5. Internal Tax
Tax on income:
Panama's income tax law is based on the principle of territoriality. Consequently, income tax is levied only upon net income derived from operations within the territorial boundaries of the Republic of Panama. This basic principle has remained
virtually unchanged since the foundation of the Republic.
The income tax law of Panama clearly defines the activities which are not subject to Panama income tax:
- Invoicing, from an office established in Panama, the sale of merchandise or products actually handled abroad.
- Directing, from an office established in Panama, operations which are completed and consummated to take effect abroad.
- Distributing dividends or participations from juridical persons when said dividends are derived from income not produced within the territory of the Republic of Panama, including the income derived from activities mentioned in subdivision
a. and b. of this proviso.
- Embarking and/or disembarking, in Panamanian ports, passengers in vessels
transiting through international waters or the Panama Canal. Also, air transportation to and from Panama of such passengers.
On the basis of the above clearly defined provisions of Panama's Income Tax Law, Panamanian corporations or local branches of foreign corporations with established offices and employees in Panama do not pay Panamanian income tax on their net profits if such offices merely direct the purchases and sales but the merchandise never physically comes through Panama.
Royalties, interests, dividends, commissions, profits on trading and other income received from foreign sources are not subject to Panama income taxes. Panama corporations may pay out such income as dividends (or otherwise) to its shareholders, free of Panama income or dividend tax. Interest on time deposits or savings accounts placed with banks operating in Panama is not subject to income tax either, regardless if the funds are originated in Panama or from abroad.
Capital gains tax:
Profits obtained from the sale of real estate owned in Panama are subject to a capital gains tax. This does not apply to property owned by Panamanian entities or citizens anywhere outside Panama.
Inheritance taxes in Panama have been completely abolished.
In spite of the abolition of inheritance taxes, taxes on gifts "inter-vivos" of properties located in Panama are in effect and the rate depends on the degree of kinship between the donor and the
donee. This does not apply to property owned anywhere outside Panama.