.
The main taxes payable by local taxpayers are owed to the national government.
Municipal taxes are payable by taxpayers with a permanent business establishment in
the district, pursuant to tax rates on their gross sales, as approved by each municipal
council. Municipal taxes may not be levied on activities that have been previously
taxed by the national government. Exemptions of municipal taxes may be granted
solely by each municipal council.
PAN/2 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

The Constitution provides that no one may be compelled to pay duties or taxes that were
not legally established and which collection was not made in accordance with the laws.1
This has been interpreted on several occasions by the Supreme Court of Justice to
imply that only taxes provided for in a law enacted by the legislature are payable (as
well as exemptions granted) and that no taxes may be imposed by decree.
Panama has a regime of taxing only local-source income, allowing many exemptions
for income from preferred activities conducted in Panama. Therefore, Panama may be
classified as a no-tax jurisdiction for foreign activities. The main tax provisions are
found in the Tax Code, enacted as Law Number 8 of 1956. Its main regulations are
found in Executive Decree Number 170 of 1993.2

Local and Foreign-Source Income

Income tax is levied only on local-source income, ie, taxable income generated inside
Panama, regardless of where it is earned, at a 30 per cent fixed rate for corporations
and other entities and at progressive rates for individuals. Income tax rates for
individuals are:
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$12,000;
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cent of the excess up to US $15,000;
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cent of the excess up to US $15,000;
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cent of the excess up to US $30,000; and
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the excess.
Income tax is payable in Panama only by individuals and entities that have Panama-
source income from transactions with Panamanian taxpayers on a regular basis, minus
the deductions for office expenses and those allowed by law. Taxpayers with income
sourced from Panama must file an annual income tax return.
Individuals and entities whose sole income has been subject to income tax with-
holding (such as salaries, dividends from local companies, or social security funds) or
whose income is tax-exempt (such as interest from bank accounts), or individuals
whose net taxable yearly income is less than US $9,500, are not required to file a tax
return.
Taxable income is the difference resulting from subtracting deductible expenses from
gross income. Deductible expenses are those incurred for the maintenance and

1 Constitution, art 48.

2 Executive Decree Number 170 of 1993, art. 13.
PANAMA PAN/3

production of the income (eg, office expenses and promotion), as well as others
authorised by law. The taxpayer must allocate expenses to exempt, taxable, or
foreign-source income, maintaining separate accounting for each type of income to
ensure approval in case of an audit.
Taxpayers with both Panama- and foreign-source income must prove to taxation
authorities that expenses were indeed used for Panama-source income in order to
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types of income may be deducted only in the proportion that they maintain to total
income.
From the resulting taxable income amount, any applicable incentives (such as those
mentioned for reforestation, construction, and tourism), carry-over allowances, or
personal deductions are subtracted which, in turn, results in a net taxable income to
which applicable tax rates are applied. From the tax on the net taxable income, any
pre-existing tax credits are subtracted, which results in the payable tax for the year.
Every year, the taxpayer must declare an estimated net taxable income for the
following year. This estimated income tax must be paid along with the tax payable for
the actual year. The estimated income tax is then credited as an advance payment for
the tax that will be payable next year. No tax refunds are granted until the taxpayer
ceases local-source activities and submits a final tax return.
An Alternative Income Tax Estimate must be determined by taxpayers, who must pay
the highest between the traditional income tax under the abovementioned methods
and the Alternative Income Tax under these rates:
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corporate taxpayers; and
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the income exceeds US $60,000 yearly.
After-tax gross income of individuals whose sole income is salary and other employee
compensation below US $9,500 a year is exempt from income-tax.
After-tax gross income of individuals whose sole income is a salary and other
employee remuneration below US $10,400 a year (with a monthly average under US
$800) is exempt from income tax.
Under article 694 of the Tax Code and article 10 of Executive Decree Number 170 of
1993, income from the following is considered foreign-source and, therefore, not
taxable:
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Panama;
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conducted abroad;
PAN/4 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

‡3DVVLYHLQFRPHIURPORDQVRURWKHUILQDQFLDOWUDQVDFWLRQVZLWKIRUHLJQERUURZHUV
even if the reimbursement is conducted in Panama;
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income.

