A Guide to Personal Income Tax for Expats in Panama
We explain how the income tax in Panama works for foreign residents, and why this is considered one of the biggest tax draws in the country.
All over the internet, there are several expat youtubers, journalists and writers living in Panama that will tell you that the country’s income tax scheme is pretty convenient for them.
There’s also plenty of articles on the web talking about the perceived advantages of living in Panama as an expat while receiving income from other countries.
The thing is, there’s also a lot of misinformation, misunderstanding and even confusion around this subject. This article will try to explain it in a simple way.
It is true that many expats that come to Panama consider it an advantage that the income they generate outside of the country is exempt from income taxes. But it is also true that expats have the obligation to file their tax returns in Panama every year.
Below, we will explain how the income tax in Panama works for foreign residents, and why this is considered one of the biggest tax draws in the country.
What personal income is taxable?
Regardless of the residency program you choose, taxable income in Panama includes any income generated solely from business activities in the Panamanian territory.
Unlike the American and European tax system, Panama gives the advantage that it will tax you only on income generated from Panamanian sources.
This includes income from local salaries, professional services, business activities, the sale of real estate, and profits from the sale of shares, among others.
Dividends are not subject to Panamanian income taxes, as they are subject to a 10% tax before distribution.
Some sources of income are not taxed. These include interest on Panamanian government securities, interest on savings accounts, and interest on certificates of deposit/investment certificates guaranteed with banks established in Panama.
Types of personal taxes in Panama
Personal taxes in Panama are progressive. People who earn less than USD $11,000 a year do not pay income tax. Income between USD $11,000 and USD $50,000 pays an income tax rate of 15%. Earnings over USD $50,000 pay a 25% rate.
Income tax return
Employees with a job in a Panamanian company –who are subject to payroll deductions– do not need to file income tax returns, unless they also carry out other business activities outside of their employment.
In all other cases, such as professional services, they are required to file an income tax return.
By law, personal income taxes must be filed in Panama the following calendar year before March 15. It is possible to request an extension of 30 days at no additional cost.
Filing income taxes after April 15 carries fees and penalties based on income.
The process for filing income taxes requires the assistance of an accountant. The entire process is digital using the Panama eTax platform.
Tax residency certificate in Panama
If you obtain Panamanian permanent residence, you may be interested in obtaining your tax residence certificate. The purpose of this certificate is to demonstrate to other countries your status as a tax resident in Panama.
The certificate can also be used to avoid double taxation to citizens of countries that have agreements with Panama such as Mexico, Spain, France, the United Kingdom, and Germany, among others.
One of the ways to obtain the tax residence certificate is by showing that 183 days or more have been spent in a calendar year in Panama. Generally, the requirements to apply for the certificate include:
• Fully notarized passport copy
• Proof of address in Panama
• Proof of economic activity that generates income in Panama
• Proof of residence
• Details of a tax treaty to apply
• Fiscal year of the request for the certificate
We hope you find this information helpful. If you have any questions or comments, let us know now and we’ll address them as soon as possible.