Changes to Panama tax code

Subject: AMENDMENTS TO THE TAX CODE: LAW NO. 6
Speaker: Alvaro A. Aleman H. (Panama City
507-205-6018), Ana
Graciela Medina (Panama City 507-205-6000) and
Klenya M. Morales
(David - 775-3703): Icaza Gonzalez-Ruiz & Aleman,
Attys.

AMENDMENTS TO THE TAX CODE: LAW NO. 6
Recent reform of Law #6 amended the fiscal code of
the Rep. of
Panama.
Foreign income

Panama has a territorial tax code, meaning only
income generated in Panama is taxed. Income from foreign sources is not
taxed, and filing income tax forms is not required. So if you
are a pensionado and receive social security and/or other
income from the U.S., this income is not taxed in Panama. You do,
however, have to file U.S. income taxes.

An amendment to Article 694 of the fiscal code
retained this territorial system of taxation, but changed the way
Panamanians who receive foreign income are taxed. Prior to the
amendment, if an employ of a Panamanian company spent some of their
time working outside the country, they could exempt all their
foreign income. Now they must work more than 30% of the time outside
the country to get the exemption.

Corporations and Private Foundations
Annual franchise tax on Panamanian corporations and
private
foundations: At the time of founding, payment is
$250; after the
first year, payment is $300/year. Payment must be
made by July 15
if the entity was founded between Jan. and June 15;
by Jan. if
founded between July 16 and Dec. 31. The surcharge
for a late
payment is $50. If two payments are missed, there is
a $300
penalty. If there are no payments in 10 years, the
corporation is
dissolved. It is not known if this 10 year period is
retroactive
prior to 2005. A decision from the government is
pending.

Income-generating corporations: If the corporation
does not
generate income, it does not have to file a tax
return. If it does
generate income, the tax rate is 30%, unless the
income is less than
$200,000. This qualifies the corporation for a small
business tax
rate: The first $100,000 is taxed at 30%; the next
$100,000 is
taxed at the personal income tax rate (see below).

Personal income tax rates: The first $9,000 is
exempted; after
that, the tax is progressive. It is $4,705 on the
next $30,000.
The highest bracket is 27%. If gross income is
$60,000, tax is
calculated based on deductions and the net income,
or there is a 6%
tariff, whichever is higher.

Charitable deductions: Ceiling of 1% of taxable
income allowed, or
up to $50,000.

Capital gains from the sale of property or stock:
There are two
options depending on two factors:
1) If you owned the property less than 24 months, or
are a real
estate dealer, tax is based on the difference
between the amount of
sale, less the assessed value, less the cost of
improvements, less
the sale expenses; OR 2) You can pay 10% of the
capital gain.

If you owned the property more than 24 months, and
are not a real
estate dealer, you pay the 10% rate. There is also a
2% transfer
tax, which you can credit if you use the first
option, but not if
you use the second. If you sell two or more
properties in a year,
you are considered to be in the real estate
business, and you have
to take option #2.

Capital gains taxes calculated by option 1 are paid
at the time of
filing an income tax return (if you are required to
file). The 2%
transfer tax is paid at the time of sale. The 10%
tax is paid
within 30 days of the sale.

Property tax exemption changes
Tax exemption can apply to both purchase of an
existing home and to
construction of a new home. It does not apply to raw
land, only to
improvements. If you buy an existing home, the 20
year tax
exemption is probably already in effect.

Improvements whose construction permits have been
issued
before September 1, 2005 shall have twenty years of
exemption from
payment of the Real Estate Tax, counting from the
date on which the
occupation permit is issued, as long as the
registration of the
improvements in the Public Registry is made before
August 31, 2006.
Improvements whose construction permit is issued
as of (on
or after) September 1, 2005 are exempt from the
payment of the Real
Estate Tax from the date on which the occupation
permit is issued,
based on the following table:

1. Improvements for residential use. Note: The
term `improvements' includes new construction.:
Value of the improvements
Years of Exemption
Up to $100,000.00 15
From $100,000.00 to $250,000.00 10
More than $250,000.00 5

2. Other Improvements
Value of the improvements
Years of Exemption
Any value 15

The Panamonte Meeting book discusses this topic in
more detail.

Import/Export: There is no export tax, but income
from this
activity is taxable unless you operate from an
export processing
zone. This is a physically designated place (all are
around Panama
City), where goods are further processed and
exported. Income
generated from such activity is exempt from taxes.
Import companies
pay the same tax rate as corporations.

Interest on time deposits (e.g. Certificates of
Deposit): Tax
exempt.