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Principal Tax Contacts
Rafael Sayagués
+506 2208-9880 (resident in San José, New York: +1 (212) 773-4761 Costa Rica)
Costa Rica Mobile: +506 8830-5043
US Mobile: +1 (646) 283-3979
Efax: +1 (866) 366-7167
Email: rafael.sayagues@cr.ey.com
Luis Eduardo Ocando B.
Business Tax Services
Lisa María Gattulli
+507 208-0144
Panama Mobile: +507 6747-1221
US Mobile: +1 (305) 924-2115
Fax: +507 214-4300
Email: luis.ocando@pa.ey.com
+506 2208-9861 (resident in San José,
Mobile: +506 8844-6778 Costa Rica)
Meitner González
Email: lisa.gattulli@cr.ey.com
+507 370-1129
Email: meitner.gonzalez@pa.ey.com
International Tax and Transaction Services – International Corporate Tax Advisory
Luis Eduardo Ocando B.
Juan Carlos Chavarría
+507 208-0144
Panama Mobile: +507 6747-1221
US Mobile: +1 (305) 924-2115
Fax: +507 214-4300
Email: luis.ocando@pa.ey.com
+506 2208-9844
(resident in San José, Mobile: +506 8913-6686 Costa Rica)
International Mobile: +1 (239) 961-5947
Email: juan-carlos.chavarria@cr.ey.com
International Tax and Transaction Services – Transfer Pricing
María José Luna
+507 208-0147
Fax: +507 214-4301
Email: maria.luna@pa.ey.com
Paul de Haan (resident in +506 2208-9800 San José, Costa Rica)
Business Tax Advisory
Luis Eduardo Ocando B.
Email: paul.dehaan@cr.ey.com
+507 208-0144
Panama Mobile: +507 6747-1221
US Mobile: +1 (305) 924-2115
Fax: +507 214-4300
Email: luis.ocando@pa.ey.com
International Tax and Transaction Services – Transaction Tax Advisory
Luis Eduardo Ocando B.
+507 208-0144
Panama Mobile: +507 6747-1221
US Mobile: +1 (305) 924-2115
Fax: +507 214-4300
Email: luis.ocando@pa.ey.com
Antonio Ruiz
+506 2208-9822 (resident in San José,
Mobile: +506 8890-9391 Costa Rica)
Rafael Sayagués
International Mobile: +1 (239) 298-6372
Email: antonio.ruiz@cr.ey.com
+506 2208-9880
(resident in San José, New York: +1 (212) 773-4761 Costa Rica)
Costa Rica Mobile: +506 8830-5043
US Mobile: +1 (646) 283-3979
Efax: +1 (866) 366-7167
Email: rafael.sayagues@cr.ey.com
People Advisory Services
Luis Eduardo Ocando B.
+507 208-0144
Panama Mobile: +507 6747-1221
US Mobile: +1 (305) 924-2115
Fax: +507 214-4300
Email: luis.ocando@pa.ey.com
Ana Clement +507 370-1100
Mobile: +507 6780-9191
Email: ana.clement@pa.ey.com
A. At a glance
(a) For details, see Section B.
(b) The withholding taxes apply only to nonresidents. Nonresident companies are entities not incorporated in Panama.
(c) Certain interest is exempt from tax. See Section B.
(d) For details, see Section C.
B. Taxes on corporate income and gains
Corporate income tax. Corporations, partnerships, branches of foreign corporations, limited liability companies and any other entity considered a legal entity by law are subject to income tax on any profits or income generated in or derived from Panama.
Income that does not arise in Panama or is not derived from Panama is not subject to tax in Panama. However, dividends arising from foreign income that are distributed by Panamanian companies holding a Notice of Operation (formerly Commercial License) are subject to tax (for further details, see Dividends).
Corporate income tax rates. Income tax is assessed at a flat rate of 25% on net taxable income. For details regarding net taxable income, see Section C.
