Is Panama a tax haven?
Whether you’re looking to live in or retire to a low-tax country, Panama could be the perfect tax haven for you.
Panama’s territorial tax system and secure privacy options for banking and incorporation have made the Panama tax haven a popular spot for expats. Panama is a low to zero tax country and has been referred to as the United States of Latin America.
There are lots of different options for getting a Panamanian residence and enjoying the low tax rates. If you structure your tax plan correctly, you can reside in Panama and pay zero income tax.
Nonresidents can incorporate in Panama to save money on corporate taxes. And the privacy policies in the country will keep your private information well protected. All we’ve already mentioned, among other reasons, are great examples of why you should consider including Panama in your low tax plan. Continue to read to get more details.
In this article, we’ll discuss:
- Panama Quick Facts
- Is Panama An Offshore Tax Haven?
- Who Has to Pay Tax in Panama?
- Cost of Living in Panama
- Panama Residence and Citizenship
- Incorporating in Panama
- Privacy Policies
- What were the Panama Papers?
Panama Quick Facts
Where is Panama?
Panama is the southernmost country in Central America located right above South America. It’s south of Costa Rica and north of Colombia.
Capital City: Panama City
Currency: Panamanian Balboa (PAB) or US Dollar
Official Language: Spanish
Is Panama An Offshore Tax Haven?
Panama is a territorial tax country. A territorial tax country does not charge an income tax on any foreign-sourced income.
Territorial tax countries may have domestic taxes, such as taxes on income sourced within the country, capital gains tax on real estate in the country, or income made from an investment made within the country.
Due to these stipulations, Panama can be used as a tax haven. You can live in Panama without paying income tax as long as your income is all sourced overseas.
Also, Panama does not have any inheritance or wealth taxes.
Who Has to Pay Taxes in Panama?
As mentioned, if you are earning all of your income from a source outside of Panama, you will not have to pay an income tax in Panama.
Conversely, if you are a resident of Panama and are sourcing your income locally, you will be required to pay income tax on the money earned within Panama.
Panama has a progressive income tax for income sourced within the country. For the fiscal year 2021, the rates are as follows:
|Income||Income Tax||Income Tax Over Column 1|
|$0 – $11,000||$0||0%|
|$11,000 – $50,000||$0||15%|
|$50,000 and over||$5,850||25%|
Even though you are mandated to pay tax on locally sourced income you’ll still be paying less tax than if you were to live in a high-tax country.
It’s also important to note that Panama is not a zero-tax jurisdiction for companies, although you can pay zero tax if you structure your tax plan properly.
You may be able to set up your company in Panama and pay zero tax there, but it’s still possible you would have to pay tax to your home country. If you’re a US citizen, you’ll need to file and pay corporate taxes in the US. For other western countries such as Australia, Canada, and the UK, you’ll still have to pay taxes there if you are still considered a tax resident of that country.
Panama does have a 5% withholding tax for foreign revenue from a Panamanian company as well as a 10% tax on dividends that are distributed out of domestic profits. The withholding rate will increase to 12.5% if the interest and royalties end up being paid to a Panama non-resident.
Taxpayers pay a flat 10% rate on capital gains. If you invest in real estate, capital gains taxes are 10%.
When do you have to pay taxes in Panama? The Panamanian tax year ends on December 31. Tax returns are due March 15.
Nonresident Private Interest Foundations and International Business Corporations (IBC) in Panama do not have to file a tax report in Panama and do not have to pay any income tax, interest tax, capital gains, property tax, stamp tax, gift tax, inventory tax, or succession tax.
Cost of Living in Panama
One nice thing about living in Panama is that US dollars are accepted as one of their main currencies.
Even better is that the cost of living in Panama is lower than it is in the US with monthly expenses for a family of four coming in at around $2,500 (without rent).
A one-bedroom apartment in the city center is going to cost around $730 a month, while a one-bedroom outside of the city’s center will cost only around $472 a month.
A three-course meal for two people at a nice restaurant cost around $45. A loaf of bread costs about $1.73 and a beer costs $2.00.
Panama Residence and Citizenship
The Panama Friendly Nations Visa has been a pretty popular option for expats looking to get a second residence. Securing a second residence in Panama might be a great option for your offshore tax plan.
The Panama Friendly Nations Visa came out in 2012, and started with 22 countries but has since increased to include a total of 50. Anyone who qualifies for the Panama Friendly Nations Visa program can apply to get a fast-track permanent residence in Panama.
To qualify you have to be a national of one of the 50 countries included in the program. Then you need to establish an economic or professional tie with Panama. After that, you’ll show proof of financial solvency, provide the required documents, and pay any associated fees.
In order to establish professional or economic ties to Panama, you’ll need to either be hired by a Panama-based company or incorporate your own company in Panama.
