Panama

Panamanian income tax is levied based on the territoriality principle. Panamanian-source income is subject to taxation whether it is received by a resident or non-resident entity. Residency is only relevant to determine if the entity is subject to withholding tax (WHT) or not.

Corporations are subject to income tax at a fixed rate of 25%.

The tax base (i.e. amount to which the tax rate will apply) for companies whose taxable income is greater than 1.5 million United States dollars (USD) is the greater of:

• net taxable income calculated on the normal basis or
• 4.67% of the gross taxable income (excluding exempted and non-taxable income and foreign-source income); this is called the alternate calculation of income tax (Calculo Alternativo del Impuesto sobre la Renta or CAIR).

If the entity's tax year results in a loss due to the alternative calculation, the taxpayer may request to the tax administration (the General Directorate of Income, i.e. Dirección General de Ingresos or DGI) not to be subject to the CAIR.

The taxpayer may also request not to apply the CAIR if its effective income tax rate is higher than the applicable income tax rate (i.e. 25%). Here is an example of such an instance:

The DGI has a six-month period to reach a decision on such requests; otherwise, the petition will be considered as granted.

Regarding income tax, it should be noted that Panamanian entities that are part of multinational groups and generate foreign source passive income including dividend, interest, royalty, capital gain, real estate capital income or other movable capital income must comply with substance requirements in order to maintain a zero-tax rate (0%) according to the territorial approach of taxation. Otherwise, these entities will be subject to a fifteen percent (15%) tax rate on the net taxable income related to this passive activity.

Substance requirements include: (i) having qualified personnel and adequate facilities in Panama, (ii) making strategic decisions and bearing risks in Panama and (iii) incurring operating costs and expenses consistent with the activity generating the passive income.

Entities subject to this obligation must annually report foreign-source passive income in their income tax return and provide supporting information to demonstrate compliance with economic substance requirements.

Local municipal tax

Local municipal tax is charged based on the gross income generated by the business through the corresponding accounting period; it also depends on the type of activity being conducted by the corporation. In most cases, it cannot exceed USD 2,000 per month for each activity performed.

An Annual Municipal Tax Return for the District of Panama or District of San Miguelito must be filed before the Municipal Authorities in the first 90 calendar days after the ending of the fiscal year. In case the taxpayer does not file the return before the deadline, a USD 500 penalty will be applicable.