Exempt Income

An additional category is that of exempt income, which is that earned from the
exempt activities mentioned hereinafter, conducted inside Panama. Despite the fact
that Panama taxes only local-source income, income from these activities is exempt
of Panamanian income tax.
Special exemptions have been enacted for:
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Effective 1 January 2003, income exempt under incentives laws may only be
deducted for:
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‡SHUFHQWLQWKHVHFRQG\HDU
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This diminishing exemption of income excludes incentives granted under Tourism,

Persons with Disabilities, First Employment, AIDS Prevention, and Old Town
Reconstruction Laws, as well as income from securities issued under all incentives
laws. Incentives under Forestry Laws will last for 25 years after their being granted.

3 Law Number 8 of 1925.

4 Law Number 25 of 1992.
5 Cabinet Decree Number 44 of 1990.
6 Law Number 24 of 1992.
7 Cabinet Decree Number 29 of 1992.
8 Law Number 8 of 1994.
9 Law Number 8 of 1987.
PANAMA PAN/5

Exemptions and Credits

Shipping

Income derived by international commerce of ships under Panamanian flag is exempt

from Panama tax. Ships owned by companies or individuals of any country or
Panama corporations owned by shareholders of any country may register in the
Panamanian Merchant Marine and benefit from this exemption.
As an added incentive, ships with Panamanian flag are exempt by the Panama Canal
Commission from payment of tolls when crossing through the Panama Canal.

Export Processing Zones

Companies established in previously approved export processing zones benefit from

exemption of income tax on income earned from export activities and of import duty
on all equipment and parts imported for their activities.
The income tax exemption is not allowed to companies whose country of origin
allows them to deduct or credit income tax paid in Panama. However, this provision
does not make reference to Panamanian subsidiaries of foreign companies.
Dividends and interest paid from securities issued by export processing zone
companies are exempt from Panama withholding and income taxes. These benefits
are granted to export processing zone companies engaged in the following activities
for export or for clients located abroad:
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and semi-processed goods (including those of organic origin);
‡$VVHPEO\ HQWHUSULVHV HQJDJHG LQ DVVHPEly of finished or semi-finished devices
from raw materials or other semi-finished parts;
‡3URFHVVLQJHQWHUSULVHVHQJDJHGLQUHFHLving any parts or devices and treating them
for tropicalisation, analysis, painting, packing, recycling, or any other process;
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processing zone as a complement to export activities; and
‡2IIVKRUHVHUYLFHVVXFKDVLQWHUQDWLRQDOmarketing, insurance, reinsurance, banking,
financing, auditing, management, brokerage, consulting, and all services related to
telecommunications and computers for entering, processing, storing, and
transmitting data, organising and managing and operating data bases, and
fundamental and applied scientific and technological research services.

City of Knowledge and Information Technology Park

In order to attract to Panama information technology, e-commerce, and other research

and development businesses, as well as educational institutions, the former military
base of Fort Clayton near the Panama Canal has been dedicated as a special business
PAN/6 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

]RQHNQRZQDVWKHµ&LW\RI.QRZOHGJH¶10 Businesses and institutions whose projects

have been approved by the City of Knowledge Foundation benefit from 25-year
(renewable) exemptions in regard to:
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appliances, or materials necessary for the development of the project;
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and necessary for the development of the project; and
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funds is related to the purposes of the project.
One of the components of the City of Knowledge is the Panama Industrial
Technological Park (ITP), which hosts business projects with production and service-
related activities. Business projects are grouped into a Biological Sciences Cluster
(biodiversity, environment, marine resources, forest resources, aquaculture, tropical
medicine, and pharmacology) and a communications cluster (information technology
and multimodal transportation).
Industrial Technological Park businesses that manufacture, assemble, or process
high-technology goods or provide similar services to clients in Panama or abroad
have 25-year (renewable) exemptions from income taxes, capital tax, and other taxes
on their income earned and activities conducted, in addition to the exemptions granted
to all City of Knowledge entities.