Taxpayers with annual taxable income greater than PAB1,500,000 are required by law to calculate the tax using two methods and pay the higher of the amounts calculated under these methods. This calculation must be included in their annual taxable income tax return. The following are the two methods:
• Applying the corresponding tax rate to the net taxable income
• Applying the corresponding tax rate to 4.67% of the total income
Headquarters Law. The Headquarters Law contains a special taxincentive regime for multinational companies that establish their headquarters in Panama (Multinational Headquarters [MHQ] regime; Sedes de Empresas Multinacionales (SEM) in Spanish).
Under the Headquarters Law, a headquarters is the office that renders services to its related parties.
Under the law, a headquarters may provide only specified services, including the following:
• Technical, financial and/or administrative assistance
• Financial and accounting services
• Logistics or warehousing services to the multinational group
• Marketing and publicity
• Plot or construction design
• Administration for operations in a specific or global geographic area of a business group company
• Electronic processing of any activity, including consolidations of business group operations
Under the Headquarters Law, the headquarters must belong to a multinational company with either regional or international operations or significant operations in the country of origin. To operate under the Headquarters Law, a license granted by the Commission of Licenses of the Multinational Companies of the Ministry of Commerce and Industry must be obtained.
Law No. 57, published on 24 October 2018, amended the MHQ regime. Companies granted a license must pay income tax in Panama on the net taxable income derived from the services provided at a rate of 5%. Panamanian taxpayers benefiting from services or acts rendered by MHQ companies must withhold 5% from the total sum to be paid if these services or acts were related to the generation of local income or the conservation of its source and if the payment is considered a deductible expense for the taxpayer.
Also, MHQ companies can claim a tax credit for the amounts withheld by the Panamanian taxpayers, as well as the tax effectively paid abroad for services rendered to nonresidents. However, the company must pay at least 2% of the net taxable income generated in Panama as a minimum income tax.
Likewise, MHQ companies must withhold 5% on 50% of the payments remitted abroad for services and acts received by nonresidents. The company also must withhold 5% on 50% of the interest, commissions and other charges generated by loans granted by a nonresident and used in Panama.
In addition to obtaining an MHQ license, companies must maintain an adequate number of full-time employees and incur an adequate amount of annual operational expenses, both of which must be adequate with respect to the type of business carried out by the companies, in order to apply the corporate income tax incentive. Also, companies must submit an annual report (within six months following the closing of the fiscal period of the MHQ company). Companies granted a license to operate under this regime are exempt from value-added tax (VAT). However, the VAT exemption applies only to the export of services. The VAT exemption does not apply to imports made by the headquarters or the sale or purchase of goods or services rendered in Panama.
The Headquarters Law also includes immigration aspects. For example, it clarifies that the salary received by an employee with an MHQ Permanent Personnel Visa is exempt from income tax, social security contributions and educational insurance in Panama. Employees with an MHQ Permanent Personnel Visa can opt for a permanent residence in Panama and keep working for a company with an MHQ license. However, these employees would be subject to income tax, social security contributions and educational insurance on the salary received by them.
Transfer-pricing rules apply under the regime.
Panama-Pacifico regime. Panama has established certain freetrade zones, which provide for an exemption from the general income tax (with the exception of certain rental income), as well as other imposts and duties, such as sales taxes, import duties, export taxes, and selective consumption taxes related to royalties on exports and re-export activities.
Law No. 41 of 2004 created the Panama-Pacifico (PP) Special Economic Zone. The law’s purpose was to create a special legal, tax, customs, labor, immigration and business regime, designed to encourage and ensure the free flow and movement of goods, services and funds in order to attract and promote investments and the generation of jobs and to make Panama more competitive in the global economy.
Law No. 66 of 2018 included relevant amendments to the PP regime by adding requirements for the recognition of income tax benefits for some activities. Also, companies under the PP regime dedicated to the categories listed below must comply with the following substance requirements:
• They must maintain an adequate number of full-time employees.
• They must incur an adequate amount of annual operational expenses.
Both of these requirements must be adequate with respect to the type of business carried out by the companies.
These companies must file an annual report within six months following the closing of the fiscal period of the company.
