PANAMA: WORLD CLASS TAX HAVEN
PART 2 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Tax Advantages
Historically, one of the major factors responsible
for the 35,000 holding company and tax sanctuary operations
established in Panama by foreign business-men has been
the relative tax freedom. Panama does not assess any
income tax income produced from sources outside the
country, including the proceeds of sales made outside
of Panama. This territorial method of taxation was
only one of the many advantages of incorporating in
Panama. Income earned within Panama, including the
proceeds of sales made within the country, is subject
to Panamanian tax.
The normal corporate tax starts at 30% on income up
to 100,000 balboas ($100,000) and graduates to 42%
on income over 500,000 balboas ($500,000). Corporate
dividends and earnings of branches of foreign corporations
are subject to a 10% withholding tax. Interest paid
or credited to the account of a foreign lender is subject
to a 6% withholding tax. Interest on bonds, notes and
other registered securities is taxed a flat 5% withholding
tax unless traded on a registered exchange in Panama.
Royalties paid to a foreign movie or television production
company or distributor also are subject to a 6% withholding
tax. Companies also must withhold a 10.75% social security
tax on employees' salaries.
Tax rates begin at 3,000 balboas ($3,000), and individual
income is taxable at 52% between 3,000 balboas ($3,000)
and 3,250 balboas ($3,250) or a tax of 130 balboas
($130), then falls to 4% between 3,250 balboas and
4,000 balboas ($4,000), rising to 33% between 50,000
balboas ($50.000) and 200,000 balboas ($200.000), and
then dropping back to 30% over 200,000 balboas ($200,000),
at which the tax amount payable is 59,905 balboas ($59,905).
The first 3,000 balboas of income are not taxable.
Employees also must pay a 7,25% social security tax
on wages and salaries withheld by the employer.
Foreign companies, which do not buy or sell goods
in Panama or the Colon Free Zone, are exempted from
the 10% dividend withholding tax. Headquarters companies
rendering services to companies and offices outside
of Panama are exempt from income tax but pay the 1%
business tax levied on declared capital, with the maximum
20,000 balboas ($20,000). Income derived from transfer
of shares in companies established under Panama law
engaged exclusively in activities abroad is tax-free
as it is considered to be foreign-source income.
Small Business Concessions
Under Law 31 of 1991, special rules were adopted for
small enterprises or micro-businesses earning less
than $200,000 in gross income annually. The first $100,000
of income is taxed at personal tax rates and the next
$100,000 of income earned by the micro-business is
taxed at corporate tax rates. The micro-business is
exempt from the retained earnings tax and withholding
tax on dividend distributions.
In addition to the favorable tax situation, some of
the other reasons for which Panama's corporate law
is considered to be desirable are that there are no
minimum capital requirements nor is there a time limit
for issuing shares. Moreover, there is no requirement
to file either tax returns or financial statements
annually and it is not necessary to maintain a share
register. Capital can be in United States dollars or
any other currency and foreigners can serve as directors
and/or shareholders.
Reduction on Exterior Operations
In order to qualify for tax reduction, the law states
that the taxpayer must declare the income and pay the
tax in a foreign country, which does not permit a credit
of the total or part of the tax paid to Panama. However,
companies operating the Colon Free Zone have an option
to pay their taxes to Panama or to the country of the
parent corporation of the Panama entity. Thus, the
exterior operation profits earned on export shipments
from the Colon Free Zone are not subject to tax. Reduced
rates on income derived in the Colon Free Zone from
manufacturing operations by taxpayers whose financial
year began on or after May 1, 1975, are imposed at
2,5% up to 15,000 balboas ($15,000), 4% between balboas
($30,000) and 100,000 balboas ($100,000), and 8,5%
over 100,000 balboas ($100,000). Colon Free Zone companies
are exempt from withholding tax on distributions of
export profits. Reinvested earnings may be taxed. Individuals
are permitted to discount from their tax on income
payable to exterior operations in the Colon Free Zone
0.5% of the net taxable income if there are from 30-100
national workers permanently employed, 1% of net taxable
income if from 101 to 200 national workers are permanently
employed, and 1.5% of the net taxable income if 200
or more national workers are permanently employed.
Beginning as of January 1, 1976, individuals deriving
80% of their income from exterior operations during
the first five years of operations may qualify for
a 95% rebate on taxes payable provided that a minimum
of 30 national workers are permanently employed.
The rebate is reduced by 5% during the three years
following the 20% deduction permitted in the first
four years. Wage payments may not exceed 15% of the
salaries in collective contracts and the increase in
number of workers employed may not produce an expansion
of more than 10% in fixed assets.
