Simple Tax Guide for Americans in Panama
US Expat Taxes - Panama
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Panama for over 8 years. Our clients live in Panama, San Miguelito and Tocumen.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Panama for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Panamanian Tax System for the American Expatriates.
ndividual income tax rates in Panama are progressive to 27%..
Individuals with annual taxable income exceeding USD 60,000 may be required to compute an alternative minimum tax of 6%.
Taxable Income (US$)
Column 1 / Column 2 / Income Tax for Column 1 / Income Tax over Column 1
|$0 - $9,500:||$0||0%|
|$9,500 - $12,000:||$0||20.5%|
|$12,000 - $15,000:||$512.50||21.5%|
|$15,000 - $20,000:||$1,557.50||23%|
|$20,000 - $30,000:||$2,307.50||24%|
Alternative Minimum Income Tax - Individuals with a gross taxable income over US$60,000 will calculate an alternative income tax of 6% of the total taxable income.
The larger amount arising from the current calculation method and the alternative method will be the income tax to be paid. In the case of individuals who are merchants, they will apply the alternative calculation established for corporations.
If, after applying the alternative method, the individual incurs losses due to the payment of the tax, he (she) can request the Tax Department not to apply the alternative calculation.
Nonresident individuals hired or otherwise rendering services to Panamanian residents for periods of less than 180 days in a calendar year are subject to withholding tax at source at a rate of 15% of their gross income. If the individual stays for more than 180 calendar days, the Panamanian resident will have to withhold at the above statutory tax rates.
Residence - An individual is resident in Panama if he/she is in the country for more than 180 days in a calendar year.
Tax Filing status - Joint tax returns are permitted.
Taxable income - Individuals are taxed on wages and salaries, income from the carrying on of a commercial or an agricultural business and investment income.
Taxation of Capital gains - Taxpayers pay a flat 10% rate on capital gains. Gains derived from the sale or transfer of real property are considered capital gains. Taxpayers that do not engage in business activities involving the transfer of real property are subject to a final 10% tax on capital gains derived from the disposition of real estate; however, a 3% withholding tax, which operates as an advance payment of the capital gains tax, will be levied on the higher of the sales price or the value of the property. If the gain on the transfer is higher than the advance tax paid, the taxpayer may set that amount off against other taxes due.
Tax Deductions and tax allowances - Individuals are entitled to: a basic deduction of USD 800; USD 250 for each dependent; mortgage interest (up to USD 15,000 per year); donations to non-profit organisations (up to USD 50,000 per year); political contributions (up to USD 10,000); medical expenses incurred in Panama and not covered by insurance; and educational tax payments.
Other taxes on individuals:
Stamp duty - Revenue stamps must be attached to all invoices and other official accounting documents evidencing the transfer of goods or rendering of services not subject to VAT. Accounts receivables, checks, bank drafts, notes and similar documents also are subject to this tax. Stamp duty generally is 0.001 per PAB or fraction thereof.
Real property tax - Real property located in Panama is assessed by the government and tax is levied at rates ranging from 1.75% to 2.1%.
Capital duty - No
Capital acquisitions tax - No
Inheritance/estate tax - No
Net wealth/net worth tax - No
Social security contributions - An employee is required to make social security contributions in an amount equal to 8% of remuneration.
Panama Tax year - Panama tax year is the calendar year
Tax Filing and payment of tax - Employment income is taxed by withholding. Individuals with only 1 salary as their source of income are not required to file an income tax return. Individuals with more than 1 salary or other taxable income not subject to income tax withholding are required to file a tax return. Individuals who are required to file a return must do so by 15 March following the end of the tax year, but this deadline may be extended by 2 months upon request.
Penalties - Interest is charged on late payments.
Panama Corporate Tax
Panama's income tax law affects aggregate and annual revenue from business activities conducted in Panama or from assets situated in the country, when any of the causes of such revenue occur within the national territory.
ALTERNATIVE MINIMUM INCOME TAX
A tax rate of 30% is applied to the net taxable income on whichever is larger between:
1. The amount of the net taxable income (traditional calculation of deducting costs and expenses from gross taxable income), and
2. The net taxable income that arises after deducting 95.33% from gross taxable income.
If, after applying the second alternative, the company incurs losses due to the payment of the tax, or if the effective rate of the income tax exceeds 30%, it can request the Tax Department not to apply the alternative calculation. Small companies that invoice up to US$150,000 in the fiscal year are exempt from applying the alternative calculation.