The following are the categories referred to in the above paragraph:
• Radio, television, audio, video and data signal linking
• Office administrative services
• Call centers
Movable assets. Capital gains derived from transfers of movable assets are subject to income tax at a reduced rate of 10%.
Real estate transfer tax. The sale of real estate located in Panama is subject to a 2% property transfer tax. The 2% property transfer tax rate is applied to the higher of the following amounts:
• Sales price set forth in the public deed of transfer
• The cadastral value of the property on the date of the acquisition, plus any increase in value derived from improvements, plus 5% per year computed on the sum of the cadastral value and the improvements
To execute the deed of transfer before a Notary Public, the seller of real estate must submit evidence to demonstrate that the corresponding transfer tax and capital gains tax have been paid.
The real estate transfer tax is not imposed on the first transfer of new houses and commercial establishments if the transfer occurs within the two-year period after the occupation permit is issued.
Sales of homes and business premises by taxpayers engaged in real estate business. For the sale of home properties by taxpayers in the real estate business, the following rates are applied to the higher of the total value of the transfer or the land value.
The rate imposed on taxpayers in the real estate business for sales of new business premises is 4.5%.
The above rates apply if building permits are issued on or after 1 January 2010.
Ordinary taxpayers that are not engaged in the trade or business of the purchase and sale of real estate. For ordinary taxpayers that are not engaged in the trade or business of the purchase and sale of real estate, tax is calculated at a rate of 10% on taxable income. This income is not taken into account in determining the taxpayer’s taxable income, and the taxpayer may not deduct the transfer tax or transfer fees incurred.
Advance income tax of 3% must be paid on the greater of the total value of the transfer or cadastral value.
The above tax can be considered as final payment or the surplus can be reimbursed if the amount of the tax exceeds 10% of taxable income.
Administration. The calendar year is the fiscal year. However, under certain circumstances, a special fiscal year may be requested from the Panamanian tax authorities. Businesses earning income subject to Panamanian tax must file annual income tax returns even if the net result for the period is a loss. Corporations having no Panamanian taxable income or loss are not required to file income tax returns. Tax returns are due 90 days after the end of the fiscal year. The regulations provide for an extension of time of up to one month to file an income tax return if the corporation pays the estimated tax due. For corporations, the late filing
Interest income derived from the following investments is exempt from withholding tax:
• Savings and time deposits held in Panamanian banks
• Panamanian government securities
• Securities issued by companies registered with the National Securities Commission, if the securities were acquired through a securities exchange established to operate in Panama
• Interest and commissions paid by banking institutions in Panama to international banks or financial institutions established abroad, in connection with loans, bankers’ acceptances and other debt instruments
• Interest paid to official or semiofficial institutions of international bodies or foreign governments
• Interest paid to foreign investors, if the capital on which such interest is paid is exclusively intended for housing projects for people of low income
For a loan granted by a domestic bank or related Panamanian party, no withholding tax is applicable, because the financial services payment is taxed in the lender’s annual income tax return.
Except in the case of financing, if a local company does not take a deduction for an expense, no withholding tax applies.
Foreign tax relief. Because Panama taxes only income sourced in Panama, regardless of where payment is received or the residence of the taxpayer, no credit or deduction is available for any foreign taxes paid, except in international transport activities.
C. Determination of trading income
General. Taxable income or revenue includes all income derived from business activities in Panama less expenses incurred wholly and exclusively in the production of taxable income or the conservation of its source.
Net taxable income is the difference or balance that results on deducting the following from gross income or general earnings:
• Foreign income
• Exempt income
• Deductible costs and expenses
Revenues must be recognized in the year in which they are earned. Construction companies may recognize long-term contract revenues either by the percentage-of-completion method, percentageof-invoicing method or the completed-contract method. The installment-sales method of recognizing revenue is not permitted by the Panamanian Fiscal Code.