Construction

The growth of construction in Panama City has been fueled by tax and financial
incentives and credits that are not found in other countries. The construction industry
has the following incentives:
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construction activity;
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valued under US $100,000 and five to 15 years for other housing; and
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commercial buildings valued under US $100,000 and five years for other buildings.
The banking and housing sectors benefit by a reduction of four per cent from the
reference interest rate (currently set at 11 per cent) for housing mortgage loans.
Housing must be valued under US $80,000 or be built for reconstruction of the Old
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payable by the house buyer, which difference is applicable by the lending institution
as an income tax credit.11

10 Law Decree Number 6 of 1998.

11 Law Number 3 of 1985.
PANAMA PAN/7

Real estate investment trusts settled in Panama for construction of industrial parks and
social interest housing are exempt from tax on their income and distributions to their
beneficiaries.

Forestry
Incentives have been enacted for activities related to planting of trees on eroded lands
or the purchase and maintenance of forests for their later use as lumber. After
approval by the national forestry authority, the project is exempt from all income, real
estate, municipal, and import taxes, withholdings, and duties for a period of 25 years.
Holders of shares and bonds of corporations approved to conduct forestry projects are
exempt of taxes or withholdings on distributions and interest paid on these securities.
Lending institutions may use as a tax credit the amount equivalent to the four per cent
difference between the preferential rate granted to a forestry project and the normal
reference rate.

Free Trade Zones

Panama has the largest free trade zone in the Americas, located in the city of Colon,
with access to the Panama Canal and the main world trade routes. Foreign and local
companies use the Free Trade Zone for duty-free purchasing of merchandise, its
storage, and later re-exporting to Caribbean and Latin American destinations.
Companies established in the Free Trade Zone are exempt from all income, real
property, and withholding taxes. Exemptions also are applicable to other free trade
zones.

Petroleum Export Zones

With the turnover of many installations in the Panama Canal related to the trans-
shipment of oil, opportunities have appeared that benefit from the application of tax
incentives.
Foreign and local companies established in previously approved petroleum export
zones for the re-exportation of petroleum and its by-products may choose to be taxed
based on a taxable income equal to 25 per cent of the yearly production, as well as
exemption of import duty on all equipment and parts.

Tourism
Previously approved tourism projects have the following tax incentives:
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‡)RUSURMHFWVYDOXHGDERYH86a 20-year income tax exemption, a 20-year
real property tax exemption, an exemption from docking and landing duties and, for
PAN/8 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

lending institutions, a deduction for interest earned from lending to tourism

companies; and
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projects built on historical sites, a 10-year real property tax exemption on land, and
a 30-year real property tax exemption on improvements.
Trade fairs and conventions have full import duty exemption on goods imported and
re-exported to other destinations.

Mining

A special income tax regime and import duty exemptions are applicable.

Agriculture

Agricultural activities, including those related to ranching, fishing, aquaculture,

aviculture, and industries dedicated to processing of those products, have the
following incentives:
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activities;
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‡ 6SHFLDO WKUHH SHU FHQW IODW LPSRUW GXW\ on previously specified materials and
equipment; and
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businesses.

Exporters of non-traditional agriculture products have the following incentives:

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Banana producers have:

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Estate and Gift Taxes

Estate or mortis causa, as well as gift or inter vivos taxes, were abolished in 1985 and
2002.
PANAMA PAN/9

Tax on Transfer of Personal Goods and Services

A five per cent tax is payable on the transfer of title or possession of personal
property and the provision of almost all services within Panama.12
Among the services exempt are:
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‡3D\PHQWV UHFHLYHG E\ OLFHQVHG ILQDQFial service providers for their services,
contributions to pension funds and other licensed savings entities, except for
commissions for banking and financial services:
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enactment for five years;
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‡([SRUWUHODWHGVHUYLFHVVXFKDVWKRVHE\Panama-flag ships of international service,
those related to ship chandlering of ships crossing the Panama Canal, and free trade
and maquiladora zones; and
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activities of co-operatives.

