Panama Tax: Panama enacts tax reform

Panama has introduced a tax reform via Law No. 49 of 2009 that includes major changes to the tax system, such as an extension of the dividend tax to apply to dividends paid out of foreign-source profits and those paid by companies in a Panamanian free zone. The tax reform, which became effective on 18 September 2009, is designed to increase the revenue accruing to the government and address the unequal distribution of wealth in the country.


Dividend Tax and Complementary Tax

Law No. 49 extends the 10% dividend withholding tax to dividends paid out of foreign-source profits and dividends paid out of export profits. Now, all companies that have a "Notice of Operations" are required to withhold a 10% tax on dividends paid out of domestic profits and a 5% tax on dividends paid out of foreign-source profits and dividends paid out of export profits. Companies located in a Panamanian free zone must pay a 5% dividend tax on the distribution of profits, regardless of where the dividends are sourced. Before the reform, the distribution of foreign-source profits was exempt.

A 2% retained earnings tax (an advance payment of the tax on dividends) is imposed on profits distributed by companies established in a free zone. Where no dividends are paid during a year or if those paid are less than 40% of taxable income from operations, the retained earnings tax must be calculated and paid at the time the Panamanian income tax return is filed. For regular companies, the retained earnings tax is currently levied at 4% of Panamanian-source profits and can be recovered when the actual distribution is made. A 2% complementary tax is set on profits distributed by companies established in a free zone.

Profits derived from storage and warehousing activities, leases and subleases, and internal transfers of goods and cargo in the Colón and other free zones are subject to the dividend withholding tax and the complementary tax (i.e. 5% and 2%, respectively).

Income from commissions and services rendered to juridical persons or individuals within the Colón and other existing free zones (or future zones), such as income from storage and warehousing activities, leases and subleases and the internal transfers of goods and cargo, are considered local operations and therefore subject to income tax at a rate of 30% and alternative minimum tax (30% on 4.67% of taxable income); in other words, the provider of such services will be subject to tax.

Law No. 49 also provides that retained earnings in a fiscal period and capitalized in any subsequent fiscal period are subject to the dividend tax and the complementary tax.


Franchise tax

Panama levies an annual franchise tax of PAB 300 on corporations and private interest foundations. Law No. 49 extends the reach of the annual corporate franchise tax to limited liability companies, as well as any other foreign and national juridical persons, except for nonprofit associations.

The reform measures increase the penalty for failure to pay the franchise tax. An entity that fails to pay the franchise tax for 10 years will be deemed to be dissolved for a period of three years. The company will be able to be reinstated by paying the tax due, as well as a fine of PAB 1,000, but, if the company fails to pay the tax by the end of the three-year period, the Panamanian Public Registry will have the power to cancel the company's registration.


Notice of Operations tax

Under Panamanian law, all commercial and industrial businesses must have a Notice of Operations to engage in business, unless they are specifically exempt. An annual license tax is levied at a rate of 2% of a company's net worth, up to a maximum amount. Law No. 49 increases the maximum amount payable from PAB 40,000 to PAB 60,000 and provides that companies operating in the Colón or other free zones, except for licensed multinational headquarters companies and companies operating under special regimes relating to international awards for contractor selection (e.g. the Special Economic Area Panama Pacific-Howard), must obtain a Notice of Operations. Such companies will be subject to an annual license tax of 1% on the capital of the company (subject to a minimum amount of PAB 100 and a maximum of PAB 50,000).


Capital gains tax

Law No. 49 introduces a new mechanism for ensuring that tax is paid on capital gains derived from the transfer of real property. A 3% withholding tax, which will operate as an advance payment of the capital gains tax, will be levied on the higher of the sales price or the value of the property. If the gain on the transfer is higher than the advance tax paid, the taxpayer may set that amount off against other taxes due.


Sales tax/VAT

Law No. 49 makes several changes to Panama's sales tax/VAT (ITBMS) law. The following transactions now fall within the scope of the 5% ITBMS:
- Commissions from banking and financial services, the transfer of shares and negotiable instruments and property and real estate brokerage;
- Professional services provided in the Panamanian territory to persons domiciled abroad; and
- Legal services provided to international trading ships registered in the merchant navy.

The following services are exempt from ITBMS:
- Leases and subleases of residential property where the contract has a term of less than six months;
- Freight;
- Commercial land-line telephones;
- Commissions earned by travel agents; and
- Cargo loading and unloading operations, transfers in or between ports and ancillary services rendered to cargo in ports, as well as repairs, maintenance, cleaning and ancillary services rendered to vessels in transit in territorial waters.

Export services are no longer exempt from ITBMS.


Miscellaneous

- Financial institutions must pay an annual tax equal to 2.5% of their capital as at 31 December each year. Law No. 49 increases the top amount payable from PAB 12,500 to PAB 50,000.
- Insurance tax is levied on premiums for the granting of bonds issued by an insurer. Law No. 49 extends the reach of the additional tax of 5% levied on gross premiums paid to insurance companies to premiums paid for the granting of bonds issued by an insurer.
- Non-profit associations are required to file an annual consolidated report of all donations received to the Ministry of Economy and Finance within 90 days following the end of the calendar year.