If you live in Panama or plan to move soon, you might be wondering about the tax environment in the country. In this article, we will share some information related to personal income taxes.
Tip: if you’re looking for information about property taxes, check out our detailed explanation.
Besides beautiful beaches, modern infrastructure, and a great healthcare system, Panama offers territorial taxation; meaning, income generated outside of the country is exempt from income taxes, something which many expats find as an advantage.
What personal income is taxable?
No matter what residency program you choose to use, taxable income in Panama includes any income generated only from business activities in Panamanian territory. Unlike the American and European taxation system, Panama will tax you only on the revenue generated from Panamanian sources.
This includes income from local wages, professional services, commercial activities, flipping real estate, profit from selling stock, among others. Dividends are not subject to Panamanian income taxes, since they are subject to a 10% tax before distribution.
Some sources of income are not taxed. These include interest on Panamanian government securities, interest on savings accounts, and interest on certificates of deposit / guaranteed investment certificates with banks established in Panama.
Personal Tax rates in Panama
Individuals who earn less than USD $11,000 per year don’t pay income tax. Earnings between USD $11,000 and USD $50,000 pay an income tax rate of 15%. Income higher than USD $50,000 pays a 25% rate.
Filing income taxes
Employees with a job in a Panamanian company – who are subject to deductions in their paystub – do not need to file income tax returns, unless they also carry other business activities outside their employment. All other cases, such as professional services, are required to file income tax returns.
By law, personal income taxes must be filed in Panama the following calendar year by March 15th. It is possible to request a 30-day extension at no additional cost. Filing personal income taxes after April 15th results in fees and penalties depending on your income.
The process to file income taxes requires the assistance of an accountant. All the process is digital using the Panama eTax platform.
You can take advantage of certain deductions when filing income taxes, similar to the process in North American or European countries. For instance, professional services are allowed to deduct business-related expenses.
The law entitles individuals to a basic deduction of USD $800 and USD $250 for each dependent. Individuals and couples are also allowed to deduct mortgage interest paid on their primary home up to USD $15,000 yearly. Also, interest payments for student loans in Panama, under the name of the taxpayer or his dependents, are fully deductible. Health insurance premiums are also deductible.
While every situation is different, a certified accountant will help you navigate and take advantage of the deductions available by law.
Panama tax residency certificate
If you obtain Panamanian permanent residency you might be interested in obtaining your tax residency certificate. The purpose of this certificate is to prove to other countries your tax status as a resident of Panama.
The certificate can also be used to avoid double taxation by citizens of countries that have conventions with Panama such as Mexico, Spain, France, the UK, Germany, among others.
One way to qualify for a tax residency certificate is by proving that you spent 183 days or more in one calendar year in Panama. Usually, the requirements to request the certificate include:
- Notarized full copy of passport
- Proof of address in Panama
- Proof of economic activity that generates income in Panama
- Proof of residency status
- Details of a tax treaty to be applied
- Tax year of the request of the certificate
Obtain the right legal advice
Panama offers many immigration programs. Reach out to our office to discuss your situation and identify the right path to obtain Panamanian permanent residency. Likewise, Kraemer & Kraemer can provide you with tax advice and help you connect with a reputable accountant in Panama. Contact us today or send us a note at email@example.com.