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Panama

Capital city: Panama City

Aera: 78,200 km2

Population: 3,300,000

Language: Spanish

Politicalsystem: Presidential

republic

GDP/capita 2015:

USD 11,036

Currency: Panamean Balboa

(PAB)

ISO Code: PAN

Telephone code: +507

Nationalday: 3 November

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Panama

1. TAXES LEVIED ON INDIVIDUALS

1.1 Taxes levied on residents

Art.700–TaxCode(AmendedbyLaw8,datedMarch15,2010)

Net Income Bracket (USD) Rate From 0.00 to 11,000 0%From 11,001 to 50,000 15%From 50,001 and over 25%

Income tax levied on individuals is divided into three brackets.

Thefirstgoesfrom0.00to11,000oftaxableincome.Thisbracket,whichisforindividuals with a basic wage, is not liable to income tax.

The second bracket goes from 11,001 to 50,000 of taxable income. Individuals falling within this second bracket pay 15% on the excess amount above 11,000 andupto50,000;inotherwordsthebenefitofexonerationofthefirst11,000ismaintained for this bracket.

The third bracket, which is for individuals with higher purchasing power, is taxed at25%ontheexcessamountabove50,000,maintainingthebenefitofexone-rationofthefirst11,000andtherateof15%ontheamountbetween11,001and50,000;inotherwordsindividualsinthisbracketpaytaxatacombinationof rates.

Foreign residents: Foreigners who reside in Panama for more than 183 days a year and earn some income in Panama will be taxed at the same rate and in the sameproportionasnationals.

1.2 Taxes levied on nonresidents

Individuals who are not residents in Panama and who generate income in the countrywillbesubjecttowithholdingtaxatsourcebasedonthesametableasforresidentindividuals,butwiththedifferencethattheywillbetaxedon50%of the income generated. This tax shall be paid within 10 days of payment being made to the nonresident individual.

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1.3 Estimates (presumed income)

Whendeclaringtheirincome,individualsmustgiveanestimateoftheirtaxableincome for the year following the one they are declaring, i.e. the current year. Thisestimatemaynotbelessthanthedeclaredyear.Theestimatedtaxwillbepaid in three installments (June, September and December) and these payments willbeusedascreditstowardsthe incometaxthat isfinallyassessedthefol-lowing year.

1.4 Capital Gains

The rate of capital gains tax varies depending on the type of property being transferred.OnlypropertieslocatedinPanamaaresubjecttocapitalgainstax.The standard rate is 10% of the gain on the sale.

The transferof shares fromaPanamanianentity thatobtainsPanama-sourceincomerequiresthebuyertowithhold5%ofthepurchasepriceforthetaxau-thoritieswithinaperiodof10days.Thisisconsideredanadvancepaymentofthe seller’s capital gains tax. The seller can declare this 5% as the total capital gains tax or, if the amount exceeds the normal rate of 10% of the real gain, the sellermayclaimataxcreditfortheamountexceededwhenfilingtheannualtaxreturn.APanamanianentitywhosesoleincomeisobtainedfromnon-Panama-nian sources (outside Panama) is exempt from capital gains tax.

The transferof shares fromaPanamanianentity thatare registeredwith theNationalSecuritiesCommissionthroughanauthorizedstockexchangeisexemptfrompaying capital gains tax even if the entity obtains gross Panama-sourceincome. Therefore, by selling shares through a stock exchange, the transfer is exempt fromcapitalgains tax.ThemergerandreorganizationofPanamanianentities registeredwith theNationalSecuritiesCommissionandalsowith thestock exchange involved in the transfer of shares are also exempt from capital gainstaxiftheycomplywithcertainspecificrequirements.Takeoverbids,asde-finedbythesecuritiesregulations,arenotexemptandthebuyermustwithhold5% of the total purchase price as capital gains tax.

The Real Property Transfer Tax, also known as the Capital Gains Tax or 10% tax, is none other than the Income Tax that all taxpayers who have obtained gains from the sale of a real property have to pay. The legal basis for this tax is included in Article701oftheTaxCode,specificallyinparagraph(a)ofthesame.

