Panama · Tax guide
What taxes a company pays in Panama
Tax depends on the activity, the source of income and the applicable regime. This guide explains what the company pays, when it withholds tax from its shareholders and how each item is calculated.
By Lic. Carlos Quirós V., lawyer, professional licence 15033.
Updated on .
In this guide
First: what activity does the company conduct?
The starting point is to identify where each income item comes from. Panama applies the territoriality principle: under the general regime, ISR applies to Panamanian-source income. The location of the client or the bank account receiving payment does not in itself determine where that income was generated.
A company may have a local business, operate abroad, hold investments or own real estate. Each situation produces different obligations. For example, a company that rents out a house in Panama receives income requiring tax analysis, even if its owner lives outside the country.
If it only holds an asset that produces no income and carries out no taxable transactions, it may have no ISR liability for that period. Even so, it retains the corporate obligations applicable to it; and the property may have its own tax, subject to its exemptions.
How a company’s income tax is calculated
The general corporate rate is 25 % of net taxable income. To arrive at that base, taxable income is identified, allowable costs and expenses are deducted and the relevant tax adjustments are applied. An accounting profit may change when preparing the return because certain expenses are not deductible.
The company must be able to support its expenses and demonstrate their connection with the activity generating taxable income. Shareholders’ personal expenses require separate treatment.
The B/.11,000 allowance for individuals does not carry over to a company under the general regime. Special regimes exist, including those for certain small businesses, and must be reviewed before applying 25 %.
What CAIR is and when it applies
The Alternative Income Tax Calculation (CAIR) is a second method for determining ISR. Under the general corporate regime, it is required when annual taxable income exceeds B/.1,500,000. The threshold refers to income before expenses are deducted.
The company compares the tax calculated on its net taxable income with the tax resulting from CAIR and, unless non-application is available, pays the higher amount. For CAIR, a base equivalent to 4.67 % of total taxable income is calculated, and the relevant corporate rate is applied to that base.
With a 25 % rate:
CAIR = taxable income × 4.67 % × 25 %
= taxable income × 1.1675 %.
Once the threshold is exceeded, the formula considers all taxable income counted for CAIR. Exempt, non-taxable and foreign-source income are separated under the applicable rules.
Non-application may be requested from the DGI when CAIR produces a loss or an effective rate higher than the applicable ISR rate. Supporting evidence and timely filing are required; merely selecting a preference in the return is not enough. Receipt of the application does not amount to approval either.
An individual practising on their own account is not subject to this corporate CAIR. Civil professional partnerships and sectors with special rules require a review of their specific regime.
What happens when the company distributes profits
After the company’s ISR is calculated, distributing profits to shareholders may give rise to dividend tax. For companies subject to this obligation, the general rates for registered shares or ownership interests are:
- 10 % on distributed Panamanian-source profits.
- 5 % on distributions of foreign-source, export and certain exempt income specified by law.
It must be checked whether the entity is required to withhold because of its notice of operation or because it generates taxable income in Panama. There are also particular rules for special zones and treaties. This explanation concerns registered shares or ownership interests. If the company’s historical documentation mentions bearer shares, its legal status and compliance with the applicable legal regime must be reviewed before determining the tax effects.
If profits remain in the company
Under the general regime, if less than 40 % of net profit after ISRis distributed, the complementary tax is 10 % of the difference up to that threshold. With no distribution, it equals 4 % of that profit. It is credited against dividend tax when applicable.
For profits whose distribution is taxed at 5 %, the threshold is 20 % and the complementary tax is 10 % of the difference; without a distribution it equals 2 %. The source of profits must be separated and the applicable exemptions reviewed.
ITBMS: the tax charged on taxable transactions
The general ITBMS rate is 7 %. For ordinary taxable sales and services, the general annual invoicing threshold is B/.36,000, subject to the rules for determining taxpayer status. There are also exempt activities and special rates.
The settlement considers ITBMS collected on transactions and allowable tax credits for purchases and expenses connected with the activity. A company may have ISR and also an obligation to charge and declare ITBMS.
Annual franchise tax, notice of operation and other obligations
The company’s annual franchise tax
A company’s general annual franchise tax (tasa única) is B/.300, even when it is inactive, unless an exemption applies. Resident-agent fees are an additional, separate professional cost.
Depending on the half-year in which registration takes place, ordinary due dates are 15 July or 15 January of the following year. An inactive company must also retain its accounting records and comply with the information obligations applicable to it.
Notice-of-operation tax
Where applicable, there is an annual tax calculated on the business’s tax capital. The general rule is 2 %, with a minimum of B/.100 and a maximum of B/.60,000, subject to exemptions and special regimes. That base requires an accounting calculation; it should not be confused with sales, profit or necessarily the nominal capital in the articles of incorporation.
It must be checked whether the activity requires a notice of operation and whether any exemption applies, including the one for businesses with invested capital of less than B/.10,000. Initial issuance of the notice and its annual tax are separate items.
Depending on the activity
There may also be municipal, employment and social security obligations, property tax, withholding on payments abroad or other sector-specific charges. The review starts with actual operations, assets and the hiring of employees.
Share sales and real estate sales: two transactions that must be distinguished
When a shareholder sells their shares or ownership interests, the income belongs to the seller. In a transaction subject to the general capital gains regime, the rate is 10 % of the taxable gain; the buyer withholds 5 % of the total sale price as an advance.
For example, on a B/.100,000 price, the withholding would be B/.5,000. That figure does not in itself determine the seller’s gain: the tax basis of their investment must be known. The law provides for treating the advance as final tax or settling the gain and any excess, as appropriate.
The DGI states that the buyer must remit the withholding within ten days after the obligation to pay arises. Before completion, exemptions, documentation and any special rule governing the transaction must be reviewed.
If the company owns real estate, selling its shares and selling the property directly are distinct legal transactions. The structure must be analysed separately: a tax-free sale should not be promised, nor should the taxes on both transactions be automatically added together.
Annual return and income tax advances
For a company with a 31 December year-end, the ordinary deadline for filing the income tax return and paying the corresponding balance is 31 March of the following year, unless there is an official calendar adjustment or a particular rule.
Estimated income is used to advance ISR for the current period. The general due dates are 30 June, 30 September and 31 December. When the year’s tax is settled, advances and credits are compared with the final tax.
For example, if final ISR is B/.10,000 and there are B/.7,000 in applicable advances, the balance would be B/.3,000. The estimated return relates to the period following the one being declared and must be budgeted for separately.
An extension to file the return does not automatically postpone payment. Special tax periods and monthly obligations have their own calendar.
Do all companies pay 25 %?
25 % is the general rate. Article 699-A of the Fiscal Code establishes a regime for certain micro, small and medium-sized businesses with annual gross income of up to B/.500,000, registration with AMPYME and other requirements.
The conditions include having individual shareholders and registered shares or ownership interests, along with restrictions on affiliation, control and the splitting of businesses. Compliance must be substantiated annually before the DGI. This regime provides differentiated rates and an exemption from complementary tax.
An S.A. and an S. de R.L. require an analysis of their operations and the regime applicable to them. The company’s designation does not in itself demonstrate that a tax benefit exists.
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