Note that there have been rumors that the Panama Friendly Nations Visa program may be canceled or amended in the future, but that is the nature of these programs. They may be updated to removed at any time.
Still, there are many different residence programs in Panama apart from The Panama Friendly Nations Visa. You can find still one that will work best for you. I have included a few below:
- The Reforestation Investor Visa was made to help rebuild the forests in Panama. Through this program, you can get Panamanian residence by making a minimum investment of $80,000 into five hectares or a reforestation project.
- The Pensionado Visa or the Retiree Visa allows people to get a Panamanian residence and retire in Panama. To qualify for this program, you need a $1,000 minimum monthly pension.
- The Self Economic Solvency Visa gives you a residence in Panama in exchange for a $300,000 investment into the country. This can be an investment into real estate worth $300,000, a $300,000 bank deposit into a Panamanian account or it can be a combination of the two — as long as the total is equal to or more than $300,000. Dependents require an additional investment of $2,000 each.
- The Business Investor Visa gives you residence in exchange for a minimum investment of $160,000 into a Panamanian business.
- The Panama Agricultural Investor Program is an option for getting Panama residence by investing a minimum of $60,000 into an agricultural business.
None of these programs are for Panamanian citizenship. They are all avenues by which one can get residence in Panama. So how can you get a second citizenship in Panama?
You can apply for citizenship in Panama after five years of residence or three years if married to a Panamanian or having had Panamanian children with a Panamanian parent.
However, this doesn’t mean you’ll be granted citizenship immediately.
Many people have had issues with getting their citizenship applications processed and approved. The Panamanian government isn’t very efficient when it comes to processing citizenship applications. There are individuals who have lived in Panama for nearly 20 years and still haven’t had their citizenship approved.
Overall, it’s relatively easy to get a second residence in Panama, but it’s a lot harder to get Panamanian citizenship.
Incorporating in Panama
Some of the residency programs will require you to start a corporation in Panama. Outside of incorporating in Panama, your other options are to open up a bank account in Panama or to invest in real estate or the reforestation project.
You can also incorporate in Panama if you are a nonresident. There are over 400,000 foundations and corporations registered in Panama. Why are there so many? This is probably due to the fact that these nonresident corporations do not have to pay income tax or file a tax report to Panama.
However, remember that Panama is not a perfect tax haven. If you are a resident of Panama and have a Panamanian business that is sourcing income from within the country, that income will be subject to tax in Panama.
You can incorporate in Panama with an IBC or LLC (Limited Liability Company.) If you aren’t interested in starting your own Panamanian company, you can also establish economic and professional ties in Panama by investing in an already existing Panamanian company.
If you do the proper planning, Panama could be a great offshore jurisdiction. Make sure you have an international tax professional who can help you figure out how forming or investing in a Panamanian company could work for you.
In the information-sharing era, it’s really not possible to hide your money overseas. While Panama has some of the best privacy laws in the world, it did sign onto the Common Reporting Standard in 2018.
This means you can’t hide your money in Panama, and you should not try to do so. Hiding your money overseas is illegal and can get you into a world of trouble.
With that said, Panamanian laws will protect your banking information with the only exception being if you are being investigated for a criminal charge.
Panama doesn’t have any exchange control laws. That means you do not have to report on money transfers from out of the country in either your personal or corporate bank accounts. There are also no limits on how much or how often these offshore exchanges can be made.
These laws protect the personal information of shareholders involved in trusts, corporations, or foundations in Panama. It is not even required that the names of the shareholders are publicly registered.
This makes Panama one of the best places to bank or incorporate if you are heavily invested in your personal privacy or the privacy of your corporation.
What were the Panama Papers?
Panama’s reputation was dragged through the mud after the release of the Panama Papers, so it’s important to briefly clear up what the Panama Papers were and why that shouldn’t heavily impact your opinion of Panama.
The Panama Papers were a collection of financial files from an offshore law firm that ended up being published in a German newspaper. The firm, Mossack Fonseca, was based in Panama, which is why the leak was called the Panama Papers.
The papers had information from individuals and companies from 200 different countries. This wasn’t the fault of the Panamanian government and does not mean that it’s no longer safe to the bank or incorporate in Panama. This leak was one specific firm and shouldn’t reflect on Panama as a whole.
Panama could be a great place for you to retire, incorporate, or even spend just part of your year. The territorial tax system makes the Panama tax haven a great place for saving money on taxes. As long as your income is sourced outside of Panama, you can live in Panama and pay zero income tax.
If you do source your income in Panama, the tax rate and cost of living are relatively low. You can move to Panama after getting a permanent residence. There are plenty of options for getting a permanent residence. This can come from an investment in reforestation or from starting your own Panama corporation.
Panama is a perfect place for protecting your personal payments. Your bank information and corporate information will be well protected in Panama due to their strict privacy laws.