Two kinds of taxpayers are liable for this tax:

“OrdinaryBusinessTaxpayers”(ContribuyentesconGiroOrdinario),thosethat,in the ordinary course of business, engage in the buying or selling of real proper-

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tyorconductanyotherkindconveyanceofpropertyonapaymentbasis;and

“Non-ordinaryBusinessTaxpayers”(ContribuyentesconGiroNoOrdinario).

These are all other taxpayers who sell real estate on an occasional basis.

Therearetwotypesofrealpropertyinthecaseof“OrdinaryBusinessTaxpayers”:

• Saleofnewhousingandcommercialpremises(firstsale).Thefollowingpro-gressive rate is applied to the total value of the transfer or cadastral value, whichever is greater. Value of the new home:

• up to B/.35,000.00, a rate of 0.5%; more than B/.35,000.00 and up toB/.80,000.00,arateof1.5%;andmorethanB/.80,000.00,arateof2.5%;new commercial premises, 4.5%.

• Saleofnotnewhousingandcommercialpremises:Thesetransactionsaresubjecttoestablishedgeneralrulesand,consequently,theypayincometaxatthegeneralrateestablishedinArticles699or700oftheTaxCode.

“Non-ordinaryBusinessTaxpayers”:ThetaxbaseforthesetaxpayersisTaxableIncome.TaxableIncomeisdefinedasfollows:TI=RSV-[BC+CE],whereTI=Taxable Income=CapitalGains;RSV=RealSaleValue;BC=BasicCostoftheProperty = Cadastral Value or Book Value, whichever is the lower in the case of land, and of improvements, if applicable. CE = Conveyance Expenses = notary, registrar and lawyers’ expenses, sales commissions, realtors’ commissions, etc.

1.5 Types of shares

AccordingtoPanamaniancompanylegislation(Law32onCorporations),corpo-rationshavethepowertocreate,issueandsubscribedifferenttypesofshares.Anyindividualorcompanycanholdsharesinacompanywithnorestrictionsasregardstheirlegalresidenceornationality.

The most usual types of shares are bearer shares and registered shares.

Registered Shares

Registeredsharesarethosethatcontaindetailedinformationabouttheholderoftheshares.Thepersonalinformationrequestedintheseshares,suchasthefull name and actual street address of the new holder, for example, will be stored inthecompany’sshareregisterwithoutitbeingnecessarytosubsequentlyre-portthisinformationtothePublicRegistryofPanama.Thesesharesallowtheissuertointeractdirectlywiththeshareholdertoprovidehimwithinformationregardingupcomingmeetingsornewshavingtodowiththecompany.

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Bearer Shares

Bearersharesarefreelytradablesharesthatdemonstrateanequityinterestinthe company merely by their possession. Neither the full name of the owner of thesharesnortheowner’saddresshastoappearonthem;theowneroftheseshareswillbedeterminedmerelybypossessionofthecertificate.Inthisway,notonly is the confidentiality and anonymityof their transfer respected, buttransferringthemisanextremelysimplyoperation.

“Law 47 of 2013 has laid down new measures with regard to bearer shares issued by companies already existing in Panama and those that are to be foun-ded in the future.”

This new law, which went into force on August 7, 2015, maintains the possi-bilityof issuingbearer sharesbutestablishesnew requirements thatpreventtaxevasion.Ontheonehand,bearersharesissuedafterAugust6,2015,mustbe handed over to an authorized custodian, which shall be designated by the shareholder within 20 days from approval of the issuing of these shares so as to keeparecordoftheendbeneficiary.Inthecaseofbearersharesissuedpriorto the entry into force of this new law, the owners have a period of three years’ maximum inwhich tohandover thebearer sharecertificates toacustodian,providing full information identifying theownerof the shares bymeansof asworn statement.

1.6 Filing Returns and Payments

In thecaseof individuals, taxreturnsarefiledbetweenJanuary1andMarch15,withamaximumextensionof30daystoApril15.FailuretofilewithinthatperiodcarriesasinglefineofUSD100.00.

