Tax Residence in Panama
Contributed by W.W. Corporate Services Ltd
11 September, 2017
We are seeing an increasing number of entrepreneurs in online or internet businesses, such as developers of software and applications for mobile platforms or simply individuals that work out of their laptops and keep moving around the world doing business and retirees that are looking for a solution in order to keep their financial privacy and/or simply gain protection of the assets they accumulate and flexibility to do business.
However, individuals looking for solutions may be misled by those marketing, quite aggressively, Permanent Residence and Second Citizenships as a way to escape the Automatic Exchange of Information. Dubai, Dominica, Grenada, St. Lucia, among others, offer great programs, but gaining residence, from an Immigration point of view, will not be sufficient in light of the OECD's closing loopholes and forcing countries and subsequently Banks, to do more due diligence on their clients to determine where is a client tax resident. Faking a relocation will not work, it will not be enough as you will need to prove you actually live in that new country you say you are resident of, you will effectively have to choose between playing by the new rules or leave your country and relocate to countries that are friendly to you.
In this sense, showing a bank that you have a utility bill with an address from X country may not be enough in the future. Therefore, you should start planning how to become tax resident in a country that offers you stability, good communications, good infrastructure and flexibility tax wise.
Why Panama? The answer is simple: Panama has it all, warm climate year-round, beaches, mountains, great food, great internet and air connectivity, but above all, has stability as it is a proud member of a select group of Latin American countries (Chile, México, Brazil and Peru) that have Investment Grade. On March 23, 2010, Fitch Ratings granted Panama the rating of BBB- with a positive perspective. Since 2010 the Investment Grade has been sustained every year, the latest ratings are: Standard & Poor's credit rating for Panama stands at BBB with stable outlook. Moody's credit rating for Panama was last set at Baa2 with stable outlook. Fitch's credit rating for Panama was last reported at BBB with stable outlook.
In addition to the above, by doing business from Panama your income is not taxable in Panama, so long as such income derives from foreign sources. It's not even reportable to the Panamanian Revenue Agency. What does this mean? It means that Panama has a Tax System that is based on the Territorial Principle of Taxation. This principle that Panama has embraced means that only Panama-sourced income is taxed.
An entity or an individual which has its activities outside of Panama will automatically escape taxation. On the contrary, an entity or an individual which engages in a business activity within Panama, receiving Panamanian source income, will be subject to pay income tax annually.
According to Paragraph 2 of Article 694 of our Fiscal Code, the income derived from the following activities is not considered from Panamanian source:
a. Invoice, from an office established in Panama the sale of merchandises or products for a higher amount of that for which such merchandises or products have been invoiced against the office established in Panama, always that such merchandises or products only move outside.
b. Manage, from an office established in Panama, transactions that perfect, consume or have effects abroad.
c. Distribute dividends or participations of juridical persons, when such dividends or participations derive from incomes that are not produced within the territory of the Republic of Panama, including those incomes derived from the activities mentioned in literals a and b of this paragraph.
In this sense, Panama is the perfect place for clients to relocate, establish their base of operations and create the necessary history, to acquire a tax resident status. And remember, the latter, does not necessarily translates into filing tax returns and paying income tax in Panama, due to the Territorial Principle of Taxation.
How to become tax resident in Panama?
The first step is to secure your Permanent Residence in Panama from the Immigration point of view and Panama does offer several programs to this effect.
One of the most popular programs is the Friendly Nations Visa, that allows nationals of the following 50 countries to apply for Permanent Residence in Panama:
9. Costa Rica
12. Czech Republic
18. Great Britain
20. Hong Kong
34. New Zealand
39. Republic of Korea
40. San Marino
44. South Africa
50. United States of America
The immigrant must prove economic solvency to the immigration service and professional and economic ties with the Republic of Panama. An "Economic Activity" means the applicant owns either a Panama corporation or a Panama company (new or an existing business). Foreigners are prohibited from owning a Panama retail business though.
Another option is to prove "Professional Activity" by means of being employed by a professional Panama company, obtain a work permit and registered with Panama's Social Security system.
To prove the economic solvency, the foreigner would need to open a personal bank account in Panama and deposit a minimum of USD5,000 (plus USD2,000 for each dependent spouse and children under 18 or up to 25 years of age if still studying).
There are other interesting programs to acquire Permanent Residence, such as the Pensionado Visa (better known as the Retiree Visa) and the Self Economic Solvency Visa (Requires an investment of minimum USD300,000).
To become a tax resident in Panama and therefore be eligible to apply for a Tax Residence Certificate, the following rules apply:
Article 762-N of the Fiscal Code of the Republic of Panama defines who is considered a Tax Resident: Article 762-N: They are considered fiscal residents of the Republic of Panama natural persons who remain in the national territory for more than 183 calendar days or alternates in a fiscal year or the year immediately preceding.
Likewise, they shall be considered fiscal residents of the Republic of Panama, those natural persons who have established their Permanent residence in the territory of the Republic of Panama.
They are also considered fiscal residents of the Republic of Panama, legal entities incorporated under the laws of the Republic of Panama and have material means of Direction and administration within the Panamanian territory.
Likewise, juridical persons constituted abroad who have material means of management and administration within Panamanian territory and who are duly registered in the Public Registry are considered to be fiscal residents of the Republic of Panama.
There is a list of requirements set forth on Resolution Number 201-0354 of 13 of January of 2016, in regards to the attainment of the Tax Residence Certificate. The goal is to provide evidence that the foreigner has economic or family ties to Panama, thus providing a utility bill, groceries receipts, rental agreement, among others will help to access this certificate, which will serve to prove to your bank, whether in Panama, Switzerland, Hong Kong or anywhere else in the world, that you are tax resident in Panama and therefore to not share your financial information with your previous country of residence. It will not matter, if the bank shares the information with Panama, if the income you receive in those bank accounts outside Panama is exempt in Panama, as per the Territorial Principle of Taxation.
Now, do bear in mind that gaining tax residence in Panama or elsewhere, will not be enough. You still have to cancel your tax residence where you reside right now and this may prove to be quite challenging, as some countries will have an astounding number of requirements you have to meet, included, in some cases, an exit tax. Therefore, proper planning shall be made and should you need help on this area, we have a network of advisors that will be able to provide you with the assistance necessary.
We hope this article enlightens a lot of you out there that are looking for a safe and stable country to relocate and become tax residents of. We remain at your disposal for any queries you have on this matter.
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