Panama: Offshore Legal and Tax Regimes
Taxation of Foreign Employees of Offshore Operations
This section refers to the taxation of foreign employees of offshore operations, see Domestic Personal Taxation 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.