2. Taxes levied on juridical persons or companies

2.1 Types of Company

Panamaoffersdifferenttypesofcompanies forbusinessmentoconducttheirbusiness inacontextofconsiderablefinancial,political,and juridicalstability.Protected by Panama’s Code of Commerce, Panamanian commercial companies havebecomeanextremelyattractiveoptionforthosewishingtoprotecttheirequityandincreasetheirprofits.Herewewillfocusonfivetypesofcompany,which are the most usual and most used in Panama:

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Corporation

CorporationsareformedbytwoormorepeoplewhoareofagebutdonothavetobePanamanianand/orbedomiciledintheRepublicofPanama.Corporationsmayengageinanykindoflegalactivity.Settingupacorporationmaybeusedbyindividuals or companies to protect their assets, diversify their investments, and considerablyreducetheirtaxes,giventheprotectionaffordedbytheBankSe-crecyAct,whichoffersconfidentialityforbanktransactionsconductedthrougha Panamanian company.

Limited Liability General Partnership

ALimitedLiabilityGeneralPartnershipisabusinessassociationthatdividesupitsregisteredcapitalintoquotashavingthesameordifferentvalue,limitingtheliability of its partners in accordance with the capital subscribed by each. A mi-nimumoftwoindividuals,whoareofage,oracompanyofanynationalityandhavinganyplaceofresidenceisrequiredtosetupsuchapartnership.ThenameofthepartnersandthecapitalcontributedbyeachshallbefiledwithPanama’sPublic Registry.

Offshore Company

OffshoreCompaniesinPanamaaretaxinstrumentsparexcellence,astheyhaveavarietyoffunctionsandbenefits.

Theyareusuallyusedfortaxplanning,butwheretheycanbemostbeneficialisincommercialandeconomicmanagementforfacilitatingthetradingofgoodsandservicesandalsoasameansofprotectingassets.

Panamanianoffshorecompaniesgenerallyadoptthelegalformofcorporations,whichhelpstoprotecttheidentityoftheowners,who,throughtheuseofunre-gisteredpowersofattorneyandnominaldirectors,canreinforcethe levelsofconfidentialityforthebeneficiary.

Nowthen,Panamanianoffshorecompaniescanalsotaketheformofalimitedliability or any other kind of company, provided they do not conduct or carry outlocalactivitiesinPanama,sincetheprincipleofterritorialityinPanama’sTaxCode exonerates their income or gains obtained exclusively outside Panamanian territory, but not those obtained locally.

Limited Liability Sole Proprietorship

ThemaincharacteristicofaLimitedLiabilitySolePartnershipisthatithasjustonemember.This isa juridical instrumentthat isextremelyuseful forpeople

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196 • Taxes in America

whowishtostartupasmall-scalebusinesswithoutputtingtheirpersonalequityatrisk.Thepersontransferspartofhisequitytothisentity,limitingtheliabilityof the business to the amount of the assets transferred. In this way, the risk of compromisingpersonalequity indoingbusiness isconsiderablyreducedas, ifthebusiness incursdebtsor liabilities,only theassets thathavebeenagreedwillbeusedtomeetthem,withoutaffectingthepersonalassetsofthepersonwhofoundedit.Thecompany’sequitymayconsistofmoveableproperty,realpropertyormoney.Theperson,ofanynationalityorhavinganycountryofre-sidence, can use his own name as the name of the company or choose another namefollowedbythelettersLTDA(limited)orEIRL(limitedliabilitysoleproprie-torship).

Non-commercial Partnership

A Non-commercial Partnership is formed by two or more individuals, never com-panies.Ashappensinothercountries,taxlegislationgrantsspecialbenefitsorexemptions to non-commercial partnerships. For example, a non-commercialpartnershipdoesnotpaytaxesondividendsand,ifalltheprofitsarepaidtoitspartners,thenthepartnership,assuch,doesnotpaytaxes,onlyitspartners;nordoesitpaytheoperationsnoticetaxorbusinesslicensesorwhatinotherpartsoftheworldiscalledassetstax;nordoesithavetopaytheannualcompanytaxand it is exempt from paying municipal taxes.

However,non-commercialpartnershipsdonothave theprerogativesenjoyedby companies that do limit the liability of their partners or shareholders. Only individuals or natural persons can be partners in non-commercial partnerships. Partners in non-commercial partnerships are personally, universally and unli-mitedlyliableforthepartnership’sdebts.Eachpartner’screditorscanrequesttheembargoandauctionofthatpartner’sshareinthepartnershipassets.Allthe partners of a non-commercial partnership (unless otherwise agreed) are deemed“proxies”ofthesamebylaw.Allthepartnersmustassumetheirshareofthepartnership’slossesandundertaketobejointlyliableforthepartnership’sdebts.

