Recently a World Bank analysis of tax laws ranked Panamá among the worst in the Western world for ease of filing and clarity of the tax rules. So don’t be surprised if a ‘simple tax return’ turns out not to be so simple, and therefore more expensive to have prepared than you would expect based on your experience in another country. Here are a few of the relevant items.
Individuals who reside in Panamá more than 180 days a year (regardless of your immigration status) must file a Panama declaration if they have over $3,000 in Panamá-source income. Panamá has a territorial approach to income taxes; that is non-Panama source income is not included in the taxable income for Panamá. So the good news for pensionados who have only non-Panamá source income is that you do not have to file a Panamá Declaration. Individuals who only earn a salary from a Panamanian entity which is subject to withholding do not have to file an annual declaration.
What is taxable:
If individuals have Panama-source earned income they may have some tax liability on net income over $9,600 at rates ranging from 2% to 30%. If the individual is paid as a salary then they are also subject to Panama’s social security and education taxes, and depending on the composition and amount of the salary, they may be subject to withholding of income taxes. (See our FAQ on related item about the rates of taxes compared to the USA.)
Consultants will probably need the services of a Panamanian CPA as the payments they receive may be taxable in varying amounts for either or both social security/education taxes and income taxes depending on how much they earned, how it was deducted by the paying entity, and how old the consultant is. There are different calculations in the new Panamanian tax laws that phase-in Gastos de Representación and consulting fees at varying rates over a period of years.
If an extranjero who doesn’t have a Panama work permit is hired on a short-term non-recurring contract of less than 2 months by a Panamanian entity, according to DGI, the employing entity must present the contract to DGI and they will calculate the 15% withholding and an additional 2.75% education tax both of which have to be paid immediately.
Small Panama corporations with gross receipts under $200,000 are taxed as if they were individuals and if the revenue is under $100,000 they do not have to have the return prepared by a Panamanian CPA.
Dividend distributions from Panama corporations are taxed at 10%; it is withheld from the dividend and paid by the SA. Panama-source Interest income is not taxed to the recipient.
Note: Both interest and dividends paid by Panamanian entities to US citizen-taxpayers is includable in their US tax reporting and taxed at whatever marginal rate they may pay. A foreign tax credit can be taken for the dividend tax paid to Panamá against the tax liability to the USA. Any income tax paid to Panamá on earned income which is excluded from USA tax liability cannot be taken as a tax credit.
Capital gains are complex and subject to many exclusions and different rates. Gains themselves are calculated differently than what US taxpayers are used to. For exPats it is crucial to get good legal and tax advice when originally setting up the entity through which you conduct your Panamanian business. That entity’s legal representative is responsible for filing the returns properly.
Most Panamanians do not earn more than $800 a month and therefore havo no income tax liability beyond the social security and education tax withholding and do not get or need the equivalent of a W-2 year end statement.