Earnings derived from the following activities are not considered to be Panamanian source:
• Invoicing by an office established in Panama for sales of merchandise or goods for amounts greater than cost, provided the merchandise never enters Panama
• Directing by an office established in Panama of transactions that are completed, consummated or take effect outside Panama
• Distributing dividends or profits derived from income not generated in Panama, including income derived from the two activities noted above, to the extent that the company distributing dividends does not hold a Notice of Operation
All expenses incurred wholly and exclusively in the production of taxable income or in the conservation of its source are allowed as deductions for income tax purposes, regardless of where the expense is incurred, provided that the corresponding tax is withheld (if applicable). Expenses of one tax year may not be deducted the following year, except those which, by their nature, cannot be determined precisely in the current tax year.
Interest is a deductible expense if it is incurred on loans or credits necessary for the production of taxable income. If non-taxable interest income from savings accounts or certificates of deposit is earned, the only interest deductible is the excess of the interest expense over the non-taxable interest income. Royalties are deductible, except for those paid abroad by free-zone companies.
Inventories. Inventories may be valued by using the first-in, firstout (FIFO), last-in, first-out (LIFO) or average-cost methods. However, the Panamanian tax authorities may allow other methods. After a system of valuation is adopted, it may not be changed for five years.
Provisions. The only deductible reserves are those for depreciation, bad debts (1% of credit sales, up to 10% of total receivables) of entities other than banks and financial institutions and certain fringe benefits. Reserves for personal insurance and contingencies are not deductible.
Tax depreciation and amortization allowances. Depreciation allowances are permitted for capital expenditures incurred in the production of taxable income. Depreciation may be computed by using the straight-line, declining-balance or sum-of-the-years’ digits methods. Depreciation is computed over the useful life of an asset. The minimum useful lives are three years for movable assets and 30 years for buildings.
Startup expenses may be amortized over a period of five years. Improvements to leased properties must be amortized over the period of the lease. Purchasers of intangible assets, such as patents and goodwill, may claim straight-line amortization deductions for such assets when they derive income from such assets.
Relief for losses. Tax-loss carrybacks are not recognized under Panamanian law. Carryforwards of net operating losses are allowed. Taxpayers can deduct net operating losses over a period of five years following the year in which the loss is incurred. The maximum annual deduction is 20% of the relevant loss, but the amount of the deduction may not exceed 50% of the taxable income for the year.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax
Rate (%)
Value-added tax; tax on the sale or transfer of any chattel, services and imports of goods; certain goods and services are specifically exempt, such as medical services and fixed telephony that is not for commercial use 7
Notice of Operation (formerly Commercial and Industrial Licenses); paid annually on corporate capital (up to a maximum amount of PAB60,000)
Notice of Operation for companies operating under a free-trade zone regime; paid annually on corporate capital (up to a maximum tax of PAB50,000)
Municipal tax; based on the nature of the business activity and the amount of sales (up to a maximum tax of PAB3,000 a month) Various Social security contributions and education tax, based on wages or salaries;
Imports of jewels, cars, motorcycles, jet skis, boats (including sailboats), noncommercial airplanes, cable and microwave television services and mobile phones
E. Miscellaneous matters
Foreign-exchange controls. Panama does not impose foreignexchange controls.
Transfer pricing. Cross-border intercompany transactions conducted by Panamanian taxpayers are subject to transfer-pricing obligations if the transactions result in income, costs or expenses that are taken into account in the determination of taxable income.
The transfer-pricing rules are based on the arm’s-length principle established in the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
An annual statement of transactions (Form 930) with related parties must be submitted to the tax authorities within six months after the end of the fiscal year (if the fiscal year coincides with the calendar year, the deadline is 30 June). In addition, taxpayers must prepare a transfer-pricing study and make it available to the tax authorities.
Resolution No. 201-1937 of 2 April 2018 modified Form 930, “Transfer Pricing Information Return” (Version 1.0). The new form is Form 930, Version 2.0.
