Taxes In Panama

Foreign residents pay tax in Panama only on money earned inside this country.

Regardless of your residency status, personal income tax is only applied to Panamanian sourced income. Americans retirees are not taxed on pensions, Social Security, or similar income earned in the States.

Still, the IRS requires that U.S. citizens file U.S. tax returns, even if they’re not living in the States and even if they have no tax liability (as long as they meet the minimum income requirements).

You will not be taxed on your first US$101,300 (2016) of earned income (double that for a couple). When it comes to taxation, this is as good as it gets for the foreign resident or retiree.

More on the Foreign Earned Income Exclusion

Personal income tax in Panama is based on a sliding scale, ranging from a minimum of 15% after the first US$11,000 to a maximum rate of 25%. For temporary residents, the tax is only applied to Panamanian-sourced income.

When buying real estate in Panama there will be applicable taxes rates for every circumstance, including:

Rental Income Tax

If you receive rental return on your property, you will be liable for income tax up to a maximum of 25% (on returns greater than US$250,000). However, if you invest in a hotel or condo-hotel you may be exempt from income tax for 15 years. This does not apply to any private residence, only hotels and condo-hotels.

Transfer Tax

Real estate transfer taxes in Panama are paid by the seller, and are 2% of either the updated registered value of the property or the sale price—whichever is higher. The updated value is the registered value, plus 5% per annum of ownership. If the property is bought by a corporation, it is customary for the shares of the company to be sold, thus eliminating the need to pay transfer tax.

Property Tax

Properties with a registered value of US$30,000 or lower do not pay property tax. Properties worth more than US$30,000 are taxed as follows:

• 1.75% from US$30,000 to US$50,000
• 1.95% from US$50,000 to US$75,000
• 2.1% over any property value above US$75,000

Capital Gains Tax

If you are not in the business of selling and buying property, you pay a flat 10% of the gross profit.

Construction And Improvements

Various property tax exemptions are in place, ranging from 5 to 20 years. If you buy resale, the remaining exemption time is yours.

If you invest at least US$50,000 in tourist-related infrastructure in designated special tourism areas of Panama’s interior, you can benefit from:

• A 20-year exemption on any import taxes due on materials, furniture, equipment, and vehicles;
• A 20-year exemption on real estate taxes for all assets of the enterprise;
• Exemption from any tax levied for the use of airports and piers;
• Accelerated depreciation for real estate assets of 10% per year.

The investment amount does not include the price of the land. The minimum investment requirement for projects in the metropolitan area is US$300,000.

You could live in Panama tax-free, even as a U.S. citizen (that is to say, paying no income tax either in Panama or in the United States).

However, some work and preparation are required. You have to set yourself up properly.

If you’re retired, you won’t pay taxes on retirement income you bring into Panama or on any dividends or interest income earned outside the country. But, you would still pay taxes in the United States on the dividends and interest income.

And, depending on the source of the retirement income, you’d pay the same tax to the IRS as you would if you lived in the States (although, if you live in a state that taxes retirement income, you’d avoid that tax by moving to Panama).

To live completely income tax free in Panama as a U.S. citizen, you must have a business generating earned income for you as an individual and that income must be derived from outside Panama.

Panama taxes residents on income earned in the country only, so your non-Panama business would pay no taxes in Panama.

And, assuming it is a business where you can legitimately claim that you are earning your income outside the country, your individual income wouldn’t be taxed there.

Typically, this means a consulting or an Internet-based business.

If you start an active business in Panama, with sales in Panama to Panama residents, then that income would be taxable in Panama, as would any related personal compensation you receive.

In either case, your salary up to the annual Foreign Earned Income Exclusion limit (US$101,300 for 2016) can be excluded for U.S. income tax purposes. The key is that it be truly earned income.