Panama Tax & Business Guide & Deloitte

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Basic facts
Population 3.2m Inflation 2.2% (2004)*
Main languages Spanish (official), English GDP per head US$4,320*
Currency Balboa (PAB) GDP growth 5.4% (2004)*
Economic communities WTO
GDP sources 5.5% agriculture, 14.1% industry, 80.4% services
*Economist Intelligence Unit estimate.
Political environment

Panama is a presidential democracy with a unitary republican form of government.

MartÃn Torrijos, the leader of the Partido Revolucionario Democr?tico (PRD), took office as president in September 2004, having secured 47% of the vote in the general election in May. Next elections (legislative and presidential) are due in May 2009.
Foreign trade and investment
Exports US$6.3bn (2004)* Imports US$7.3bn (2004)*
*Economist Intelligence Unit estimate.

Main exports: Bananas, prawns, sugar and coffee.

Leading export markets: the US, Nigeria, Korea and Japan.

As an international service centre, Panama welcomes foreign investors. Significant investments have been made in recent years to develop infrastructure for ports, telecommunications and tourism. The tax structure is favourable, and generous incentives are available for ventures in tourism, in-bond assembly manufacturing and export-oriented production, and for locating in the Colon Free Trade Zone or in industrial parks outside major cities.

Panama City, the capital, is the financial centre.
Business and financing
Business forms Corporations

Foreign banks have long had a significant presence in Panama and represent one-third of all financial institutions, which are regulated by the Banking Superintendency. All major banks are based in Panama City.
Labour environment
Unemployment rate 11.8% (2004)* Minimum wage Varies
*Economist Intelligence Unit estimate.

The government sets minimum wage levels, which are determined by industry and geography (and, in some cases, by company size). Hourly minimum rates are highest in Panama City and Colon, where they are set at US$0.76 in agriculture, US$1.08 in the commercial, industrial and banking sectors, and US$1.33 in construction.

Union membership is 10Ò12% of the workforce.

Employers contribute 10.75% of each employeeÌs base pay to the Social Security Institute (CSS), and employees must pay 7.25% (withheld by the employer). The CSS also collects an education tax, paid by employers (1.5%) and employees (1.25%), and worker insurance with rates between 0.98% and 5.67% of gross salaries.

No more than 10% of the workforce of a local company may be made up of foreign senior executives. Such foreign nationals may receive a maximum of 10% of a companyÌs total wage bill.
Taxation
Corporate tax
Main rate The highest of 30% of net income or 1.4% of gross receipts

Resident and non-resident companies are taxed at the highest of 30% on net income sourced in Panama or 1.4% of gross receipts (sourced in Panama). A 34% rate applies to certain legal entities registered with the Industrial Registry on income over PAB 500,000. Dividends paid to companies (and individuals) are subject to a 10% withholding tax. However, if part of the distributed profits relates to dividends received from other companies under deduction of tax, these are not included in the taxable base for calculating the 10% withholding tax. Panama allows bearer shares to be issued, and when dividends are distributed to such shareholders the withholding tax is 20%. Undistributed profits may be subject to an additional tax at an effective rate of 4%. However, this is creditable against the withholding tax payable when a distribution is made.
Individual tax
Progressive rates to 27%

Income tax is charged on aggregate income at progressive rates up to 27%. Dividends received are subject to a 10% final withholding tax (20% on bearer shares). Interest and royalties received are generally treated as part of general income. Individuals with taxable income exceeding US$60,000 must pay tax based on 6% of gross income where this is higher than the tax otherwise payable.

Certain individuals residing in Panama for 70% or more of the time are taxed on their full income regardless of where this income is sourced. Such full taxation occurs where the taxpayerÌs income is derived from services performed partly inside and partly outside of Panama. The time spent outside of Panama is not taken into account if the taxpayer was not engaged in income-generating activities during that time.
Capital gains
Generally taxed as income

Capital gains of companies and individuals are generally taxed as income at the usual rates applicable to either corporations or individuals. However, gains on the disposal of immovable property and movable goods have special rules depending on the time that they have been held.
Indirect tax
VAT standard rate 5% Higher rates 10%, 15%

Value-added tax (VAT) applies to most transactions at the standard rate of 5%. Registration is compulsory for businesses with monthly turnover above US$3,000 (annual turnover US$36,000). A higher rate of 10% applies to alcoholic beverages and a 15% rate applies to tobacco-related products. Exports are zero-rated. Exemptions include food, medicine, agricultural raw materials, fuel and books. Panama also levies excise taxes on several products and services at a rate of 5%. Items covered by the excise tax include cars, motorcycles, cable television, pre-paid cellular phones, insurance premiums and airfares.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies must file a tax return within three months after the end of the accounting year, but this limit may be extended by two months on request. Three advance payments are due, based on an estimate of the income for the current year. A final payment of tax is due at the time of filing the tax return. Employment income is taxed by withholding. Individuals who are required to file a return must do so by March 15th following the end of the tax year.
Additional tax information
Withholding taxes Dividends 10% (20% for bearer shares), Interest 15%, Royalties 15%.
Tax treaties Panama has not concluded any double-tax treaties.
Dividends Dividends are subject to a final withholding tax of 10%, with a 4% advance payment on non-distributed profits.
Revenue protection There is no specific transfer-pricing or anti-haven legislation.
Groups There are no provisions for group taxation.
Incentives Farming and forestry; export; mining; industrial promotion; tourism; call centres.
Other taxes Annual tax on insurance companies, Annual tax on banks, Business and industrial licensing tax, Customs duties, Immovable property tax, Payroll tax, Unimproved land tax, Property transfer tax, Stamp duty, Annual fee on corporations.