Tax Law

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Income tax regime

Overview of Panamanian system

It is a Basic constitutional principle in the Republic of Panama that no tax or contribution is levied unless such taxi s legally established (Article 52 of the Political Constitution). The Supreme Court of Justice overseas constitutional control through judicial revision of laws, and therefore has a crucial roll giving certainty to legal system.

Tax reforms

On February 2005, the National Assembly approved Law 6 for implementing what was denominated as an equal fiscal system.

Previously, there have been others reforms whose relevant matters are divided in two periods as follows:

  • From 1991 to 2001.  In 1991, it was approved the Tax Reform Act.
  • The provisions set forth in such a law promoted tax justice by reducing tax rates and modernizing the fiscal administration.
  • In 1995, another tax reform was enacted through the Tax Incentives Globalization Law, which introduced important changes to local income tax, even for the Colon Free Zone.
  • On February 2000, a commission was appointed to analyze the process of modernization and simplification of the tax policy.
  • The Inter American Development Band (IDB) and the Inter American Centre for Tributary Administrators (ICTA) were involved as consultants.
  • From 2002 to 2005. As a result of those analyses, there have been two tax reforms approved on December 2002 and February 2005 which have modified the tax system in relatively large sense.
  • Last laws have primarily reoriented the income tax system and the indirect taxes. Ultimately, Law 6 of 2005 and its modifications have varied not only the concept of income tax as for the principle of territoriality but also the methods of its calculation for both individuals and legal entities.
  • Thus, no little changes to tax system are in force since 2005.
  • Mainly items which have been introduced are as follows:number of days working within Panama, individual tax burden as per taxable income brackets, a new method for calculating income tax and social security threshold.

Basic principles in levying income taxes

On the grounds of the Constitution, any tax might not be collected unless provided by a law. The principle of “no taxation without representation” (nullum tributum sine lege) rules the legality of the system, while the Panamanian Fiscal Code adopts the territoriality principle and defines a taxpayer as any natural person or legal entity (corporation or partnership), national or foreign, receiving taxable income.

Territoriality principle

The Republic of Panama bases its income tax system on the territoriality principle, as opposed to worldwide taxation method used in most countries. This means that, in principle, all income derived from local operations is subject to income tax while income arising from foreign sources is exempt. According to the territoriality principle, income produced within Panama or considered to be as Panamanian sourced is taxable regardless of the place the contracts are signed or even of the place where the amounts are paid.

Taxpayer and taxable income

Article 694 of the Fiscal Code defines a taxpayer as ”the individual or juridical person, either Panamanian or foreigner, who receives the taxable income subject to income tax”. Taxable income is defined as the one produced, from whatever source, within the territory of the Republic of Panama, regardless of place where the income is perceived.

However, a tax reform passed on February 2005, established for the first time in Panamanian legislation that income derived from any act or services rendered outside of Panama were subject to income tax, when they benefit individuals or corporations residents of Panama and are related to the generation or continuance of their Panamanian source income.

This latest reform represented a modification of the previous understanding that income arising from any service or act rendered overseas was not considered Panamanian sourced.

Sources of income

According to the Tax Section of Fiscal Code, as said before, the general rule is that the principle of territoriality governs income taxation.

Exceptionally, tax payers working both in Panama and abroad are subject to tax on income not produced within the Panamanian territory as it will be briefly revised on this chapter and Chapters 7 and 8.

As for individuals, t is considered as Panamanian source (produced within the national territory) the income arising from the exercise of professions, occupations and all kind of performance of services by natural persons within the territory, when the taxpayer who receives the income has remained consecutively or alternatively within Panama at least for a seventy (70) percent of the days of the calendar year (255.5 days).

According to article 694 of Fiscal Code and Law of 2005, it is exempted from the previous computation all the days that the taxpayer is outside of Panama carrying out activities that have no incidence on the generation of the taxable income.

The law also exempts the taxpayers that provide services sporadically outside of Panama to attend consultancies, personal presentations, conferences and similar activities, even when the absence from the country does not reach the thirty (30) percent of the year (109.5 days).

It is considered from Panamanian source all income received by natural or juridical persons domiciled outside of Panama arising from any service or action that benefit persons located in Panama, including fees, interests and royalties. The amount of the tax to be withheld is upon one-half of the sum remitted and at regular rates of the legal entities and natural persons respectively (articles 699 and 700 of the Fiscal Code).

On the other hand, the services and acts perfected and provided within Panamanian territory the withholding tax applies on the full amount paid, one hundred percent, to the non-resident beneficiary.


