Panama is currently one of the most popular and established tax havens. Located between Costa Rica and Colombia, it is characterized as having political stability, good telecommunications, very little or no collaboration with international fiscal authorities and a low cost of living. There are no capital requirements nor a time limit for issuing shares. There are also no requirements to file annual tax returns or financial statements.
Panama has a territorial tax system meaning that there is no tax on income derived outside of the Republic of Panama. This applies for both personal and corporate income. Panama companies income is payable on income from a business operating in Panama or for individuals employed in the country. Capital gains are considered a special form of income and those derived overseas are tax free. Companies are subject to the territorial tax rule, just as individuals. Therefore, if a company does not derive income from Panamanian activities, no taxes will be payable.
The approximate corporate tax rate is 30% on income up to $100,000.00 and increases to 42% on income exceeding $500,000.00. Corporate dividends and earnings of branches of foreign companies are subject to 10% withholding tax. A 6% withholding tax is applied to interest paid or credited to a foreign lender. Interest on bonds and other securities is subject to a 5% flat withholding tax unless traded on a registered Panamanian stock exchange. A 6% withholding tax is applied on royalties paid to foreign distributors. Panama companies are also subject to a 10.75% social security tax on employee salaries.
Foreign companies that do not buy or sell goods in Panama or the Colon Free Zone are exempt from the 10% dividend withholding tax. Companies headquarters offering services to companies outside the Republic of Panama are exempt from income tax, but are subject to the 1% business tax levied on declared capital with a maximum of $20,000.00. Income derived from the transfer of shares in companies established under Panama law and that carry out activities abroad is exempt of taxes as it is considered to be a foreign source of income.
Special rules were adopted for small businesses earning less than $200,000.00 in gross income per year under Law 31 of 1991. The first $100,000.00 is taxed at personal rates and the remaining $100,000.00 at corporate rates. Small businesses are exempt from retained earnings tax and withholding tax on dividend distributions.