Dividend and Distribution Withholding Taxes

Corporations and other business entities which are required by law to have a business
license must withhold dividend or distribution tax at a 10 per cent rate (20 per cent if
shares are issued to the bearer) on the portion of distributions from Panama-source
income and at a 5 per cent rate on the portion of distributions from foreign-source
income.
Companies or business entities which have a physical presence in Panama and invoice
clients from Panama are required to have a business licence called Operation Notice
(Aviso de Operacion). When a company has a mixture of Panama-source and foreign-
source income, it is required to distribute all of its dividends from Panama-source
income before distributing earnings from foreign-source income.
Companies in free-trade or export-processing zones must withhold the dividend tax at
a 5 per cent rate independently of the source of the income.
If less than 40 per cent (20 per cent for companies free trade or export processing
zones) of net after-tax earnings from Panama-source or foreign-source income are
GLVWULEXWHGDSHUFHQWµFRPSOHPHQWDU\WD[¶PXVWEHSDLGRQWKHXQGLVWULEXWHGDPRXQW
instead. Branches of foreign business entities must withhold the dividend tax at a 10
per cent rate of the Panama-source income, allowing a tax credit for taxes paid in the
country of incorporation.

12 Sellers withholding such tax are allowed a credit for sales tax already paid to other
taxpayers for raw materials purchased. Tax Code, art 1057V.
PAN/10 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

Corporate Franchise Tax

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HQWLWLHV H[FOXGLQJ QRQSURILW DVVRFLDWLRQV¶ PXVW SD\ D \HDUO\ IUDQFKLVH WD[ Tasa
Unica) on a yearly basis, at a flat rate of US $250 the first year, and US $300 the
following years. This tax is applicable to all entities whether they have physical
presence or have earned income sourced in Panama or not. The tax is collected by the
resident agent of the entity and is due no later than 15 July of each year for entities
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Late payment results in levying of a US $50 surcharge per year. Non-payment for
more than one year will result in an additional levy of a US $300 fine for each year.
Non-payment also may result in the entity being struck off. During the liquidation
period of the following three years, the entity may be reinstated by payment of all
taxes, surcharges, and fines due, plus a US $1,000 fine. Resident agents are entitled to
collect from the entity an annual fee of US $250 yearly unless agreed otherwise with
the entity beneficiaries.

Other Taxes

Other taxes are applicable, but only on activities sourced in Panama. These are levied
on income from:
‡5HDOSURSHUW\WD[DWDUDWHEHWZHHQ4 per cent and 2.1 per cent of the registered
value above US $20,000 of real property located in Panama; 13
‡5HDOSURSHUW\WUDQVIHUWD[DWDUDWHRI 2 per cent of the registered value (adjusted
for the number of years held) or the transfer price, whichever is higher, before each
transfer of real property located in Panama; 14
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entities and non-liberal professionals, without exceeding US $60,000 (taxpayers in
free trade and export processing zones pay the tax at a rate of 1 per cent of paid-in
capital, without exceeding US $50,000);15
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highest being US $0.10 for every US $100 of the value of a transaction of Panama-
source income;16 and
‡&RUSRUDWH)UDQFKLVH7D[SDid by corporations and private interest foundations on a
yearly basis, at a flat rate of US $250.

13 Tax Code, art 766.

14 Law Number 106 of 1974.
15 Tax Code, art 1004.
16 Tax Code, art 967.
PANAMA PAN/11

Impact of Tax Treaties

In General

The impact of double-taxation treaties in Panama is limited and addresses mainly the
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ships, aircraft, and Panama Canal contractors.
The provisions contained in most double-taxation treaties allowing disclosure of
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veil by local courts and the administration.