The changes include the following:
• The addition of new cells in the main tab of Form 930 related to the adjustments made in the related-party transactions analyses
• The addition of an “Intangible Annex” for reporting intangible transactions
• The addition of a “Comparable Companies Annex” for reporting the name, type, location and country of the comparables, as well as the selected profit level indicator and the financial information for each one of them
• A new section with “Questions related to the taxpayer” and “Questions related to the multinational enterprise,” in which some of the questions are related to the information required by Article 11 of Executive Decree 390, published on 24 October 2016
If Form 930 is not filed, a 1% fine capped at PAB1 million applies to the gross amount of the transactions with related parties.
Law No. 57 of 2018 contains provisions regarding the application of the transfer-pricing rules to transactions conducted by entities with an MHQ license. The law establishes that the transferpricing rules apply, starting with the 2019 tax year, to any relatedparty transaction that an individual or entity conducts with an MHQ license.
The transfer-pricing rules also apply to transactions conducted by companies with related parties that meet the following conditions:
• They are established in Panama.
• They are tax residents of other jurisdictions.
• They are established in the Colon Free Zone.
In addition, the transfer-pricing rules apply if the related parties operate in or under any of the following:
• The Oil Free Zone under Cabinet Decree 36 of 2003
• The PP Special Economic Zone
• The MHQ regime
• The City of Knowledge regime
• Any other current or future free zones or special-economic areas
Law No. 52 of 2018 contains provisions on the activities that individuals or entities with a call center concession may conduct. The law also includes provisions on applying transfer-pricing rules to transactions conducted by those entities.
The law establishes that, starting with the 2019 tax year, the transfer-pricing rules apply to any related-party transactions conducted by individuals or entities with individuals or entities that have a concession to provide call center services.
Although individuals and entities with a concession to provide call center services are exempt from income tax, the transferpricing rules also apply to transactions conducted by those individuals or entities with related parties that meet the following conditions:
• They are established in Panama.
• They are tax residents of other jurisdictions.
• They are established in the Colon Free Zone.
In addition, the transfer-pricing rules apply if the related parties operate in or under any of the following:
• The Oil Free Zone under Cabinet Decree 36 of 2003
• The PP Special Economic Zone
• The MHQ regime
• The City of Knowledge regime
state, a pension fund, an investment authority or any other institution or fund that is recognized as an integral part of the other state, political subdivision or local authority, as mutually agreed.
(g) The rate is reduced to 4% if the beneficial owner of the dividends is a company (other than a partnership) that owns at least 10% of the capital of the payer of the dividends.
(h) The rate is reduced to 5% if the beneficial owner of the dividends is a company (other than a partnership) that owns at least 40% of the capital of the payer of the dividends.
(i) The rate is reduced to 0% if the beneficial owner of the dividends is a company that owns at least 80% of the capital of the payer of the dividends (additional specific conditions apply).
(j) The rate is reduced to 5% if the interest is derived by a bank that is a resident of Barbados.
(k) The rate is reduced to 0% if the beneficial owner of the interest is a contracting state, the central bank of a contracting state, or a political subdivision or local entity of the contracting state or if the interest is paid to another entity or body (including a financial institution) as a result of financing provided by such institution or body in connection with an agreement concluded between the governments of the states.
(l) The rate is reduced to 0% with respect to the following:
• Interest paid to or by the state, a local authority or central bank
• Interest paid on sales on credit
• Interest paid by a financial institution to another financial institution
• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states
(m) The rate is reduced to 0% with respect to the following:
• Interest paid to the state, a local authority, central bank or a public financial institution
• Interest paid on sales on credit
• Interest paid to entities (including financial institutions) as a result of financing provided in relation to an agreement between the governments of the states
(n) The rate is reduced to 5% if the interest is derived by a bank that is a resident of Mexico.
(o) The rate is reduced to 0% with respect to interest paid to the state, a political subdivision or local entity of the state, the central bank or specific credit institutions.
(p) The rate is reduced to 0% with respect to the following:
• Interest paid to the state, a local authority or the central bank
• Interest paid on sales on credit
• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states
• Interest paid to pension funds
(q) The rate is reduced to 0% with respect to interest paid to the state, a political subdivision or local entity, or the central bank.