The fiscal year of companies normally corresponds to the calendar year but it is allowable to have fiscal years ending on other dates if a request is made to the Tax Department authorities. Generally, a corporation is required to prepay its estimated tax liability in three instalments, based on the income tax of the previous fiscal year.
Corporate tax returns and payments are due by the end of the third month following the end of the fiscal year. An extension of two months may be granted if requested. Extensions to file a return, however, do not affect the time for payment of tax.
CAPITAL GAINS TAX
On sales of real estate there are two taxes involved. One is a 2% transfer tax and the other is a 10% income tax on the net profit. The 2% transfer tax rate is applied on the higher of the sales price or the registered value of the property in the Public Registry plus a 5% surcharge for each complete calendar year for which the property is held.
The 10% income tax is calculated on the net profit of the transaction. Net profit is calculated by deducting the cost of the property plus any related expenses from the sales price.
The buyer of the real estate will withhold 3% of the higher amount between sale price or the cadastre value and remit it to the Tax Department. The seller will calculate a 10% tax on the profit. If the 10% of the profit is higher than the 3% withheld by the buyer, the seller can opt to consider the 3% as the definite tax. If the 10% of the profit is lower than the 3% withheld by the buyer, the seller can request a reimbursement for the difference.
Income from the sale of securities is taxable as follows: The buyer will withhold 5% of the sale price and remit it to the Tax Department. The seller will calculate a 10% tax on the profit. If the 10% of the profit is higher than the 5% withheld by the buyer, the seller can opt to consider the 5% as the definite tax. If the 10% of the profit is lower than the 5% withheld by the buyer, the seller can request a reimbursement for the difference.
Income from the sale of government securities and those issued by companies registered with the National Securities Commission is not taxable.
BRANCH PROFITS TAX
Branches of foreign companies are subject to the same tax rates as Panamanian companies.
Panama's income tax law affects the whole national territory equally.
There are other taxes that are applicable in their various manifestations. These include:
Prepaid Dividend Tax: Local corporations must pay a 4% complementary tax on each fiscal year's net taxed profit on behalf of their shareholders if no dividends are declared. This 4% will be applied to dividend tax when dividends are declared. The rate for companies established in a Free Zone is 2%.
Franchise Tax: Foreign and domestic corporations registered in the Public Registry are subject to an annual tax of US$300, regardless of whether they are doing business in Panama. There is a penalty of US$50 for late payment and after two years of non-payment of the franchise tax there is a restoration fee of US$300.
Annual Licence Tax: All industrial or commercial business, except those exempted by specific laws, are required to have a licence to operate. Annual License tax is 2% of the company's net worth, including amounts owed to the foreign home office or affiliated companies. The tax is payable annually up to a maximum of US $60,000. For companies established in a Free Zone, this tax is 1% of the company's net worth, including amounts owed to the foreign home office or affiliated companies. The tax is payable annually up to a maximum of US$50,000.
Annual Banking Institutions Tax: Banking institutions are subject to an annual tax as follows:
|Banks with General Licence|
|Assets up to US$100 millions||US$50,000.00|
|Assets between US$100 and US$200 millions||US$75,000.00|
|Assets between US$200 and US$300 millions||US$100,000.00|
|Assets between US$300 and US$400 millions||US$175,000.00|
|Assets between US$400 and US$500 millions||US$250,000.00|
|Assets between US$500 and US$750 millions||US$300,000.00|
|Assets between US$750 and US$1,000 millions||US$325,000.00|
|Assets above US$1,000 millions||US$350,000.00|
|Banks with International Licence||US$50,000.00|
DETERMINATION OF TAXABLE INCOME
The net taxable income of a corporation or partnership is determined by subtracting all allowable deductions from gross taxable income. Generally, expenditures and/or losses are deductible provided they are incurred in gaining or producing taxable income, or preserving the source of income. Special rules apply in respect of certain expenditures.
Alternative method of calculating a minimum net taxable income. The net taxable income under this method arises after deducting 95.33% from the gross taxable income.
Under this formula, the net taxable income will be 4.67% of the gross taxable income. The larger of the two amounts will be the net taxable income for the fiscal year.
