Panama: Domestic Corporate Taxation
Dividends paid out by Panamanian companies are subject to 10% withholding tax; the rate is 20% for dividends on bearer shares. Companies located in free zones must withhold tax on dividends at 5%.
If less than 40% of taxed income is distributed, then Undistributed Profits Tax of 10% becomes payable on the undistributed balance; this therefore amounts to a maximum of 4% tax. In effect this is an advance withholding tax, and it is creditable against the 10% tax on later distributions of the taxed income.
Branches of foreign corporations pay the 10% 'deemed dividend tax' on their full taxed income (making their effective taxation rate equal to 37%); but they are not subject to withholding tax on eventual distributions.
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 subject to a flat 5% withholding tax unless traded on a registered exchange in Panama. There is no withholding tax on domestic royalty payments, although there is a 15% withholding tax on royalties for non-treaty countries.
The fiscal reform package introduced in 2005 includes 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 has been inserted, including 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.