Panama

Royalties and commissions on services paid to foreign entities are taxed through the application of the corresponding tax rate (i.e. 25%) over 50% of remittance under the concept of WHT (effective tax rate is 12.5%). The taxpayer may decide not to withhold taxes and consequently not deduct the expense.

Payment of interest is also subject to income tax on 50% of the interest paid to a beneficiary abroad on loans invested in Panama, but the payer must proceed with the WHT even if one does not deduct the interest.

If the beneficiary is registered as a taxpayer in Panama before the tax administration, no WHT may be required.

If, according to a special law, the payment of interest, royalties, dividends, fees, etc. is exempt from WHT, said exemption will not apply if the beneficial owner of the payment can credit the taxes that would have been paid in Panama in its country of residence. In the event that the credit application is not allowed in the country of residence, the taxpayer must request a formal opinion from an independent expert stating the non-applicability of the tax credit in the country of residence.

* See the description of Dividend income in the Income determination section.

In case of treaties, special rules are applicable in order to avoid double taxation.

Notes

1. Depending on the percentage of ownership held by the beneficial owner (at least 25% to apply the 5% rate).
2. Depending on the person or entity receiving the payment. If the beneficial owner is a bank, the 5% rate will apply; if the beneficial owner is the Central Bank of either state, the 0% rate will apply; in all other cases, the 7.5% rate will apply.
3. If the services are not rendered in any of the states, the income will only be taxed in the state where such income arose.
4. If paid to government financial institutions, the 0% rate will apply.
5. 3% for the use or right to use industrial, commercial, or scientific equipment.
6. Depending on the percentage of ownership held by the beneficial owner (at least 10% to apply the 5% rate).
7. Depending on the person or entity receiving the payment. If the beneficial owner is a bank, the 5% rate will apply; if the beneficial owner is the Central Bank of either state, the 0% rate will apply; in all other cases, the 10% rate will apply.
8. The 12.5% rate applies if the person rendering the services is in the other state for more than 60 days.
9. No WHT is levied if the foreign company (beneficial owner) receiving the dividends directly holds at least 15% of the shares of the company paying the dividends, provided that the shares of the foreign company are regularly traded on a recognised stock exchange or at least 50% of the shares of the foreign company is owned by residents of either contracting state or by companies the shares of which are regularly traded on a recognised stock exchange. Also, no WHT is levied if the foreign company is a bank or insurance company, a state or political subdivision, a headquarter owning at least 10% of the shares of the Dutch company, or a pension fund.
10. Depending on the percentage of ownership held by the beneficial owner (at least 10% to apply the 10% rate).
11. If the services are rendered in Panama, then the 10% rate will apply.
12. Depending on the percentage of ownership held by the beneficial owner (at least 10% to apply the 4% rate).
13. 5% WHT rate is levied if the recipient (excluding partnerships) is a shareholder with at least a 40% direct interest in the paying company; otherwise, a 10% rate is levied. No WHT is levied if the recipient is a shareholder with at least an 80% direct interest in the paying company, and (i) its shares are listed on a stock exchange, (ii) the recipient is at least 50% owned by residents from either of the two countries, (iii) the recipient is owned by shareholders resident for tax purposes in third countries by a proportion of less than 25%, and (iv) the recipient is owned (an interest of more than 25%) by residents in third countries, provided that a tax treaty for the avoidance of double taxation has been signed with the country of the company paying the dividends and that this tax treaty establishes the same or more favourable conditions. No WHT is levied for dividends paid to pension funds.
14. If the services are rendered in Panama, then the 7.5% rate will be applicable.
15. No WHT is levied if the foreign company (beneficial owner) receiving the dividends directly holds at least 15% of the shares of the company paying the dividends, provided that the shares of the foreign company are regularly traded on a recognised stock exchange or at least 50% of the shares of the foreign company is owned by residents of either contracting state or by companies the shares of which are regularly traded on a recognised stock exchange.
16. 5% but only if: (I) the interest is beneficially owned by: (i) an individual, (ii) a company with shares regularly traded on a recognised stock exchange, (iii) a financial institution or (II) the interest is paid by: (i) a state, political subdivision, or local authority, (ii) a bank, or (iii) on a quoted eurobond. The 0% rate will apply if it is paid to the Central Bank of either state.
17. If the person is more than 90 days in Panama, then the 12.5% rate will apply.
18. 0% applies for sales on credit and payments to the Central Bank; 5% for payments to banks in general; and 10% for all other cases.
19. 5% if the beneficial owner is resident of a contracting state or the beneficial owner is a pension scheme.
20. 5% if the beneficial owner has contributed at least 25% of the stock capital; 10% for all other cases.
21. If paid to financial institutions, the 5% rate will apply.
22. 5% if the beneficial owner has contributed more than 50% of the capital stock; 7% if the beneficial owner has contributed between 25% and 50% of the capital stock; 12.5% for all other cases.

Panama has deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI), which now covers almost 1,700 bilateral tax treaties, thus underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises.

For Panama, the MLI is in force. The MLI establishes the principal purpose test (PPT), and, as a result, in each case it should be studied how the MLI can affect tax treaty applications.