DEPRECIATION AND DEPLETION
Depreciation is normally calculated by the straight-line method over the estimated useful life of the asset. The regulations also permit the use of the sum-of-the-digits and declining-balance methods.
Depletion of mines and other natural resources is based on units extracted or produced. Using any other method requires the approval of the Income Tax Department.
The Income Tax regulations allow the use of the specific cost, FIFO, retail-inventory, or average-cost method according to the normal course of operations. The method used cannot be changed by the taxpayer for at least five years and will require a written notification to the Tax Department authorities.
The corporation declaring the dividend must withhold a 10% tax on all dividends declared from income earned within the Republic of Panama.
Dividends declared by domestic subsidiaries on income earned within the Panamanian territory are subject to the 10% tax as well. However, dividends on bearer shares are subject to a 20% dividend tax.
Companies requiring a commercial operating licence must withhold a 5% tax on dividends declared from income obtained on exports or from foreign source. Companies established in a Free Zone must withhold a 5% tax on dividends, regardless of the source of income.
The following manifestations of interest earned are not subject to income tax:
- Savings and time deposits with banks
- Panamanian government securities
- Securities issued by companies registered with the National Securities Commission, provided the securities were acquired through a securities exchange duly established to operate in Panama
- Loans granted to the agricultural and agro-industrial sectors
- Loans granted to the tourism sector.
Interest is normally deductible on an accrual basis but must be capitalized if it relates to financing of real estate construction. Once the construction is completed, interest is then deducible from income.
Losses incurred in any given year can be taken as a valid deduction over the next five (5) years at a carry forward rate of 20% of the loss per year, as long as this deduction does not reduce the current taxable income by more than 50%. Excess over this limitation for any given year will be lost.
SOURCE OF THE INCOME
Foreign-sourced income is not subject to income tax. Only income earned in the territory of Panama is subject to Panama income tax.
Income received by persons or companies domiciled outside of Panama will be considered from a Panamanian source if it arises from services or actions that benefit persons or companies located in Panama, including fees, interests and royalties. The income tax withholding is at the regular rates for individuals or corporations but only on 50% of the amount of income received by the recipient.
The following incentives are available to these qualifying industries and corporations:
(a) Companies operating in the Colon Free Zone, or any other Free Zone in the country, are tax-exempt on profit derived from sales from Free Zone to foreign countries.
(b) Companies operating in "Ciudad del Saber" (City of Knowledge), are exempt of income tax, import duties and VAT. Dividend tax of 10% or 5% applies when dividends are declared.
(c) "Small business" companies, except those requiring a commercial operating licence, are exempt from dividend and complementary taxes. Income tax is calculated over a combination of the personal tax rate and corporate tax rate.
Companies would be considered small as long as they:
1) are not related or affiliated to other companies
2) are not a result of the fractionalization of other corporations
3) have an annual gross income of less than US$200,000, and d) its shareholders are individual persons.
Group taxation is not permitted in Panama.
RELATED PARTY TRANSACTIONS
Transactions between related parties are treated normally as long as an "arm's length" basis is used.
Services and fees paid or accrued to individuals and to resident corporations are not subject to income tax, except payments on dividends distributed from retained earnings arising from Panamanian-source income.
Services and fees paid or accrued to foreign corporations for work done in Panama are subject to income tax withholdings at corporate tax rates. Services and fees paid or accrued to non-resident individuals for work done in Panama are subject to income tax withholdings at a 15% flat rate.
Interests, commissions, royalties or technical assistance fees paid to foreign recipients are subject to withholding tax. The income tax withholding is at the regular rates for individuals or corporations but only on 50% of the amount of income received by the recipient.
EXCHANGE CONTROL The exchange rate in the Republic of Panama is always US$1 = B/1.00 (BALBOA).
Panama vat (Value Added Tax)
The standard rate of VAT in Panama is 5%. Many consumer services and goods are subject to a 5% value added tax. Alcoholic beverages have a 10% tax rate and cigarettes have a 15% tax rate. The following items are exempt from VAT: Food (except restaurants that serve alcoholic beverages which are taxed), medicine and medical services, and house rentals with contract period of more than six months. House rentals with contract periods less than six months are subject to VAT.
VAT Registration - Registration for VAT is compulsory for businesses with monthly turnover exceeding USD 3,000 or annual turnover of USD 36,000.
Filing and VAT payment - VAT returns must be filed monthly.