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Panama: Domestic Corporate Taxation

Corporate Taxation Introduction

Taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself. The existence of a sales or administration office in Panama, or the re-invoicing of external transactions at a profit, does not of itself give rise to taxation if the underlying transactions take place outside Panama. Dividends paid out of such earnings are free of taxation. See Offshore Legal and Tax Regime for details of the (minimal) taxation of companies which do not carry on business inside Panama, and companies in the Colon Free Zone.

In February, 2005, Panama's unicameral legislature approved a major fiscal reform package in order to raise revenues from new business taxes, and reduce the country's level of debt. The legislature voted 46 to 28 in favour of the measures, which included a 1.4% tax on companies' gross revenues, and a 1% levy on firms operating in the Colon Free Trade Zone - the largest free port in the Americas.

From July, 2005, all firms which prior to 2005 were exempt from value added tax in Panama are affected by a new interpretation of the country's Tax Code by the tax authorities. In a little publicised move, Panama's Revenue Office circulated a series of opinions which stated that the recent tax reform has abolished all VAT exemptions and special treatment given prior to February 2005.

The new interpretation centered on paragraph 26, article 1057-V of Panama's Tax Code which, although the wording is the same as the original draft passed in 1976, the Revenue Office has taken to be a new law after it was reproduced in the major reform approved in February 2005. Therefore, according to the Revenue, it is effectively a new law, which can be interpreted differently to the 'old' legislation.

Consequently output VAT could now be charged on clients previously exempted. Similarly, input VAT may also affect previously exempted taxpayers.

In addition to the taxes described below, employers pay social security contributions of 12% in respect of employees (see Personal Taxation).

 

 

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