Air and Shipping Tax Treaties

Double-taxation treaties have been allowed for international maritime and

aeronautical activities. Under article 13 of Executive Decree Number 170, the
following are considered as exempt income:
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country where such ships or aircraft are registered, the reciprocity principle is in
effect with regard to income obtained in such country by ships and aircraft with
Panamanian flag; and
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foreigners resident or not in Panama, as long as the country of the nationality of the
individual or the country where the entity is incorporated grants an equivalent
exemption to Panamanian individuals or entities, or to residents in Panama.
Under this principle, reciprocity agreements exist with the following countries:
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PAN/12 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

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3DQDPD±8QLWHG6WDWHV6KLSVand Aircraft Income Tax Treaty

In 1987, Panama and the United States concluded an agreement to exempt from
income tax on a reciprocal basis income derived by residents of the other country
from the international operation of ships and aircraft. Under sections 872(b) and
883(a) of the United States Internal Revenue Code, the United States agrees to
exempt from tax gross income derived from international operation of ships or aircraft
by individuals who are residents of Panama (other than United States citizens) and
corporations organised in Panama.
Equivalent exemptions are granted under article 13 of Executive Decree Number 170
of 1993 by Panama to citizens of the United States (who are not residents of Panama)
and to corporations organised in the United States (which are not subject to tax by
Panama on the basis of residence). In the case of a corporation, the exemption will
apply only if the corporation meets either of the following conditions:
‡0RUHWKDQSHUFHQWRIWKHVKDUHVDUHRZQHGGLUHFWO\RULQGLUHFWO\E\LQGLYLGXDOV
who are residents of Panama or of another country which grants a reciprocal
exemption to United States citizens or corporations; or
‡7KHVKDUHVRIWKHFRUSRUDtion are primarily and regularly traded on an established
securities market in Panama, or are wholly owned by a corporation whose shares
are so traded and which also is organised in Panama.
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Revenue Code will be exempt from United States tax. Gross income includes all income
derived from the international operation of ships or aircraft, including income from:
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‡5HQWDORIFRQWDLQHUVDQGUHODWHGHTXLSPHQt which is incidental to the international
operations of ships or aircraft; and
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3DQDPD±)UDQFH7UHDW\ of Establishment

$UWLFOH9,,RIWKH3DQDPD±)UDQFH7UHDW\RI(VWDEOLVKPHQWRI-XO\SURYLGHV
that, subject to provisions contained in double-taxation agreements, the nationals of
each party will not be subject within the territory of the other party to higher taxes of
any kind than those which are imposed on its own nationals.
PANAMA PAN/13

7KH )UHQFK FRXUWV KDYH JLYHQ WKLV QRQGLVFULPLQDWLRQ FODXVH RI WKH  3DQDPD±
France Treaty of Establishment a tax-treaty effect by declaring that it forms an
obstacle to the application of a tax applicable only on property held by non-French
corporations. A similar interpretation has yet to be issued by a Panama court on the
applicability of special taxes for foreign corporations.

Friendship and Foreign Investment Protection Treaties

Panama has signed treaties with the United Kingdom,17 the United States,18 France,19
and Switzerland.20
These treaties call for each party to provide to investments by citizens of the other
party the treatment granted to its own nationals or the treatment granted to citizens of
a most-favoured nation, if this is more advantageous. This treatment does not include
granting of the benefits accorded under a free trade agreement.

Sourcing Income in Panama

Foreigners may source their income in Panama by several methods, such as

establishing residence, invoicing from Panama, or acting through Panamanian
vehicles. Individuals and legal entities that do not have a registered domicile or place
of incorporation or registered branch in Panama may be subject to taxation. As a
general rule, taxpayers are considered to be the individuals or entities, despite their
nationality, domicile, or residence, that earn income considered taxable by law (ie,
non-exempt local-source income).
Individuals who remain more than 180 days during the fiscal year in Panama and earn
any taxable income are subject to income tax at normal rates, despite their
immigration status. Income taxes owed by a deceased individual at the time of death
are payable by the heirs as a debt deducted from the estate assets. Activities exempt
from Panamanian taxes under article 13 of Executive Decree Number 170 of 1993
are:
‡,QWHUQDWLRQDO  PDULWLPH  FRPPHUFH  FRQGXFted by ships registered in the
Panama National Merchant Marine, as well as gains from transfer and operation of
such ships;
‡7UDQVSRUWLQJRIJRRGVDQGSDVVHQJHUVDFURVVWKH3DQDPD&DQDO
‡,QWHUHVWIURPEDQNDFFRXQWVRIDQ\NLQGLQ3DQDPDQLDQEDQNV
‡,QWHUHVWDQGFRPPLVVLRQVSDLGE\3DQDPDQLDQEDQNVWRILQDQFLDOLQVWLWXWLRQVDEURDG
for loans, acceptances, or other credits;
‡,QWHUHVWIURPJUDQWLQJRIILQDQFLQJWREXLOGHUVRIORZFRVWUHVLGHQFHVLQ3DQDPD

