Taxation in Panama broadly follows a territorial income system. This means that only that income is taxed that is directly sourced from within Panama.
As far as residents (and citizens) of Panama are concerned, they are taxed on income that is sourced from Panama. On the other hand, non-residents are also only taxed on income that is earned from within Panama. However, all tax that is paid on the income earned by a non-resident is supposed to be withheld by the payer.
Residents, as well as non-residents are only taxed on income that is not exempt from taxes. This implies that they are not taxed on income earned as interest received from the Panamanian government, interest on savings accounts, as well as time deposits that are maintained with the banks that are registered in Panama.
Personal Income Taxation Rates in Panama
The following Personal Income Tax Rates are levied in Panama:
- For an income between 0 and 11,000 USD: A tax rate of 0% is applicable.
- For an income between 11,000 and 50,000 USD: A tax rate of 15% is applicable on the amount over and above 11,000 USD.
- For an income greater than 50,000 USD: A flat tax of 5,850 USD is supposed to be paid. Additionally, a tax rate of 15% is also applicable on the amount over and above 50,000 USD.
Other than these personal income taxation rates, there are no taxes that are applied on personal income in Panama.
Other Personal Income Taxation in Panama
There are a couple of other personal taxes that are levied on individuals in Panama. These taxes are as follows:
- Social Security Tax: The social security tax is assessed at a rate of 9.75%. This is imposed on wages and other compensation that is paid. It also includes all the compensation in kind that is disbursed to the employees (the employer, however, has to bear a social security tax equivalent to 12.25%). In the same manner, there is no maximum limit on the taxable amount paid by individuals in this regard.
- Educational Insurance Tax: Educational Insurance Tax is also levied at a rate of 1.25% for employees, and 1.5% for employers. This rate is imposed on salaries and wages paid. Similar to social security tax, there is no maximum limit that is imposed on the taxable amount.
- Capital Gains Tax: In the case of property transfers, a real estate transfer tax is levied at a rate of 2%. Additionally, a 3% income tax advance payment is also levied. For new housing constructions, the following rates are levied:
- For a new housing construction project up to USD 35,000: Tax is levied at a rate of 0.5%.
- For a new housing construction project between USD 35,000 and USD 80,000: Tax is levied at a rate of 1.5%.
- For a new housing construction project greater than USD 80,000: Tax is levied at a rate of 2.5%.
- For any new commercial construction: Tax is levied at a rate of 4.5%.
- Consumption Taxes: Value Added Tax (VAT) is imposed as a consumption tax. The rate is imposed at a rate of 7%.
- Excise Tax: Excise Tax is levied as a selective consumption tax, on luxury goods including jewelry, automobiles, alcohol, as well as beverages. The tax base that is used in order to calculate the tax liability is the cost, as well as insurance, and all other relevant import duties in this regard.
- Immovable Property Tax: All real estate owners are also supposed to pay Immovable Property Tax, which is levied at a rate varying between 0% and 0.9%.
Corporate Income Taxation in Panama
Similar to personal income taxation, corporate income is also taxed using a territorial basis. Only income that has been earned from Panamanian source is supposed to be used for basis of tax calculation. This is consistent, regardless of the residency status of the tax-filing corporation. This implies that for both, resident, as well as non-resident entities, the tax base that is used to charge corporate income tax is the income that has been sourced from within Panama only.
The corporate income tax rate that is applicable in Panama is 25%.
However, there is a different stipulation for companies that have a taxable income greater than 1.5 Million USD. The tax base in this regard is the higher of either of the following:
- The net taxable income that is calculated on a normal basis, or
- 67% of the gross taxable income. The gross taxable income in this regard is excluding the exempted as well as non-taxable income and income sourced from foreign sources. This is also referred to as alternative calculation of corporate income tax (locally named CAIR).
Local Corporate Taxes in Panama
Other than the corporate income tax imposed by the federation, as mentioned above, it can be seen that there is also an incidence of the local municipal tax. This is levied on the gross income earned during a given accounting period. In most of the cases, this amount is not higher than an amount of USD 2000 per month.
Other Taxes in Panama
In addition to the income taxes mentioned above, there are a couple of other taxes that are imposed in Panama. These taxes are as follows:
- Stamp Duty: Stamp Duty is also imposed at a rate of 0.1 USD on every 100 USD on commercial contracts.
- Franchise Tax: Franchise Tax is also supposed to be paid by corporations every year, at a rate of USD 300 per year. This is applicable on all entities working for profit. Hence, it does not apply to non-profit entities, cooperatives, as well as civil partnerships.
- Operations Notice Tax: An operations notice tax is an annual tax on equity at a rate of 2%. The minimum tax amount in this regard is USD 100, whereas the maximum amount of tax in this regard amounts to USD 60,000.