Tax Guide for US Expats Living and Working in Panama
ho Is Liable For Income Taxes in Panama
Resident and nonresident individuals are taxed on their Panamanian-source income regardless of the nationality of the individual and the location of the payment of the income. For tax purposes, the nationality of the individual is irrelevant. Individuals are considered resident for tax purposes if they reside or work in Panama for more than 183 days in a calendar year.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Taxable income includes wages, salaries (including salaries in kind), bonuses, pensions, directors’ fees, profit-sharing, severance payments, seniority premium payments and other remuneration for personal services.
Education allowances are considered to be taxable salary and, consequently, they are subject to income tax and social security contributions, provided they are granted to employees with children under the age of 18.
Amounts received by the taxpayer for representation expenses are subject to a flat 10% withholding tax rate on amounts up to B/. 25,000. Representation expenses in excess of B/. 25,000 are subject to withholding tax at a rate of 10% on the first B/. 25,000 and 15% on the excess. Effective from 1 July 2010, 100% of representation expenses is subject to social security contributions.
Self-employment and business income. Profits derived from business, commercial and agricultural activities in Panama are subject to tax. Farming income is exempt from tax if gross sales are less than B/. 250,000.
If self-employment and business income is received in addition to employment income, the total income is taxed at the rates listed in Rates.
Investment income. Panamanian-source dividends earned by residents and nonresidents are subject to a final 10% withholding tax. The tax rate is 20% for dividends paid on bearer shares. A final 5% withholding tax applies to dividends distributed by companies operating in free-trade zones in Panama and to foreign-source dividends distributed by companies with local operations.
Foreign-source dividends distributed by Panamanian companies that do not require a Notice of Operations and that do not produce any taxable income in Panama are exempt from dividend tax.
Dividends distributed from interest and gains on the sale of government securities and other interest from deposits with Panamanian banks are subject to a final 5% withholding tax. Other interest income and royalties derived from Panamanian sources are subject to withholding tax at a rate of 12.5%. However, interest is exempt from tax if it is earned with respect to any of the following:
- Savings or time-deposit accounts maintained in banking institutions established in Panama
- Government securities
- Loans granted to finance the construction of “socially-required housing,” as certified by the Ministry of Housing Foreign-source interest and royalties are exempt from tax. Royalties received or earned by foreign persons from businesses established in the Colon Free Zone (a duty-free zone) are treated as dividends and are subject to a final withholding tax of 5%.
Stock option plans. In principle, the benefit derived from stock option plans granted by the employer is subject to tax at the time of sale of the shares. However, gains derived from sales of shares issued by companies registered on the Panama Stock Exchange and negotiated through the stock exchange are exempt from tax.
Capital gains and losses. Net capital gains derived from the sale of bonds, shares, quotas and other securities issued by legal entities are subject to income tax at a rate of 10%. Capital gains derived from the sale of shares (or other forms of equity participation) of a Panamanian company are considered Panamanian-source income, regardless of where the transaction takes place, if the company has operations in Panama or has assets located in Panama.
The buyer must withhold and deposit 5% of the gross purchase price paid to the seller with the tax authorities. The 5% withholding tax must be remitted to the tax authorities within 10 days after the date on which the withholding obligation arose. The 5% withholding tax may be considered the final capital gain tax due.
If the 5% withholding tax is greater than 10% of the net capital gain, the taxpayer may credit the 5% withholding tax against the 10% capital gain tax that is finally determined. The excess amount may be refunded, credited against other tax liabilities or transferred to other taxpayers.
In addition, gains derived from the sale of real estate are subject to tax at a rate of 10%. The tax base equals the sales price minus the sum of the original cost of the property and expenses incurred on the sale. However, if the sale is made in the ordinary course of trade or business of the taxpayer, the general income tax rates apply.
For purposes of capital gains on real estate taxed at the 10% rate, the seller must pay 3% of the sales price or the recorded value of the property, whichever is greater, as a capital gains tax advance. The 3% tax may be considered the final capital gain tax due. If the 3% tax is greater than 10% of the net capital gain, the taxpayer may credit the 3% tax against the 10% capital gain tax that is finally determined. The excess amount may be refunded, credited against other tax liabilities or transferred to other taxpayers.
Deductions
Deductible expenses. Individuals may deduct the following from gross taxable income:
- Mortgage interest related to loans for a principal residence, up to B/. 15,000 a year
- Interest paid on educational loans
- Donations up to US$50,000 if made to charitable organizations recognized by the tax authorities
- Medical expenses incurred in Panama and not reimbursed by insurance
- Medical and hospitalization insurance premiums (excluding payments or withholdings for social security)
- Certain investments in tourism
- Contributions up to 10% of gross salary or up to B/. 15,000 to pension plans
Personal deductions and allowances. Individuals are entitled to a B/. 800 deduction when filing jointly with the spouse.
Recipients of severance and seniority premium payments on termination of employment are entitled to a deduction at a rate of 1% of the payments for each complete year of service with the same employer. In addition, B/. 5,000 may be deducted from the payments.
Nonresidents may not claim any deductions or personal exemptions.
Business deductions. All costs and expenses that are necessary to generate taxable income and protect investments are deductible.
Relief for losses. Self-employed individuals incurring a loss in a tax year may deduct 20% of the loss in each of the five subsequent tax years. However, the deduction is limited to 50% of taxable income in each subsequent tax year, and any nondeductible amount may not be carried forward.
B. Other taxes
Estate or gift taxes. Panama does not impose estate or gift taxes.
Real property tax. A real property tax applies to land, buildings and other permanent structures located in Panama. These properties are subject to tax.
Education tax. Education tax is imposed on employers and employees. The rates are 1.5% for employers and 1.25% for employees.
C. Social security
For 2011, social security contributions are levied on salaries, at a rate of 12% for the employer and 9% for the employee. Contributions are computed based on an employee’s gross compensation. No ceiling applies to the amount of remuneration subject to social security contributions. In addition, an employer must pay workers’ compensation insurance at rates that vary from 1% to 7%, depending on the type of business and risk in which the employer is engaged.
Panama has not entered into any social security agreements with other countries.
Double tax relief and tax treaties
Panama has signed double tax treaties with Barbados, Belgium, Italy, Korea (South), Luxembourg, Mexico, the Netherlands, Portugal, Qatar, Singapore and Spain. At the time of writing, only the treaty with Mexico had taken effect. Panama has concluded tax treaty negotiations with the Czech Republic, France and Ireland.
To learn more about the history, culture, economy and other information about Panama
We have been preparing US income tax returns for US Citizens and permanent residents living in Panama for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Panama and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Panama.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email