TERRITORIALITY AND RESIDENCE
Panama’s tax system is based on a territorial concept of income. Citizens and residents are taxed on income earned from Panama sources. Nonresidents are taxed only on income from Panama sources, and the tax on any type of income paid to a nonresident must be withheld by the payer. Citizens, residents, and nonresidents are not taxed on exempt income (i.e., interest
on Panamanian government securities and interest on savings accounts and time deposits maintained with banks established in Panama).According to this territorial principle of taxation, compensation received in respect of duties performed wholly overseas will not be subject to Panama individual income tax. The system for determining this exempt income is to consider income related to the days spent outside Panama on job-related duties as foreign source, so that it is not liable tax.
GROSS INCOME
Employee gross income/An employee is taxed on compensation earned for work done in Panama, regardless of where payment is made or received.Compensation includes salary, premiums, profit distributions, living allowances, housing allowances, tax reimbursements, benefits-in-kind, house car, retirement benefits, and any other compensation-in-kind. There is no concession to a foreign employee.
Capital gains and investment income/Capital gains on the sale of real estate located in Panama and on securities not registered with the National Securities Commission are taxable.
Capital gains arising from the sale of real estate are subject to a specific tax rule. Capital gains from the sale of shares, bonds, and other securities represent an integral part of the taxpayer’s gross income, unless these securities are exempt.
Investment income from a Panama source, such as dividends, is subject to a 10% withholding tax. However, dividends on bearer shares are subject to 20% withholding tax.
DEDUCTIONS
Business deductions/Unreimbursed items such as moving expenses,
business-connected travel expenses, and business entertainment expenses are not deductible against the employee’s compensation income.A fixed allowance (representation expenses) can be given to employees as a part of salary. This allowance is considered to be gross taxable income, and the taxpayer may deduct 25% of this allowance as expenses up to a maximum of B/.6,000 per year. Representation expenses are not subject to
social security and educational insurance taxes for either the employee or the employer.Nonbusiness expenses/Interest paid on mortgage loans for homes or for home improvements on residences located in Panama is deductible; the maximum deduction allowed is B/. 15,000 annually, provided the interest payment does not classify as preferential interest for new homes. Interest paid
on loans for financing education is deductible if duly documented. The educational insurance tax (see below) is deductible. Medical expenses are deductible, provided they were incurred in Panama and are duly documented. Donations to local educational and charitable institutions are deductible, provided the deductions are authorized by the law establishing such institutions or by the Income Tax Department. Dues paid to nonprofit associations or organizations in Panama are also deductible expenses.Personal allowances/An individual who is not married is entitled to a personal exemption of B/. 800; married couples filing a joint return are entitled to an exemption of B/. 1,600. An additional exemption of B/. 250
is granted for each dependent. These exemptions are applicable in determining taxable income.
TAX CREDITS
No tax credits are allowed for income taxes paid to foreign countries.
OTHER TAXES
Social security taxes/Social security tax is assessed at a rate of 7.25% on wages and other compensation paid, including compensation-in-kind. However, compensation-in-kind from the employer is subject to social security tax. There is no maximum limit on the taxable amount.Educational insurance tax/Educational insurance tax is assessed at the
rate of 1.25% on salaries and wages paid. There is no maximum limit on the taxable amount.
Local taxes on income/There are no local taxes on income.
Tax administration
Returns/Husbands and wives can file joint returns. Joint filing is not advantageous if both spouses earn separate income, because the tax rates are graduated. The only advantage of filing a joint return for a couple with a single source of taxable income is that in a joint return, there is an exemption of B/. 1,600, while in a single return, the exemption is
B/. 800.All taxpayers, except employees having only one source of income from wages, salary, or other remuneration for personal services and whose monthly income tax is deducted by the employer, must file a tax return on a calendar-year basis.
Employees having only one source of income from personal services who want to take advantage of nonbusiness expen
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