Taxes for individuals and professionals in Panama

At what threshold does an individual pay income tax?

For professional fees and other ordinary income of an individual under the general regime, ISR starts when annual net taxable income exceeds B/.11,000. This base is obtained after applying allowable deductions.

The calculation is progressive. The first B/.11,000 retain the zero rate; the next bracket is taxed at 15 %, and 25 % applies only to the amount exceeding B/.50,000. For example, with B/.12,000 in net taxable income, ISR is B/.150.

The threshold is annual and applies to the taxpayer. Having several clients or activities does not create a B/.11,000 exemption for each one.

How to move from professional fees to net taxable income

When preparing the return, it is useful to separate three figures:

1. Income from the activity: professional fees and other income that must be recognised in the period.
2. Result after costs and expenses: what remains after deducting the activity’s expenditure.
3. Net taxable income: the tax base after excluding non-taxable income and applying legally allowable expenses, deductions and adjustments.

Professional expenses must be supported and connected with the production of taxable income. They may include office rent, services used for work, supplies or remuneration, subject to the relevant conditions. When an expense has both personal and professional use, the proportion attributable to the activity must be identified.

Personal deductions, such as certain medical or educational expenses, have their own requirements. It is useful to review them without mixing them with business expenses.

Members of the liberal professions may use cash-basis accounting without prior authorisation from the DGI, applying a consistent approach to income and expenses. The accountant must determine which amounts belong to the period being declared.

Examples of how much is paid

These calculations illustrate only the ISR liability. Advances, withholdings and credits may reduce the balance payable. Educational insurance and other obligations are determined separately.

Does a self-employed professional pay CAIR?

An individual practising on their own account is not subject to corporate CAIR. Their ordinary ISR is calculated using the table in article 700, unless a special regime applies.

CAIR is the Alternative Income Tax Calculation which, under the general regime, certain legal entities whose annual taxable income exceeds B/.1,500,000 must compare. With a corporate rate of 25 %, it is equivalent to 1.1675 % of that income.

If services are invoiced through a company, that entity’s regime must be reviewed. Civil professional partnerships made up of duly licensed professionals have particular rules. You can read more on this point in our guide to company taxes.

Educational insurance: why a payment may be due even when ISR is zero

For a self-employed person, educational insurance is generally assessed at 2.75 % of the applicable base. The DGI calculates that base by considering the corresponding income, exclusions and deductible costs and expenses.

The educational insurance base does not always coincide with net taxable income for ISR. The B/.11,000 allowance in the income tax table is not automatically deducted when calculating this contribution.

If the person also receives a salary subject to withholding, it must be identified separately to avoid duplicating bases or payments. Obligations to the Caja de Seguro Social require their own review according to affiliation, activity and the employment of staff.

When must a professional charge ITBMS?

The general threshold of B/.36,000 in annual invoicing is used to determine ITBMS taxpayer status for ordinary taxable activities. The activity, reference period and rules applicable when operations begin must be reviewed.

The general rate is 7 %. Some services are exempt, such as those related to human health, while others are subject to special conditions. An ITBMS exemption for a service does not mean its income is exempt from ISR.

Two different thresholds: B/.11,000 refers to annual net taxable income for individuals’ general ISR; B/.36,000 refers to the general invoicing threshold for ITBMS. High expenses may reduce ISR without removing the ITBMS obligation.

What estimated income is and how advances are credited

When filing a return for one year, it may also be necessary to estimate income for the following period. That estimate generates advances on ISR for that new period.

Under the general calendar, the three instalments fall due on 30 June, 30 September and 31 December. The estimate must be supported by the activity and tax rules; a reduction compared with the previous year may be subject to verification.

It is useful to budget for both items: the balance for the year being closed and the advances for the current year. Each payment must be applied to the correct tax and period.

When to file and when to pay

For an individual whose tax period ends on 31 December, the ordinary calendar distinguishes these dates:

These are the general statutory dates; official adjustments for non-working days or measures applicable to the period must be checked. An extension to file does not automatically extend the payment deadline.

Filing and paying are separate obligations. A return may show zero ISR and still be required because of other tax commitments. An employee who only receives income from one employer and is subject to the corresponding withholding may have a different filing treatment from a self-employed person.

Can a different regime apply to a small business?

Article 700-A of the Fiscal Code provides a regime for individuals considered micro, small and medium-sized entrepreneurs, registered with AMPYME and with annual gross income of up to B/.500,000. The conditions must be substantiated annually before the DGI.

That regime uses rates and criteria different from article 700. Applying it requires verification that the activity and taxpayer meet the requirements; it should not be assumed that every self-employed professional can use it solely because of their income level.

For that reason, the examples in this guide are expressly calculated under the general regime. Before choosing a structure or applying a special rate, it is useful to compare the full regime and its associated obligations.

What to have ready

1. Up-to-date RUC and tax information. Check that the registered activities and obligations match your current work.
2. Invoices and income records. Identify professional fees, withholdings, ITBMS and the period to which each transaction belongs.
3. Supporting documents for expenses and deductions. Separate work expenses, personal expenses and authorised personal deductions.
4. Advances and withholding certificates. Keep the supporting documents needed to substantiate payments when settling the year’s tax.
5. Review of additional activities. If you receive salary, rental income or dividends, or sell shares or real estate, each item must receive its appropriate treatment.

Individual practice of a liberal profession may be exempt from the notice-of-operation requirement. That exception does not in itself remove tax, invoicing or registration obligations.

Questions on this topic

Read the answers in the firm’s catalogue.

• If I earn B/.11,000 a year, must I pay ISR?
• If I exceed B/.50,000, do I pay 25 % on everything?
• Can I have zero ISR and still be required to charge ITBMS?
• Does receiving payment from a foreign client make the income foreign-source income?
• Does this table apply to selling shares or real estate?

Continue reading

• What taxes a company pays in Panama
• Real estate sales: 2 % ITBI and a 3 % advance

How we can help you

If you need to apply these rules to your situation, learn about the scope of our services and arrange your consultation.

• DGI procedures and exemption applications in Panama