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Income is defined as the aggregate of income from Panamanian sources after deduction of allowable expenses and losses and ignoring exempt income.  Income includes income from employment and from rendering independent personal services, income from business activities, and investment income.

Employment income in respect of work done in Panama is taxable regardless of where the payment is made or received.  Dividends are not included in income (they will have been subject to the final withholding tax of 10%.)

Capital gains are included in taxable income.  The taxpayer has a choice of methods in computing the taxable gain on sales of real estate; gains on sales of securities issued by Panamanian companies and other personal property are taxable without adjustment; however, gains on the sale of securities listed with the National Securities Commission are exempt from tax.

Individuals have a personal allowance of PAB800 (1,600 for a married couple filing together), plus PAB250 for each dependent.  Mortgage interest is deductible up to PAB15,000 per year; medical expenses incurred in Panama are deductible, as are health insurance premiums and some charitable donations.

As of February 2005, employees who are paid what is known as Gastos de Representación (or expense-allowance) are subject to the Income Tax withholding applicable in general terms to salaries and wages.  The main difference is that the Income Tax to be withheld from this kind of remuneration will be a fixed rate of 10%.  This rule will apply to employees from both the public and private sectors.

Individuals will continue to file an Income Tax return including this specific type of remuneration and assessing the tax due at the progressive Income Tax rates provided for in article 700 of the Fiscal Code.

Moreover, fringe benefits such as housing for company executives or the use of cars, recreation or vacation packages, educational costs and others are now included in the text of article 696 (a) of the Fiscal Code, as specific types of gross income for Income Tax purposes. The only exclusion provided in the Law refers to medical insurance provided by employers to their employees.

The rates of tax on taxable income under the 2008 fiscal package are as follows:

Band of Income, PAB Rate of Tax, %
Up to 9,500                                                                    nil
9,501 to 12,000                                                           42.4
12,001 to 15,000                                                         16.5
15,001 to 20,000                                                        19.0
20,001 to 30,000                                                        22
above 30,001                                                                 27

Employers and employees make social security contributions in Panama: the employer pays 10.75% of salaries and wages, plus 1.5% educational tax; the employee pays 7.25% plus 1.25%.  The employer deducts the social security contribution along with income tax.  The self-employed also make contributions.

A 2005 law increased the retirement age to 65 years from 62 years for men, to 60 years from 57 years for women, and extended the minimum time required to pay into the fund in order to draw from it when retired to 25 years from 15 years.  The changes also required the self-employed and small business owners to contribute 13% of their gross income to the social security fund.

There are annual taxes on the value of real estate, plus capital gains tax on profits from the sale of real estate, and a transfer tax arising on sale.

The annual tax, under Article 766 of the Fiscal Code, is based on official valuations, and is levied on a sliding scale:

* 1.75% from $30,000 (lowered to $20,000 in 2005) to $50,000; plus
* 1.95% from $50,000 to $75,000; and
* 2.10% on values above $75,000

Valuations under the ‘cadastral’ system were updated in 2005, and as from 2006 the tax is based on the new values at the following rates:

*0.70% on any value exceeding US$30,000 up to US$50,000;
*0.90% on any value exceeding US$50,000 up to US$75,000; and
*1.00 % on any value in excess of US$75,000.

Capital Gains Tax is levied on real estate gains under Article 701 of the Fiscal Code and Articles 89 and 90 of the Income Tax Regulations. The rate of tax is 30% on the taxable gain after deductions, but the calculation basis is quite complex, at least for persons not otherwise paying much tax.

The tax on the transfer of real estate (not new homes) is 2%, payable by the seller, which is credited against capital gains tax (see Income Tax, above).

Incentives introduced in 2004 to encourage development gave savings on a $200,000 home over 20 years of $69,250 – or about one-third of the purchase price of a high-quality home. But they were finally withdrawn on August 31, 2005, with existing projects needing to be completed within a year.

Not all was lost after September, however. Residences with construction permits issued after September 1, 2005 benefit from the following exemptions:

* Value up to $100,000: 15 years
* Value from $100,000 to $250,000: 10 years
* Value over $250,000: 5 years

Land is not exempt and property tax would continue to be paid on it if its value is above $30,000.

These incentives were continued with some changes by 2008 legislation: improvements to real property authorized by construction permits issued after July 1, 2009, are exempt from real estate taxes for a period of 10 to 15 years.

VAT (impuesto a la transferencia de bienes corporales muebles) is a tax on consumers imposed on transfers of personal property by sale or otherwise, and also applies to imports. The taxable value is the price paid plus ancillary charges, or in the case of imports, the customs value plus customs charges. The rate is generally 5%, but 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 imposes excise taxes on several products and services at 5%. Items covered by the excise tax include cars, motorcycles, cable television, pre-paid cellular phones, insurance premiums and airfares.

There are no statutory residence rules as such, but an individual is considered resident if he is present in Panama for more than 180 days in any one tax year.  Residence has to be officially recognised by the Government.

As regards taxation, there is no distinction between foreign and Panamanian individuals.  The territorial basis of taxation applies to individuals as it does to business entities, so that individuals pay income tax on Panama-source income. ‘Panamanian-source’ means, that the services rendered are deemed to be provided within Panama - if a Panamanian entity pays an employee for services rendered abroad, tax will not be due.

A fiscal reform package introduced in 2005 and which took effect from 2006 in most respects has changed the rules in some ways:

According to the newly introduced Paragraph 1-A of article 694 of the Fiscal Code, income derived from personal services such as wages, salaries and other personal remunerations will be treated as originating from a source located within Panamanian territory – even though such personal services may be physically and actually rendered both within and outside Panamanian territory – if the individual taxpayer resides in the Republic of Panama for at least 70% of the calendar days of any given year.  Other income (dividends, pension payments and interest, for example) is not covered by the new rule.

See Direct Corporate Taxation for details of new withholding tax rules introduced under the package.