Doing business in Panama: accounting and tax for foreign companies

Doing business in Panama: the territorial tax system

Panama taxes Panama-source income, whether the recipient is resident or not. Income produced outside Panama is not subject to income tax.

That does not mean a foreign company pays nothing here. If your subsidiary sells, provides services or employs people in Panama, that income is Panama-source. Foreign-source income may also pay dividend tax when distributed.

What we do: classify each income stream by source and document the reasoning, so you can defend it if the tax authority (DGI) asks.

Branch or subsidiary: how each is taxed

Foreign companies usually operate in Panama through a registered branch or a Panamanian company (subsidiary). Both pay income tax in Panama.

A branch is treated as separate from its head office: it keeps its own books and has its own tax liability. It also pays dividend tax through a final 10% withholding on net taxable income, less income tax paid. This is paid with the income tax return.

A subsidiary pays dividend tax when it distributes profits to shareholders.

What we do: explain the tax effect of each structure. A partner law firm handles incorporation or branch registration, and we coordinate with them.

Corporate income tax and CAIR

Companies pay 25% on net taxable income. If taxable income exceeds US$1.5 million, tax is paid on the higher of net taxable income or 4.67% of gross taxable income (CAIR).

A company may ask the DGI not to apply CAIR if it causes a loss or an effective rate above 25%. The DGI has six months to respond; if it does not, the request is deemed granted.

The return is due three months after year end, with a possible one-month extension. Estimated tax is paid at the end of the sixth, ninth and twelfth months after year end.

What we do: prepare or review the return in e-Tax 2.0, compute CAIR and file the waiver request when it applies. See corporate income tax return (in Spanish).

Dividends and complementary tax

The general dividend tax rate is 10%. It drops to 5% on dividends from foreign-source, export or certain exempt income, and rises to 20% for bearer shares. Loans to shareholders are treated as dividends.

If a company distributes less than 40% of its net profit for the year, it pays complementary tax on the shortfall. It is an advance that is credited when the dividend is declared.

What we do: plan the dividend policy with headquarters before year end.

Operations notice tax, ITBMS and municipal tax

What we do: add these to your company's calendar and prepare the returns. Municipal licenses and clearance certificates are handled by our sister company, Tramita Todo.

• Operations notice tax: 2% per year on equity (assets less liabilities, excluding liabilities to related parties abroad). Minimum US$100, maximum US$60,000. Free zones: 1%, maximum US$50,000.
• ITBMS (VAT): 7% general rate; 10% on alcoholic beverages and hotel stays; 15% on tobacco.
• Municipal tax: based on gross income by activity, generally capped at US$2,000 per month per activity.
• Annual municipal return: in the districts of Panama and San Miguelito, due 90 calendar days after year end. Filing late costs a US$500 fine.

Payments abroad and transfer pricing

Payments to non-residents for services, royalties and commissions are taxed at 25% on 50% of the amount remitted: an effective 12.5% withholding. Without withholding, the expense is not deductible. Interest on foreign loans invested in Panama also carries 12.5% withholding.

No withholding applies if the recipient is registered as a taxpayer in Panama. A double tax treaty may reduce the rate.

Transactions with related parties abroad are subject to transfer pricing. The report (Form 930) is due six months after year end. Failing to file costs 1% of the total related-party transactions, up to US$1 million.

What we do: review each payment to headquarters before it goes out and prepare your transfer pricing study.

Accounting obligations

The branch or subsidiary keeps its books in Panama, separate from headquarters. Those records drive the income tax return, the operations notice tax and Form 930.

As a rule, the DGI's power to assess and collect taxes expires after five years. For additional assessments, after three. Keep support and reconciliations for at least five years.

What we do: accounting outsourcing with reports in the format headquarters asks for.

Payroll and social security

If your company hires in Panama, it registers as an employer with the CSS and files payroll monthly in SIPE. The employer pays 13.25% social security, rising to 14.25% on March 1, 2027. Add 1.50% education insurance and 0.33% to 6.25% occupational risk.

Employees contribute 9.75% and 1.25%. On top come the 13th month and 30 days of vacation for every 11 months. Income tax withheld is reported monthly on Planilla 03.

What we do: run your Panama payroll with one point of contact.