Panama: Offshore Legal and Tax Regime

On this Page:

- PANAMA FORMS OF OFFSHORE OPERATION
- PANAMA TAX TREATMENT OF OFFSHORE OPERATIONS
- PANAMA TAXATION OF FOREIGN EMPLOYEES OF OFFSHORE OPERATIONS
- PANAMA EXCHANGE CONTROLS
- PANAMA OFFSHORE ACTIVITIES
- PANAMA SHIPPING REGISTRY FEES
- PANAMA EMPLOYMENT AND RESIDENCE

The term 'offshore' is not used in Panama legislation; since taxation is on a 'territorial' basis, ie only Panama-sourced income is taxed, an entity which has its activities or assets outside Panama will automatically escape taxation. There are more than 120,000 corporate entities in Panama, of which the majority are 'offshore'.

In June 2000, Panama was identified by the FATF as a non-cooperative tax haven in the global fight against money-laundering. The result of this was that Panama was one of fifteen tax jurisdictions placed on an FATF blacklist. Each offending tax haven had a year in which to correct its regulations and legislation

The FATF released an annual report in June 2001, in which the organisation revised its list of countries and territories deemed non-cooperative. Only four were removed from the list, including Panama (the other three being the Cayman Islands, Liechtenstein and the Bahamas). Panama was praised by the FATF for its substantial efforts to conform to forty recommendations set out by the FATF in a code of good practice governing money laundering.

In April 2009, following that month's landmark G20 summit in London, Panama was placed on the OECD's 'grey list' of territories which have committed to, but not yet substantially implemented, the internationally agreed standard in tax transparency and information exchange. Later that month, the government of Panama announced the conclusion of the first round of negotiations towards a double tax agreement with the Netherlands, including tax information exchange provisions in line with the OECD standard. Panama’s deputy Economy Minister, Frank De Lima explained at the time that these negotiations "marks progress towards the removal of Panama from the Organization for Economic Cooperation and Development’s ‘grey list.’"

The OECD announced in July 2011 that Panama had moved to the list of jurisdictions considered to have substantially implemented the standard for exchange of information when it signed a tax information exchange agreement with France. This brings the total number of agreements to 12 - the international required minimum.

A DTA with Spain came into force in July 2011 and in September, a tax information exchange agreement with the country was signed by Panama. Israel and Panama initialled a double tax treaty in August 2011.

Panama Forms of Offshore Operation

Licenses are required only for financial institutions (see Offshore Business Sectors). Corporations do not have to disclose beneficial ownership, and Trusts and Foundations need not disclose the names of their beneficiaries. Limited Partnerships do however need to disclose the names of their members. See Forms of Companies for more information.

In 2007 Panama inaugurated a headquarters company regime (sedes de empresas multinacionales, or SEM) which offers tax breaks to encourage multinational companies to set up various types of service companies. SEM companies are exempt from VAT on services rendered to non-Panamanian taxpayers, and are exempt from income tax on profits from such services. Expatriate employees of SEM companies also receive tax privileges.

In order to achieve SEM status, group assets must be worth at least USD200 million. A minimum initial capital of USD2 million is required if the group's main office is to be in Panama.

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Panama Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Panama corporate taxation, which also apply to offshore entities.

Income tax is levied only on income derived from operations within Panama. A Panama business entity can direct its offshore activities from Panama without becoming liable for tax. The Fiscal Code (Article 694) excludes the following types of income from the tax net:

Interest on deposits with Panamanian banks is exempt from taxation whatever the source of the cash.

An entity with both external and Panamanian business activities is taxed only on the Panama-derived income, and is subject to withholding tax only on that income (see Direct Corporate Taxes).

Panama business entities with only external operations are exempt from the Dividends (Withholding) Tax, the Undistributed Profits Tax, the Business Tax, and from Stamp Duty on contracts executed in Panama to be performed elsewhere.

Companies in the Colon Free Zone, or in Export Processing Zones, are treated in the same way as companies with external operations, as described above. However, a fiscal package introduced in 2005 aimed at reducing Panama's indebtedness included a 1% turnover tax to apply to all operations in the Free Zone, and a 1.4% turnover tax which may apply to some other types of companies

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Panama Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of offshore operations, see Domestic Personal Taxes for the general principles of individual taxation in Panama, which also apply to the resident employees of offshore entities. There are no statutory residence rules as such, but an individual is considered resident if he is present in Panama for more than 183 days in any one tax year. Residence has to be officicially recognised by the Government.

There is no distinction between foreign and Panamanian employees, whether or not the business is 'offshore'. The territorial basis of taxation applies to individuals as it does to business entities, so that individuals pay income tax on Panama-source income. 'Panamanian-source' means, that the services rendered are deemed to be provided within Panama - if a Panamanian entity pays an employee for services rendered abroad, tax will not be due.

The fiscal reform package introduced in 2005 included a rule (Paragraph 1-B of article 694 of the Fiscal Code) that all payments remitted abroad to beneficiaries not resident in the Republic of Panama shall be subject to withholding if the payments are related to the generation of income within Panamanian territory or the conservation of a source of income located within Panamanian territory, and are considered to be deductible expenses by the payer operating from Panama. As examples, a non-exhaustive list of payments subject to the new rule includes fees and income relating to intellectual property rights, royalties, know-how, technological or scientific knowledge and the like.

The taxable base for application of the withholding tax (at income tax rates) is 50% of the payment involved.

Individuals or legal entities engaged in “international business activities” and carrying out operations outside Panamanian territory are however exempted from the tax, ie payments caught by the law are not considered to be Panamanian source income, although the definition of 'international business activities' was not made clear.

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Panama Exchange Control

There are no exchange controls in Panama, which in effect uses the US dollar as its currency other than for very small transactions in the Balboa, which is at parity with the dollar. There is no Central Bank.

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Panama Offshore Activities

'Offshore' entities are not prohibited from carrying on business activities in Panama, other than banks with International or Representation Licenses (see Offshore Business Sectors) but will be taxed on income arising from domestic trading, and will need to segregate such trading in their accounts.

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Panama Shipping Registry Fees

See Law of Offshore for details of the legal regime applying to ship registration.

Provisional registration for 6 months costs USD500, and USD50 for renewal; the renewable provisional 3-month radio licence costs USD150 per quarter.

Under Law no. 4 of 1983 (as amended) ongoing annual registration fees and duties (Consular Tasa) are based on tonnage as follows:

There are also annual Tasa charges dependent on tonnage covering inspection and regulatory costs.

There is a separate scale of duties for barges, pontoons and vessels operated other than for profit.

There is also a separate regime for pleasure vessels under which registration is on a renewable 2-year basis; a single fee of USD1,500 (USD1,000 for a Panamanian individual or corporation) is payable every two years. Pleasure vessels are exempt from duties and other Tasa charges.

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Panama Employment and Residence

The employment market is quite closely regulated: the law sets maximum percentages for the employment of foreigners in a business according to its sector. However, foreign companies are allowed to fill senior and/or sensitive positions with expatriates.

Long-stay working residents are issued with Immigrant visas if their employment is permitted. Short-stay visas are issued freely. The Tourist-Pensioner visa is given to those who can demonstrate a monthly designated level of income from interest on time-deposits in a Panamanian bank; the Investor's visa is for those who invest their own capital into local business activity.

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