Panama is known for its favorable tax system, which attracts many foreign investors and expats to the country. In this article, we will explain how the taxation system works in Panama and what expats need to know about taxes in the country.
Taxation System in Panama
Panama operates a territorial tax system, which means that taxes are only levied on income earned within the country. Foreign-source income is not subject to taxation in Panama. Individuals and companies are subject to income tax on their Panamanian-sourced income.
Double Taxation Agreements
Panama has signed double taxation agreements with several countries, including the United States, the United Kingdom, and Canada. These agreements aim to avoid double taxation on income earned in both Panama and the other country. They also provide relief from withholding taxes on dividends, interest, and royalties.
Main Taxes for Expats
Income Tax
Panama has a progressive income tax system with rates ranging from 0% to 25%. The income tax rates and thresholds are updated annually. The tax year in Panama runs from January 1st to December 31st.
Social Security Contributions
Employers and employees are required to make social security contributions in Panama. The employer’s contribution is 12.25% of the employee’s salary, while the employee’s contribution is 9.75% of their salary.
Property Tax
Property tax is levied on real estate in Panama. The tax rate is 2% of the cadastral value of the property. However, properties worth less than $30,000 are exempt from property tax.
Value Added Tax (VAT)
Panama imposes a value-added tax (VAT) on the sale of goods and services in the country. The standard VAT rate is 7%, but some goods and services are subject to a reduced rate or are exempt from VAT.
Special Tax Breaks for Expats
Panama offers several tax incentives to attract foreign investors and expats to the country. For example, qualified investors can receive a 5- to 10-year tax exemption on their income from foreign sources. There are also tax exemptions for retirees, including a waiver of property tax and import duties on household goods.
Filing a Tax Return in Panama
Individuals and companies are required to file a tax return in Panama if they have Panamanian-sourced income. The deadline for filing a tax return in Panama is March 15th of the following year. Expats can file their tax returns online or by visiting a tax office in person.
Tax Exit Procedures
Expats who are leaving Panama to move abroad need to follow certain tax exit procedures. Firstly, they need to notify the relevant authorities of their departure and provide details of their new address abroad. They should also settle any outstanding tax liabilities before leaving Panama.
Panama offers a favorable tax system for foreign investors and expats, with several tax incentives and double taxation agreements in place. While income tax rates are relatively low, expats should be aware of social security contributions, property tax, and VAT in Panama. Expats who are leaving Panama to move abroad should follow the tax exit procedures and settle any outstanding tax liabilities before leaving the country. By understanding the taxation system in Panama, expats can ensure they are complying with their tax obligations and maximizing their tax benefits in the country.