Under the territoriality principle, the following will not be considered as taxable income:
- All income produced outside Panama.
- All income generated from operations or services performed outside the Panamanian territory.
Inventory should be valued at the start of any business and, subsequently, at least once every accounting period. All assets must be grouped, depending on their nature, with certain characteristics indicated (e.g. the unit of measurement, the name of the asset, the price of the unit, the total value of units). Reference to the accounting records should also be included.
Inventories are generally stated at cost and can be valued using the compound average cost method, first in first out (FIFO) method, retail method, or specific identification method. Since all entities must keep legal records, any adjustment resulting from using different methods of inventory valuation for tax purposes and financial purposes should be recorded and must be reported to the proper authorities. Once a taxpayer adopts a method, they must maintain it for at least five years.
See Capital gains tax in the Other taxes section for a description of how capital gains are taxed in Panama.
Panamanian legislation establishes that distribution of dividends of a Panamanian source are subject to definitive WHT, applied at the moment of distribution. Generally, dividends are subject to income tax at a rate of 10% without taking into consideration the way of payment, types of stock, assets, or money.
For companies with mixed-source income, dividend tax applies at a 5% rate on dividends paid from foreign-source income and from income derived from exports, as well as exempt income from banking account interests and interests and earnings derived from securities issued by the government.
Free zone users are taxed at a 5% rate as well for local-source income.
Loans to shareholders are deemed as dividend distributions, subject to a 10% withholding even in the cases where the 5% tax rate applies.
Notwithstanding the aforementioned, if the entity’s shares are issued to bearer, they will be subject to dividend tax at a rate of 20%.
Dividend tax is levied if the entity meets one of the following criteria: (i) requires an operation permit to operate in Panama, (ii) requires an operation key to operate at the Colon Free Zone, (iii) is established in a Fuel Free Zone, (iv) is established in a free zone or special zone, or (v) produces Panamanian-source taxable income. Dividend tax also does not apply to dividends paid on income received as a dividend if the entity is not required to withhold dividend tax or if the entity withheld the tax.
A complementary tax applies each tax year that the entity distributes less than 40% of the net profits after income tax. The complementary tax is an advance payment of the dividend tax, calculated on the difference of the distributed dividends and 40% of the net profits after income tax, and applies the corresponding tax rate. If complementary tax is paid, then the entity may offset the paid complementary tax with the dividend tax when the corresponding dividend is decreed.
The distribution of dividends derived from income received as dividends from other entities is not subject to income tax or dividend tax as long as the entity that paid the dividend in the first instance was exempt from withholding any dividend tax, or, if it was required to, made the corresponding withholding.
Interest income is subject to income tax to the extent that it reflects operations carried out in Panama. Foreign beneficiaries are subject to WHT. The tax base will be 50% of the remittance, and the income tax rate applicable is 25%.
Royalty income is subject to income tax to the extent that it reflects operations carried out in Panama. Foreign beneficiaries are subject to WHT to the extent that the payer has a deduction. The tax base will be 50% of the remittance, and the income tax rate applicable is 25%.
Panamanian resident companies are taxed on their income generated within the Panamanian territory. Any other income generated abroad will be exempt from income tax payment but may be subject to dividend tax (see above).