Fromthe“assetprotection”standpoint,havinganon-commercialpartnershipisrisky in view of the fact that the partnership’s assets and the partners’ assets can beattachedtomeetpartnershipandindividualliabilities.

Put simply, the insolvency of one or more of the partners can lead to the bankrup-tcy of the non-commercial partnership and vice versa.

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2.2 Taxes levied on Resident Companies

Art.699–TaxCode(amendedbyLaw8,datedMarch15,2010)

Net Income Bracket (USD) RateFrom 0.00 to 1,500,000 25.00%From 1,500,000 and over 4.67% oftaxableincome(whenthisismorethan25%ofprofits)Companies in which the State has a holding of 40% or more 30.00%

Thetraditionalmethodofcalculatingincometaxistosimplymultiplynettaxableincome by the tax rate of 25%. Companies with taxable income of more than $1.5millionuseadifferentmethodofcalculation.Theirrateiseithertheoneobtainedbythetraditionalmethodofcalculationortheoneobtainedbymulti-plying taxable income by 4.67%, whichever is the higher.

2.3 Taxes levied on Nonresident Companies

Juridical Persons that are not resident in Panama and that generate income in the country will have tax withheld at source based on the same table as for Pa-namaniancompanies,butwiththedifferencethatthiswithholdingtaxwillbelevied on 50% of income generated. This tax shall be paid within 10 days of the payment having been made to the nonresident person.

2.4 Definition of Related Party

Partiesaredeemedtoberelatedwhenacompanytakespartdirectlyor indi-rectlyintheadministration,controlorcapitalofanotherorwhenapersonorgroupofpersonstakespartdirectlyorindirectlyintheadministration,controlor capital of said persons.

2.5 Dividends

Thereisa10%taxondividendsissuedbyentitiesthathaveapermittooperateacommercial business and have Panama-source income. The dividend tax is only 5% if the income comes from foreign sources, is export-related or comes under otherlawsthatgrantexemptionfrompayingthetax.Companieslocatedinthefree trade zones pay 5%on all revenues. The entity that issues the dividendwithholdsthetaxandpaysthetaxauthorities.Thereisnoincometaxonthosedividends received. Dividends paid to holders of bearer shares must pay a tax of 20% on those dividends.

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2.6 Capital Gains

The rate of capital gains tax varies depending on the type of property being transferred.OnlypropertieslocatedinPanamaaresubjecttocapitalgainstax.The standard rate is 10% of the gain on the sale.

The Real Property Transfer Tax, also known as the Capital Gains Tax or 10% tax, is none other than the Income Tax that all taxpayers who have obtained gains from the sale of a real property have to pay. The legal basis for this tax is included in Article701oftheTaxCode,specificallyinparagraph(a)ofthesame.

Two kinds of taxpayers are liable for this tax:

“Ordinary Business Taxpayers” (Contribuyentes con Giro Ordinario),.

Those that, in the ordinary course of business, engage in the buying or selling of real property or conduct any other kind conveyance of property on a payment basis;and

“Non-ordinary Business Taxpayers” (Contribuyentes con Giro No Ordinario).

These are all other taxpayers who sell real estate on an occasional basis.

Therearetwotypesofrealpropertyinthecaseof“OrdinaryBusinessTaxpayers”:

• Saleofnewhousingandcommercialpremises(firstsale).Thefollowingpro-gressive rate is applied to the total value of the transfer or cadastral value, whicheverisgreater.Valueofnewhome:uptoB/.35,000.00,arateof0.5%;morethanB/.35,000.00anduptoB/.80,000.00,arateof1.5%;andmorethanB/.80,000.00,arateof2.5%;newcommercialpremises,4.5%.

• Saleofnotnewhousingandcommercialpremises:Thesetransactionsaresubjecttoestablishedgeneralrulesand,consequently,theypayincometaxatthegeneralrateestablishedinArticles699or700oftheTaxCode.

“Non-ordinaryBusinessTaxpayers”:ThetaxbaseforthesetaxpayersisTaxableIncome.TaxableIncomeisdefinedasfollows:TI=RSV-[BC+CE],whereTI=Taxable Income=CapitalGains;RSV=RealSaleValue;BC=BasicCostoftheProperty = Cadastral Value or Book Value, whichever is the lower in the case of land, and of improvements, if applicable. CE = Conveyance Expenses = notary, registrar and lawyers’ expenses, sales commissions, realtors’ commissions, etc.