17 Law Number 3 of 1983.

18 Law Number 12 of 1983.
19 Law Number 2 of 1983.
20 Law Number 4 of 1983.
PAN/14 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

‡,QWHUHVW DQG FRPPLVVLRQV IURP JUDQWLQJ RI ILQDQFLQJ WR DSSURYHG DJULFXOWXUH
environmental forestry, and tourism projects in Panama;
‡/HDVLQJ SD\PHQWV IURP OHDVLQJ RI JRRGV DEURDG RU 3DQDPDQLDQ LQWHUQDWLRQDO
commerce ships;
‡(VWDWHDQGVXFFHVVLRQWUDQVIHUV
‡6DOHRIZRRGIURPDSSURYHGHQYLURQPHQWDOIRUHVWU\SURMHFWVLQ3DQDPDXQWLO
and gains from transfer of securities of involved companies;
‡([SRUW SURFHVVLQJ ]RQH DFWLYLWLHV ZKHQ the company is subject to taxes in its
country of incorporation; and
‡,QWHUHVWRQERQGVDQGVHFXULWLHVVROGWKURXJKWKH3DQDPD6WRFN([FKDQJH

Establishing Residence within Panama

Individuals

Individuals may establish residence in Panama under the various immigration

procedures according to their activities. All authorised foreign residents are equal to
nationals before the law, except for the application of certain restrictions relating to
retail activities. Temporary visitors include:
‡)RUHLJQHUVYLVLWLQJUHODWLYHVIRUQRPRUHWKDQQLQHPRQWKV
‡3DWLHQWVXQGHUJRLQJWUHDWPHQWDW3DQDPDKHDOWKFOLQLFV
‡0LVVLRQDULHV
‡6SHFLDOLVHGWHFKQLFLDQVRUZRUNHUV
‡([HFXWLYHVRI&RORQ)UHH=RQHDQGExport Processing Zones companies and
regional headquarters;
‡3DQDPD&DQDOZRUNHUV
‡7HFKQLFLDQVUHVHDUFKHUVDQGVWXGHQWVRIWKH&LW\RI.QRZOHGJHDQG
‡7HFKQLFLDQVQRWH[FHHGLQJSHUFHQWRIWKHSD\UROORIDOORWKHU3DQDPDEXVLQHVVHV
may reside in Panama upon filing with the immigration authorities their labour
contracts, good conduct certificates, and other personal documents.21
The following may acquire the category of permanent residents:
‡$JULFXOWXUDOZRUNHUVUHVLGLQJRXWVLGHRIWKHSURYLQFHVRI3DQDPDDQG&RORQ
‡)RUHLJQVSRXVHVRI3DQDPDQLDQQDWLRQDOV
‡2ZQHUV RI 86  LQ VKDUHV RI 3DQDPD FRPSDQLHV HPSOR\LQJ DW OHDVW ILYH
Panamanian workers;
‡2ZQHUVRI86LQVHFXULWLHVRIDFFUHGLWHGIRUHVWU\FRPSDQLHV
‡2ZQHUVRID86WKUHH\HDUFHUWLILFDWHRIGHSRVLWIURPD3DQDPDEDQN
‡2ZQHUVRI86LQVKDUHVRIFRPSDQLHVLQH[SRUWSURFHVVLQJ]RQHV

