Panama’s tax system has long been an attractive draw for expats, retirees, and investors thanks to favorable tax policies, territorial tax system, and pro-business environment. However, understanding how taxes work in Panama is crucial to avoid unexpected liabilities and to maximize financial benefits. This comprehensive guide will break down Panama’s tax system, covering income tax, corporate tax, property tax, and other key fiscal considerations for expats and investors.
Overview of Panama’s Tax System
Panama operates on a territorial tax system, meaning individuals and businesses are only taxed on income earned within the country. Any income earned outside of Panama is not subject to Panamanian taxes, making it a highly appealing option for digital nomads, international business owners, and retirees living off foreign income.
Key Features of Panama’s Tax System:
- Income earned outside Panama is not taxed.
- Corporate tax applies only to locally earned revenue.
- Property taxes exist but are relatively low.
- Various residency programs offer tax benefits.
- Panama has a network of tax treaties to avoid double taxation.
Income Tax for Individuals
Panama imposes income tax only on earnings sourced within the country. Here’s how individual income tax is structured:
Tax Rates for Residents:
- Income up to $11,000 per year – 0% (tax-free)
- Income between $11,000 and $50,000 – 15%
- Income over $50,000 – 25%
Expats earning solely from foreign sources (such as remote jobs or overseas businesses) do not pay income tax in Panama. However, those working for a local employer, freelancing for Panamanian clients, or running a business that earns revenue within Panama must comply with these tax rates.
Tax Residency Rules
To be considered a tax resident in Panama, an individual must:
- Spend more than 183 days in Panama within a calendar year.
- Have a permanent home or economic ties in the country.
Tax residency status may be beneficial for those looking to claim Panama’s tax advantages, particularly under international tax treaties.
Corporate Tax in Panama
Panama’s corporate tax laws are business-friendly, with territorial taxation applying to companies as well. Only income earned within Panama is subject to taxation.
Corporate Tax Rates:
- Standard corporate tax rate: 25%
- Small businesses (earning less than $1.5 million annually): 15% to 25%, depending on profits.
- Offshore companies with no local revenue: 0% tax.
This system makes Panama an attractive location for international corporations and offshore businesses, provided they operate outside the country.
Value-Added Tax (VAT) – ITBMS
- The Impuesto sobre la Transferencia de Bienes Corporales Muebles y la Prestación de Servicios (ITBMS) is Panama’s value-added tax (VAT).
- Standard rate: 7%
- Higher rates: 10% for hotels and alcohol; 15% for tobacco
Businesses collecting ITBMS must register and report it to the Dirección General de Ingresos (DGI), Panama’s tax authority.
Property Tax in Panama
Property taxes in Panama are relatively low compared to North America and Europe. In recent years, the government introduced new tax exemptions to encourage real estate investment.
Property Tax Rates:
- Homes valued under $120,000 – 0% (tax-free)
- $120,000 – $700,000 – 0.5%
- Over $700,000 – 0.7%
Many properties, especially in expat-friendly developments, qualify for long-term tax exemptions, sometimes up to 20 years.
Tax Incentives for Foreign Investors
Panama offers numerous tax incentives to attract foreign investors, including:
1. The Panama Friendly Nations Visa
- Allows individuals from over 50 countries to obtain residency.
- No income tax on foreign earnings.
- Simplified business setup process.
2. Free Trade Zones (FTZs)
Panama has special economic zones that provide tax benefits:
- Panama Pacifico (near the Panama Canal) – Exempt from income tax, VAT, and import duties.
- Colon Free Zone – No import/export taxes for businesses operating within the zone.
3. Retiree (Pensionado) Program
Panama’s Pensionado Visa offers tax benefits and discounts to retirees:
- No tax on foreign pensions.
- Up to 25% discounts on services like healthcare and entertainment.
- Duty-free importation of personal goods.
Double Taxation Treaties
Panama has tax treaties with countries such as the United States, Canada, and Spain, allowing expats to avoid double taxation on income. These treaties ensure that income is only taxed in one jurisdiction, which is particularly beneficial for expats with investments in multiple countries.
Tax Filing Requirements for Expats
Who Needs to File Taxes?
- Expats with local income in Panama.
- Business owners operating within Panama.
- Property owners earning rental income in Panama.
Tax Filing Deadlines
- Corporate taxes: Due on March 31st.
- Personal income taxes: Due on March 15th.
Filing taxes in Panama can be complex, so hiring a local accountant or tax advisor is highly recommended.
Common Tax Mistakes to Avoid
- Not Registering for ITBMS (VAT) – Many new business owners overlook the requirement to collect and remit ITBMS.
- Ignoring Local Income Tax Requirements – Even if earning primarily abroad, expats conducting local business may have tax liabilities.
- Failing to Declare Rental Income – Rental income from Panamanian properties must be declared.
- Not Utilizing Tax Treaties – Expats should check if their home country has a tax treaty with Panama to avoid double taxation.
Final Thoughts on Panama’s Tax System
Panama’s tax system is highly favorable to expats and investors, particularly due to its territorial tax structure and low property taxes. Whether you are an entrepreneur, retiree, or real estate investor, understanding Panama’s tax regulations can help you optimize your financial strategy.
For those planning to relocate or invest in Panama, consulting with a tax professional is advisable to navigate compliance, tax-saving strategies, and investment opportunities effectively.