The transferof shares fromaPanamanianentity thatobtainsPanama-sourceincomerequiresthebuyertowithhold5%ofthepurchasepriceforthetaxau-thoritieswithinaperiodof10days.Thisisconsideredanadvancepaymentof

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the seller’s capital gains tax. The seller can declare this 5% as the total capital gains tax or, if the amount exceeds the normal rate of 10% of the real gain, the sellermayclaimataxcreditfortheamountexceededwhenfilingtheannualtaxreturn.APanamanianentitywhosesoleincomeisobtainedfromnon-Panama-nian sources (outside Panama) is exempt from capital gains tax.

The transferof shares fromaPanamanianentity thatare registeredwith theNationalSecuritiesCommissionthroughanauthorizedstockexchangeisexemptfrompaying capital gains tax even if the entity obtains gross Panama-sourceincome. Therefore, by selling shares through a stock exchange, the transfer is exempt fromcapitalgains tax.ThemergerandreorganizationofPanamanianentities registeredwith theNationalSecuritiesCommissionandalsowith thestock exchange involved in the transfer of shares are also exempt from capital gainstaxiftheycomplywithcertainspecificrequirements.

2.7 Filing Returns and Payment

InthecaseofJuridicalPersonsorCompanies,taxreturnsarefiledbetweenJa-nuary 1 and March 30, with a maximum extension of 30 days to April 30. Failure tofilewithinthatperiodcarriesasinglefineofUSD500.00.

The dates for payment of taxes are spread out during the year as follows:Tax Payment DateIncome Tax (for the tax period) March 31IncomeTax(estimated) June30,September30,December31BusinessLicense(OperationsNoticeTax) March31Complementary Tax June 30

3. Value Added Tax (VAT) or Goods and Services Transfer Tax (ITBMS)

TheITBMSisequivalenttoValueAddedTaxorsalestaxinothercountries.Thistax applies to imported goods, products sold or services provided in Panama. Theimporter,sellerorserviceproviderpaysthistax,whichiswhythemajoritysimply add this tax on to the price so that it is paid by the consumer.

3.1 Tax Rate

On July 1, 2010, the ITBMS went up from 5% to 7%. Some of the highest rates are for the sale of alcoholic beverages (10%), tobacco products (15%), and spe-

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cificservices,suchasaccommodationservices(10%).Exemptionsfromthistaxincludetransactionsconductedinfreetradezones,generationanddistributionofelectricity,andthetransportationofcargoandpassengersbysea,landorair.

3.2 Filing Returns and Payment

ITBMSReturnsmustbefiledandpaidmonthlywithinthefirst15daysofthemonthfollowingthemonthforwhichthereturnwasfiled.

4. Social Security ContributionsEmployers and employees pay social security taxes when the employee is paid. At the moment, employers pay 12.2% and employees pay 9.75%.

Employers areunder theobligation towithhold apercentage fromeachem-ployee’s paycheck for income tax and social security tax. Failure to withhold these amounts and pay them into the Social Security Fund will give rise to sur-charges,finesandevencriminalcharges.Thereisalsoanoccupationalhazardpremium that is paid to the Social Security Fund for perceived hazards involved inthejob,whichispaidbytheemployer.

5. Other taxesStamp duty may apply based on the value of certain documents, such as contracts.Banks inPanamaandsomefinancial institutionspayanannual taxbasedonthetypeofinstitutionortotalassets.Thereisa5%taxleviedontheissuingofspecificinsurancepolicies.

Regulatedindustries,suchasfreeandsubscriptiontelevision,telecommunica-tions,generationofelectricity,banks,andinsuranceandreinsurancecompanies,payanannualregulatingfeecalledtasa(charge),uptoalimitpermittedbylaw.

Business License or Operations Notice Tax

AllpersonsandentitiesengagedincommercialactivitiesintheRepublicofPa-namamustobtainabusinessoperationspermit (OperationsNotice),which isissued by the Ministry of Commerce and Industry. The annual tax for the permit isequalto2%ofthenetvalueofthecompanyuptoamaximumof$60,000.Companies established in special economic zones or development zones inside free trade zones pay a rate of 1% up to a maximum of $50,000.