21 Decree Law Number 3 of 2008, regulated by Executive Decree 320 of 2008.

PANAMA PAN/15

‡5HSUHVHQWDWLYHVRIIRUHLJQFRPSDQLHVZith at least three workers in Panama; and

‡3HUPDQHQWZRUNHUVIRU3DQDPDQLDQFRPSDQies not exceeding 10 per cent of their
payroll.
Pensioners can apply for a permanent tourist visa that allows them to enter the
country without previous request, as long as they prove they receive benefits from a
foreign pension authority and do not work in Panama. Retirees that have a timed
deposit for US $120,000 in Panama in addition may apply for a Panamanian passport.
Foreigners in these categories are subject to taxes only on their Panama-source
income. Temporary-visitor executives, pensioners, and retirees also can import up to
US $10,000 in goods and one automobile every two years free of duty.22

Companies

Foreign companies may redomiciliate to Panama23 by filing before Panamanian

authorities copies of the incorporation documents from their country of origin and a
corporate resolution authorising the redomiciliation. The company continues subject to
its original country of incorporation unless the dissolution in that jurisdiction is carried
out.
Foreign companies actively conducting business in Panama through branches are
required to file copies of their incorporation documents and a resolution authorising
the opening of the branch.24 The branch must pay a 10 per cent withholding tax on its
Panama-source income, allowing a credit for tax paid at its country of incorporation
for such income.25
These methods are different from the holding by foreign companies of shares of their
Panamanian subsidiaries. In this case, local-source income of the Panamanian
subsidiary is treated as that of any Panamanian taxpayer and distributions to the
parent company subject to normal withholding.

Vehicles Available for Achieving Favourable Tax Status

Corporations

In General

Corporations (Sociedad Anónima) may be formed in two days by any two individuals,
foreign or national, without a need to disclose beneficial ownership under Law
Number 32 of 1927. In practice, two individuals form the corporation and, by private
document, transfer any rights they have in the corporation to the beneficial owner.

22 Decree Law Law Number 25 of 1992, art 41.

23 Commerce Code, art 60A.
24 Law Number 32 of 1927, art 90.
25 Tax Code, art 733; Executive Decree Number 170 of 1993, art 109.
PAN/16 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

No minimum capital requirements exist; nor must capital be paid in. Authorised
capital may be stated in any currency, and the corporation may maintain an issued
capital below that amount. Shares may be par value or non-par value, as well as
registered or bearer shares. Their issuance does not require government approval,
except for public sales inside Panama. Bearer shares are registered in private
FRUSRUDWHVKDUHERRNVDVLVVXHGµWRWKHEHDUHU¶
A minimum of three directors must be appointed at any time. A minimum of a
president, secretary, and treasurer must be appointed as officers, and they need not be
the same as the directors or the shareholders. These officers and directors may be of
any nationality, and they may reside outside of Panama.
Corporations may engage in any legal activities, even those not expressly stated in
their articles of incorporation. There is no need to file annual returns for companies
not operating in Panama. Corporate meetings may be held outside of Panama if the
articles of incorporation so provide. The corporation may be dissolved by filing at the
Public Registry the agreement of dissolution by the shareholders.

Banks

/DZ'HFUHH1XPEHURIGHILQHVµEDQN¶DVµ$Q\SHUVRQHQJDJHGLQWKH%DQNLQJ
Business or which acts as a Representative 2IILFH¶ ZKLFK LQ WKHRU\ DOORZV HYHQ
individuals to obtain a banking licence, but as a general rule only corporations or their
branches can fulfill the requirements by the Superintendent of Banks for said licence.
The types of banks are:
‡*HQHUDOOLFHQFHEDQNVOLFHQVHGWRHQJDJHLQIXOOEDQNLQJDFWLYLWLHVDQGZLWKDSDLG
in capital of US $10,000,000;
‡,QWHUQDWLRQDOOLFHQFHEDQNVWKRVHDOORZHGIURPDQRIILFHHVWDEOLVKHGLQ3DQDPDWR
conduct transactions that take effect abroad and receive deposits only from
foreigners; and
‡5HSUHVHQWDWLYH RIILFH UHSUHVHQWDWLYH RI EDQNV QRW RSHUDWLQJ LQ 3DQDPD ZKLFK
cannot receive deposits in or lend from Panama.
Banks with mostly foreign accountholders pay almost no income tax, but all banks
must pay a bank and exchange house tax of:
‡)URP86IRU86ELOOLRQRUPRUHLQDVVHWVRIJHQHUDOOLFHQFHEDQNVWR
US $350,000 for US $1 billion in assets; and
‡86IRULQWHUQDWLRQDOOLFHQFHEDQNV

