Memorandum regarding general tax implications for companies operating in Panama

The tax legal relationship in Panama is born and governed by the principle of strict legality (it is born from the law and only from the law), a fundamental principle protected by the Political Constitution of the Republic itself.

The tax system in Panama is based (as a general rule) on exclusive territoriality, that is, both nationals and foreigners are taxed on income produced only within Panama.

"Article 694 (Tax Code). This tax (Income Tax) is subject to taxable income that is produced, from any source, within the territory of the Republic of Panama, regardless of the place where it is received. …….”

Below is a summary of the tax liabilities incurred by a company operating in Panama that generates local taxable income.

I. Income tax

Income tax (ISR) is subject to all income produced within the Republic of Panama that is not exempt. The current general corporate IRS rate in Panama is 25% on net taxable income.

The taxpayer will be responsible for filing their income tax return within the term established by law, the general rule for companies is until March 31 of the following year to file the return for the previous year.

II. Withholding tax

As established in our tax code, as a general rule, a withholding tax is applicable to payments made or sums credited abroad by a Panamanian company.  Provided that such services have an impact on the production of income from a Panamanian source or on the preservation of such income and that their disbursement has been considered a deductible expense for the person who received the services.

Effective rate: 12.5%

III. Dividend and complementary tax

Any dividend distributed to shareholders from taxable income in Panama or abroad, for companies that carry out commercial activities within Panamanian territory, is subject to dividend tax. The general rate of this tax is 10% (5% in the case of dividends from foreign income), Article 733 of the Tax Code deepens and establishes the rules of the dividend tax.

If profits are not distributed or if the distribution is less than 40% on Panamanian-source earnings, or 20% on foreign-source income, the complementary tax must be withheld by applying 10% on 40% or 20%, as appropriate.

IV. Wealth tax (transaction notice)

Companies that carry out commercial activities within the Republic of Panama must obtain a Notice of Operation.

This notice generates an annual tax of 2%, calculated on the company's equity (the difference between the company's assets and liabilities), with a minimum of $100.00 and a maximum of $60,000.00

V. ITBMS (IVA)

It is subject to the tax on movable tangible property and the provision of services that are carried out in the Republic of Panama. The current general rate of this tax is 7%. The natural or legal person who transfers goods or provides services has the responsibility to withhold the tax and remit it to the tax administration within the term established in Article 1057V of the Tax Code.

VI. Importation of goods

Imports of goods to Panama are processed through the General Directorate of Customs (DGA), through Suitable Customs Brokers, which are the subjects authorized to process before the DGA in Panama.

Procedure for Importation

1. The interested party will need a Customs Agent or Broker.

2. The Customs Agent submits a unified customs declaration to the DGA.

3. Once the merchandise arrives in Panama, the value is determined at Customs, the general rule is that the value is determined by the value of the goods indicated on the purchase receipt plus the expenses and costs (freight, insurance, etc.). The customs officer will proceed with an inspection of the goods and determine the value.

4. Duties and taxes are paid.

5. The merchandise is released.

VII. Municipal tax

Article 245 of the National Constitution is the norm that regulates the municipal taxing power and indicates that "municipal taxes are those that do not have an impact outside the district, but the Law may establish exceptions for certain taxes to be municipal despite having this incidence...".

It is the responsibility of the company to register in the corresponding municipality where it carries out its commercial activity, being then subject to the municipal tax regime. Examples of municipal taxes are by activity, sign tax, construction tax, etc.

VIII. Social Security Fund Contributions

The company that hires workers within Panama will have the responsibility of joining the Social Security Fund (CSS). The company will be responsible for making the withholdings from salaries established by Law 51 of 2005 and its amendments. Currently, the worker pays a fee equivalent to 9.75% of his labor remuneration and the company must contribute an amount equivalent to an additional 12.75% of said remuneration and remit both sums to the CSS, within the period established by the regulations.

IX. Single fee

All legal entities, constituted in accordance with Panamanian legislation and that are duly registered with the Public Registry, are obliged to pay the annual fee in order to maintain the validity of the company. This annual payment is B/. 300.00, and late payment of the fee will generate fines and surcharges.

It is important to bear in mind that when the company is delinquent for a maximum of 3 consecutive years, the competent authority will proceed to suspend all the company's corporate rights for a period of 2 years. During this period, the reactivation of the company can be requested, and only in cases where this is not requested will the company be understood to be dissolved.