(r) The rate is reduced to 0% with respect to the following:
• Interest paid to the state or a political subdivision or local authority of the state
• Interest paid to specific credit institutions
• Interest paid on sales on credit
• Interest paid by a financial institution to another financial institution
• Interest paid as a result of financing provided in relation to an agreement between the governments of the states
(s) The rate is reduced to 0% with respect to interest paid to the government or to banks.
(t) The rate is reduced to 0% with respect to royalties including royalties for scientific works related to biotechnology industry.
(u) The rate is reduced to 3% with respect to royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment.
(v) The rate is reduced to 0% with respect to the following:
• Interest paid to or by the state, a local authority or central bank
• Interest paid on sales on credit
• Interest paid by a financial institution to another financial institution
• Interest paid to the state as a result of financing provided in relation to an agreement between the governments of the states
• Interest paid to pension funds
(w) The rate is 5% if the beneficial owner is a bank that is a resident of the other contracting state.
(x) The rate is reduced to 0% if any of the following circumstances exists:
• Interest arises in a contracting state and is paid to a resident of the other contracting state that is the beneficial owner thereof, and such interest is paid in connection with the sale on credit of merchandise or equipment.
• Interest is paid to the government of the other contracting state, including a political subdivision or local authority thereof, the central bank or a financial institution owned or controlled by such government.
• Interest is paid to a resident of the other state in connection with a loan or credit guaranteed by the government of the other state, including a political subdivision or local authority thereof, the central bank, or a financial institution owned or controlled by such government, if the loan or credit is granted for a period of not less than four years.
(y) The rate is reduced to 0% if any of the following circumstances exists:
• The beneficial owner of the interest is a contracting state, the central bank of a contracting state, or a political subdivision or local authority of such state.
• Interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of a contracting state.
• Interest is paid to other entities or bodies (including financial institutions) as a result of financing provided by such institutions or bodies in connection with agreements concluded between the governments of the states.
• Interest is paid to a pension fund established in the other contracting state to provide benefits under pension arrangements recognized for tax purposes in that other contracting state.
(z) See Section A.
(aa) The rate is reduced to 5% if the beneficial owner of the dividends is a resident of the other contracting state.
(bb) The rate is reduced to 5% if the beneficial owner of the interest is a resident of the other contracting state. The rate is reduced at 0% if any of the following circumstances exists:
• The beneficial owner of the interest is the government, a political subdivision or a local authority of the other contracting state.
• The interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of a contracting state.
• The interest is paid to financial institutions and other bodies as a result of financing provided by such institutions or bodies in connection with agreements concluded between the governments of the contracting states.
(cc) The rate is 15% if the beneficial owner of the dividends is a resident of the other contracting state. The withholding tax rate is reduced to 0% if either of the following circumstances exists:
• The beneficial owner of the dividends is a company that is a resident of the other contracting state and that holds directly at least 15% of the capital of the entity paying the dividends, and other requirements are satisfied.
• The beneficial owner of the dividends is a contracting state, a political subdivision or local authority thereof, or a pension scheme.
(dd) The rate is reduced to 5% if the beneficial owner of the interest is one of the following persons:
• An individual
• A company whose principal class of shares is regularly traded on a recognized stock exchange
• A financial institution that is unrelated to, and dealing wholly independently with, the payer
• A company other than those mentioned above, subject to conditions The rate is also reduced to 5% if the beneficial owner of the interest is a resident of the other contracting state and any of the following circumstances exists:
• The interest is paid by a contracting state or a political subdivision or local authority thereof.
• The interest is paid by a bank in the ordinary course of its banking business.
• The interest is paid on a quoted Eurobond.
The rate is reduced to 0% if any of the following circumstances exists:
• The beneficial owner of the interest is a central bank of the contracting state or any of its political subdivisions or local authorities.
• The interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of a contracting state.
• The interest is paid to other entities or bodies (including financial institutions) as a result of financing provided by such entities or bodies in connection with agreements concluded between the governments of the contracting states.
• The beneficial owner of the interest is a pension scheme.