Micro-Finance Banks

Entities with paid-in capital of US $3,000,000 are allowed to receive deposits and
lend small amounts to small businesses, as authorised by the superintendent of banks.
They must pay a Bank and Exchange House Tax of US $15,000 for micro-finance
and development banks.
PANAMA PAN/17

Trust Agents

Entities with paid-in capital of US $1,000,000 are allowed to manage as trustees of

funds settled in trust on a regular basis, as authorised by the superintendent of banks.

Lending Institutions

Entities with paid-in capital of US $150,000 are licenced by the Ministry of

Commerce to give out personal loans without receiving deposits.

Leasing Companies

Entities with paid-in capital of US $100,000 are licenced by the Ministry of

Commerce under Law 7 of 1990 to lease personal goods with an option to buy.

Limited-Liability Partnerships

Limited-liability partnerships are formed by two partners under Law Number 2 of

2009. Partnership capital is represented by negotiable, accumulative and divisible
contributions. Capital must be fully paid in order to have voting rights. Partners
should appoint one or more individuals or entities as managers who do not need to be
partners. No nationality or residence requirements exist to be a partner or manager.
A limited-liability partnership can engage only in the activities expressly stated in its
charter. There is no need to file annual returns for companies not operating in
Panama, but at least a yearly report must be submitted by the manager to the partners.
Partners' meetings are held as many times as required in the charter and may be held
outside of Panama. The partnership has a definite or perpetual duration.

Partnerships

Any number of partners of any nationality may enter into a partnership under article
297 of the Commerce Code. Partners of such an entity are fully liable for company
liabilities with their participation in the entity and their own assets.
Partners may choose one of them as a managing partner and also can appoint an
agent. The partnership can engage in any activity for its duration as stated in its
charter. Partnership meetings are required to be held at least once a year, and they
may be held outside of Panama. The partnership has a definite duration.

Trusts

Trusts are formed under Law Number 1 of 1984 by a settlor who settles assets of any
kind, present or future, for a trustee to administer them in favor of a beneficiary. The
PAN/18 INTERNATIONAL TAXATION OF LOW-TAX TRANSACTIONS

founder himself also can be a beneficiary. The assets of the trust are separate from
those of the settlor, and they are not subject to attachment by his creditors.
A trust may engage in any legal activities expressly stated in its trust deed, and it may
EHJRYHUQHGE\3DQDPDQLDQRUDQ\IRUHLJQODZRIWKHVHWWORU¶VFKRLFH7KHVHWWOLQJ
transfer, management, and holding of assets by the trust, as well as the income
produced, is not subject to any taxes in Panama.

Private-Interest Foundations

Foundations are formed by a founder under Law Number 25 of 1995 who places US
$10,000 or more in assets for a foundation council to administer them in favour of a
beneficiary. The founder himself also can be a beneficiary. The assets of the
foundation are separate from those of the founder, and they are not subject to
DWWDFKPHQWE\WKHIRXQGHU¶VFUHGLWRUV7KHIRXQGDWLRQFRXQFLOPXVWSURYLGHDUHSRUW
to the founder on a yearly basis.
A foundation may engage in any legal activities expressly stated in its foundation
deed. The transfer, management, and holding of assets by the foundation, as well as
the income produced, are not subject to taxes in Panama.
 INTERNATIONAL TAXATION
OF LOW-TAX TRANSACTIONS
HIGH-TAX AND LOW-TAX JURISDICTIONS

Second Edition

DENNIS CAMPBELL
General Editor

JURIS
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