Besides the general rule of territoriality exposed on Fiscal Code, the current Income Tax Regulation (Executive Decree 170 of October 27, 1993 as amended lately) defines in more detailed three different kinds of sources that income from an individual or legal business entity may have.

Executive Decree 170 has punctually classified certain items of income as local, foreign and exempt that will be briefly mentioned underneath in order to clarify rules.

Panamanian local income

Gross income is the total receipts in cash, in kind or in securities, received or accrued by the taxpayer in the fiscal year, minus refund and discounts.

It is expressly included as gross income of an individual the use of vehicles, use of houses, representations expenses, and educational expenses for the family of the employee, as well as leisure travels and similar remunerations for personal services under a labor relationship. Items to be included in gross income are provided by law, such as:

  • From personal labor rendered on behalf of another and in an economic employment relationship or legal subordination, in accordance with the Labor Code, such as wages, salaries, overtime payment, daily wages, director fees, gratuities, commissions, pensions, old-age retirement pensions, fees, representation expenses, bonuses, profit participation, productivity premiums, thirteen month bonus, in kind income and subsidies, among others.
  • From the exercise of any profession, artistic activities, scientific activities and other services carried out on one’s own belief without an employment relationship.
  • From commercial, industrial or financial activities, from mining operations, from construction and from the rendering of public or private services.
  • From land and cattle activities, fish farms, poultry farms or forestry activities.
  • From hunting, and fishing.
  • From the disposal, transfer or leasing of ships and airplanes, except that which is referred to Panamanian register for international trade.
  • From the employment or investment of capital in any form or nature, such as interest loans, certificates, bonds and private securities, profits or dividends distributed among partners and shareholders.
  • From royalties.
  • From subsidies paid periodically and life annuities.
  • From rentals paid by way of contracts of financial leasing to which Law 7 of 1990 refers, and income derived from trusts formed on the basis of Law 1 of 1984.
  • From a temporary or final transfer of goodwill (“derechos de llave”), trademarks, invention patents, royalties and other similar rights.
  • From obligations for not competing or abandon or not carry on an activity.
  • From reports provided in the Fiscal Code and in special laws.
  • From any increase of net wealth not justified by the taxpayer.
  • From any gain or prize not exempt by law, obtained by luck and chance in activities of entertainment or amusement, operated by persons under private law.
  • From any revenue which is received in a compensatory manner, insofar as it is not exempt by law.
  • Generally, from any other activity not expressly exempted by the law, or that constitutes a business of production, purchase, sale, trade in, exchange or disposal of property, or derived from the rendering of personal services or generated by a combination of productive factors of capital and labor, or that is expressly taxable by provision of law.

Foreign source income

Income earned either from activities or transactions performed abroad is still considered of foreign source by the article 694, paragraph 2°, Fiscal Code.

The relevant text of said article reads as follows:“It is not considered produced within the territory of the Republic of Panama the income arising from the following activities”:

  • Income from invoicing sales or merchandises or products for amounts greater than billed costs from an office in Panama, provided that the merchandise or product does not enter Panama (a).
  • Income from directing transactions which are concluded or produce effects outside Panama from an office in Panama (b).
  • Dividends and other profits distributions paid out of income not produced in Panama, including income from activities mentioned in paragraphs (a) and (b) above (c).

According to Executive Decree 170 of 1993, as amended, exclusively for income tax purposes, income derived from the following activities is not considered as being earned within Panama:

  • Invoicing from an office in Panama the sale of merchandise or products for a sum, larger than the one invoiced against the office established in Panama, provided that such merchandise or products be moved only abroad, or in transit trough national ports or airports.
  • To direct, from an office established in Panama, transactions that shall be completed, consumed or taken place abroad.
  • To distribute profits or dividends among partners and shareholders, when such profits or dividends are derived from non-Panamanian sources of income, including the income derived from the activities just mentioned above.
  • Rendering of services, outside the Panamanian territory, when they are not economically related to taxable activities that the taxpayer performs within the national territory.
  • Interests, financial commissions, and other similar receipts, obtained by an individual or legal entity, regardless of the place of their domicile or constitution, derived from loans, cash deposits, or from any other financial transaction carried out with borrowers outside the country. The furnishing and the use of the cash, however, must have effects outside of Panama, even though the reimbursement of the capital and interests is made in the country.
  • Interests, financial commissions, and other similar receipts, derived from loans, credits, or from any other financial transaction carried out with legal entities, regardless of the place of their domicile or constitution, including life annuities, old-age or sick retirement pensions or other similar revenues granted abroad as long as beneficiated persons perceive exclusively non-taxable income within Panama, and revenues derived from international trade of merchant ships registered in Panama.
  • Trusts (“fideicomisos”), established by Law 1 of 1984, in regards to properties abroad, cash deposited by an individual or legal entity, whose income is not of Panamanian source; stocks or securities of any kind, issued by companies whose income is not of Panamanian source, even though such cash, stocks or securities are deposited in the Republic of Panama.
  • Rentals payments from leases that are paid to the lessor in the case of international financial leasing contracts, of which Law 7 of 1990 refers.
  • Premiums derived from insurance and reinsurance that cover personal or property risks abroad.
  • The disposal of stocks and shares of a legal entity person formed, under the laws of the Republic of Panama, when the activities of said companies are carried out exclusively outside of the national territory.
  • Rendering of services abroad to attend consultancies, personal presentations, conferences and similar activities, even when the absence from the country does not reach the thirty percent (30%) of the year (109.5 days).
  • International business activities such as those related to international tourism, hotels and car rental companies, ship agencies and ship and airplanes repairs.

Tax-exempt income

Even though these incomes are Panamanian source, they are exempted from paying income tax according the law.

The following types of incomes are exempt from taxation.

  • Income from individuals or corporations exempt from taxes by virtue of public treaties or contracts with the Government.
  • Income of the National Government, Municipalities, and their associations, and autonomous and semi-autonomous institutions.
  • Income of churches of any denomination, seminaries and religious or charitable societies, when such an income is obtained as a direct result of worship or charity.
  • Income of asylums, houses of charity, orphanages, foundations and non-profit organizations duly recognized, provided that such income is destined exclusively to social assistance, public welfare, education, or promotion of sports.
  • Income derived from the international maritime commerce of merchant vessels legally registered in Panama, even when the transportation contracts are executed in Panama or the transportation of merchandise is from or to Panama.
  • From the embarkation, disembarkation or both, in a Panamanian port of passengers on boats crossing the international waters, or through the Panama Canal, as well as being transported by air to or from Panama as passengers that shall board or disembark from such ships.
  • From the disposal of ships or airplanes registered in the National Merchant Marine or in the Panamanian Registry Office, engaged in international trade.
  • From the operation of boats or airplanes registered in foreign countries, if the country in which said ships or airplanes are registered, apply the principle of reciprocity, insofar as the taxation of receipts, obtained in said country, by ships registered in the Panamanian Merchant Marine or airplanes of Panamanian registration.
  • From the operation of ships or airplanes of any nationality, by foreign persons whether or not resident in national territory, provided that the country of nationality of the individual or the country under whose laws the legal entity was formed, grants an equivalent exemption to individuals of Panamanian nationality. Or from legal entities formed in accordance with the laws of the Republic of Panama, or to persons who have established their domicile in the Republic of Panama, by virtue of the principle of reciprocity.
  • From rentals from leases, derived from international financial leasing contracts, and from merchant ships or airplanes engaged in international maritime trade.
  • Artists, or classical music groups, contracted by a non-profit organization registered at the National Institute of Culture (INAC). This organization must be involved in the promotion, execution and broadcasting of cultural, musical and artistic values and that engage the profit derived from such activity to their objectives, prior authorization by the Directorate General of the Revenue, but only for a specified amount.
  • Interests and commissions paid, or credited by banks established in Panama to international banking or financial institutions established abroad, for inter-banking loans and credit facilities.
  • Interests paid on local or foreign saving accounts and time deposits maintained in banking institutions established in Panama.
  • Interests paid to persons or corporations on loans to finance the construction of social interest housing units, as determined by the Ministry of Housing.
  • From interest that national or foreign banks receive or accrue, derived from loans granted to farmers in Panama, within the planting cycle. The proceeds from these loans are to be used in the planting of rice, corn, beans and sorghum, with an interest rate no greater than eight (8) percent per year, agreed upon.
  • From interest, commissions, and other expenses that the Government, and the autonomous public entities contracted therewith, by reason of loans.
  • Interests and commissions earned by banks, financial, or credit institutions on loans or other credit facilities, granted to the agricultural, livestock, or agricultural industry sector, provided that the requirements of the law are met.
  • From dividends and other profits distributed to shareholders or partners of legal entities to which the article 699-A of Fiscal Code refers (micro and some small enterprises).
  • From the marketing of products from forest plantations, up to the final cutting of the forest, whose plantation is realized within 13 years as from February 3 of 2005. The owners of such plantations must be registered in the Forestry of Renewable Natural Resources.
  • Interests paid to official or semi-official institutions of international organizations and foreign Governments.
  • Prizes paid by national lotteries, profits derived from raffles, bets, games of luck and fortune, and prizes won in Government-operated activities, non-profit entities duly authorized by the Gaming Board of Control, and for publicity purposes.
  • Sums received as compensation for labor accidents and insurance in general, alimony allowances, and benefits paid by the Social Security.
  • From sums received by individuals at the termination of an employment relationship, in lieu of notices, seniority premium, indemnity, bonus and other benefits established in collective conventions and individual labor contracts, up to five thousand US dollars (US$5,000).
  • Also, for the resulting under paragraph (j) in article 701, 2°, of the Fiscal Code.
  • Pensions funds under Law 10 of 1993, when periodic sums are received by beneficiaries.
  • From sums received or accrued by a person abroad, as royalty derived from persons established in the Colon Free Zone.
  • Properties received as inheritance, legacy, or donation.
  • Salaries and fees paid to the foreign personnel of diplomatic entities accredited in Panama.
  • Salaries and fees paid to the foreign personnel of consular corps accredited in Panama provided that the same treatment is given to Panamanian consulates abroad.
  • Individuals or legal entities that possess such exemption by virtue of public treaties or of contract authorized or approved by law.
  • For the interest received by foreign investors, provided that the capital on which the interest is paid is invested exclusively in the construction of housing for persons of lower income, as determined by the Ministry of Housing. Foreign Governments or governmental institutions must guarantee the loan of the capital.
  • State and private institutions dedicated to agricultural research, provided that these are non-profit in nature, for the sums donated to the development of their programs, and those institutions of research for the improvement of systems and technological transfer.
  • Agricultural producers that have annual gross income of less than one hundred fifty thousand US dollars (US$150,000).
  • Revenues of individuals whose annual net taxable income is not higher than nine thousand US dollars (US$9,000).
  • Revenues of employees whose annual gross income is not higher than ten thousand four hundred US dollars (US$10,400) provided that the average monthly income is not higher than eight hundred US dollars (US$800).
  • Cooperative associations covered by Law 17 of 1997, provided that they comply with the requirements established by Executive Decree 39 of 1998.
  • Enterprises under Law 8 of 1987 (hydrocarbons), signing contracts of exploration and exploitation, shall be exempt from the payment of the income tax on the profits derived from their activities, during the first 15 years of production, or until they have recovered the total initial investment, whichever occurs first. Subsequently, the contractor shall paid 25 percent of the net production of hydrocarbons, in lieu of income tax and in substitution of any other tax or receipt to which it would be subject as a result of its operation. Payment, under this type of contract, shall be retained by the State and included within the 50 percent that the State shall retain in accordance with article 47 of Law 8 of 1987.
  • Any other person expressly exempted by a special law.
  • From any other income exempted by a special law.

