4. Taxation
A. Introduction And Developments
Panama's taxation system is mainly territorial inasmuch as,
generally speaking, only income earned from Panama sources or in
respect to assets located in Panama is taxed. Income that is not
derived from activities carried out in Panama is not subject to
taxation. This territorial principle partially accounts for the
successful development of Panama as a base for international
operations.
Corporations, branches of foreign corporations, limited
liability companies, private interest foundations and any other
entity considered as a juridical person by law, are subject to a 25
per cent income tax. In the case of trusts, the trustee is deemed
the taxpayer and the income tax rate applicable to the trust is
generally that applicable to juridical persons since virtually all
trustees are juridical persons. Income derived from offshore
activities is not subject to income tax for trusts, private
interest foundations and corporations. No tax returns are required
to be filed by trusts, private interest foundations or corporations
carrying out activities exclusively outside Panamanian
territory.
B. Tax System: General Concepts Of Tax
Regime
I. International Tax Matters
Since 2009, Panama has negotiated treaties for the avoidance of
double taxation with Mexico, Italy, Belgium, Barbados, The
Netherlands, Qatar, Spain, France, Luxembourg, Portugal, South
Korea, Singapore, Ireland and Czech Republic. Panama has ratified
the tax treaties with Mexico, Barbados, Portugal, Qatar,
Luxembourg, Spain, The Netherlands, Singapore, South Korea and
Italy. Nonetheless, only the tax treaty with Mexico is in force as
of 2011. The rest of the treaties ratified would be in effect as of
1 January 2012.
Double taxation treaties generally include rules concerning,
among other things, the determination of the tax residency of
persons, the allocation of the taxing authority of various taxable
events among the treaty parties and the treatment afforded to taxes
paid in the other treaty party. The tax treaties also provide for
reduced income tax withholding rates on payments from Panama to the
treaty countries.
Furthermore, in June 2010 Panama amended the Tax Code to include
provisions regarding the formation of international treaties for
the avoidance of double taxation.
Finally, Panama has negotiated, signed and ratified a tax
information exchange agreement with the US, which took effect from
18 April 2011.
Panama does not impose foreign exchange controls.
Ii. Taxation Of Trusts
Tax treatment for trusts whose assets are located outside of
Panama differs from that of trusts with local assets. If trust
assets are located abroad, or consist of monies deposited in trust
by settlors whose income is not taxable in Panama, or if the trust
assets comprise shares or securities of any kind issued by
companies whose income does not derive from Panamanian sources,
capital gains and income of any kind derived from such assets are
exempted from all taxes, assessments, fees or charges, even if such
monies, shares or securities have been deposited in the Republic of
Panama. In such cases, no capital gains tax is levied on the
settlor when assets are transferred to a trustee to be held in
trust. In general, the same rule applies to private interest
foundations.
In turn, taxation of trusts constituted over assets located
within Panama must be analysed from at least three different
perspectives: the constitution and the transfer of the assets to
the trustee, the administration of the trust assets by the trustee
and the distribution of the trust assets to the beneficiaries. From
the first perspective, the transfer of the assets by the settlor to
the trustee is subject to the transfer taxes that would normally
apply to transfer of the relevant assets between ordinary parties.
Notwithstanding, no transfer tax would be levied on transfers made
by the settlor to the trust, provided that the trust is created as
collateral of indebtedness or other obligations.
Second, once the trust has been constituted, any income
generated by trust assets located or invested in Panama during the
life of the trust is subject to the same income tax rates
applicable to the relevant trustee.
Finally, any transfer made by the trust to the beneficiaries of
assets located within Panama would be subject to the ordinary
transfer taxes. Notwithstanding, no transfer tax applies to the
transfer of assets made by a trustee of a collateral trust to the
settlor once the secured obligations have been paid and discharged
in full by the relevant borrower.
The distribution of assets located in Panama by a private
interest foundation to its beneficiaries is not subject to transfer
taxes if the transfer is made by the foundation to the parents,
children or spouses of the founder of the foundation.
Beneficiaries, wherever located, are not taxable when not in
receipt of income.
Iii. Taxation Of Estates
There is no estate tax in Panama.
Iv. Other Taxes
Other taxes that could potentially apply to a trust depending on
its activities or the assets held by the trust are the value added
tax applicable on the sale or transfer of any tangible chattel
properties and rendering of services, import duty, immovable
property tax, immovable property transfer tax, commercial and
industrial licences tax, stamp duty and others.
V. Estate-planning Issues
Estate-planning structures (trusts and private foundations),
combined with Panama corporate entities and/or foreign instruments
or offshore entities, are commonly used within and outside Panama
for wealth management, estate-planning and asset protection.