Corporate income taxation

Tax rates

Taxable income of corporations is the balance of gross income less deductible disbursements and expenses.

  • Expenses and cost of doing business necessary to generate taxable income in Panama is deductible if based in proper evidence.
  • As a general rule, income tax for legal entities is a flat rate of 30 percent. Therefore, legal entities such as corporations, branches and partnerships pay their income tax at that rate.

Alternative methods

Along this, an alternative calculation method is established to calculate the income tax, applying the rate of 30 percent on whichever is larger between the following:

  • The amount of the net taxable income (current and traditional calculation).
  • The net taxable income that arises of deducting, from the total taxable income (defined as the amount resulting from deducting the exempt income and foreign source income from the total income), a 95.33 percent, which means a tax rate of 30 percent upon 4.67 percent resulting in 1.4 percent tax rate.
  • Only discounts and devolutions are admitted for this ulterior method of calculating income tax, based on legal presumption of revenues.

Highlights on CAIR

  • Moreover, for income from commissions, the calculation will be made on the total of the commissions.
  • Apart of that, for those enterprises that have included in their sales prices the tax on consumption of fuels and the selective consumption tax, it is allowed for them to deduct from their total income the amounts of these two taxes for the determination of the taxable income and therefore the alternative calculation.
  • For taxpayers engaged in the importation, distribution and sale of certain fuel products such as 91 and 95 octane gasolines, LPG and diesel, the cost of acquisition of these products is also allowed to be deducted for these purposes.

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