Taxes in Panama: why the territorial principle is attractive for expats and businesses

Panama has ranked among the most interesting tax locations in the world for many years.

The reason is the territorial principle: as a rule, only income originating in Panama is taxed. Income from abroad remains, in many cases, untouched by Panamanian income tax – for private individuals as well as for internationally active businesses.

At the same time, Panama is not a tax-free country. Here too, there are taxes and legal obligations you should know about.

This article gives you the overview.

Tax law for expats

Many of our clients live permanently or predominantly in Panama but continue to earn income from other countries:

investment income from securities portfolios
dividends from foreign companies
fees for consulting services abroad
rental income from properties outside Panama
pensions or retirement benefits from their home country

For this group in particular, the territorial principle is of special interest.

To the extent that income qualifies as foreign-sourced under Panamanian law, it is, as a rule, not subject to Panamanian income tax. This sets Panama apart from many European states, which tax the worldwide income of their taxpayers.

That is why Panama can be a very attractive place of residence, especially for entrepreneurs, investors, digital service providers and retirees.

Which taxes do exist

Panama is by no means a tax-free country. Other types of taxes are levied – above all where assets or economic activity exist within Panama.

Property tax (Impuesto de Inmuebles). Anyone who owns real estate in Panama generally pays property tax. The actual amount depends, among other things, on the value and use of the property. For owner-occupied homes there are in part substantial allowances and reductions – many owners pay only little or even no property tax at all.
VAT (ITBMS). Most goods and services are currently subject to a value-added tax of 7%. This puts Panama internationally among the countries with comparatively low sales taxation.
Income tax on Panamanian income. Anyone earning income whose source lies in Panama – for instance from employment or a business operated locally – is regularly subject to Panamanian income tax on it.

What Panama does not have

Among other things, Panama levies:

no general taxation of worldwide income
no classic tax on foreign capital income
no inheritance tax
no wealth tax

It is precisely this combination that makes Panama a long-term attractive place of residence for many international private individuals.

Panama as a location for international businesses

Private individuals are not the only ones who benefit from the territorial principle. For internationally active businesses too, Panama can be a very interesting location.

In recent years, however, the legal requirements have been tightened. The background is international standards on economic substance, which Panama has since implemented – most recently with Law No. 526.

Economic presence is decisive today.

Anyone who wants to use the advantages of the territorial principle should make sure the company is actually present in Panama. This includes, for example:

a real office
a local business address
organisational structures, where appropriate administrative staff
actual management taking place in Panama

In many cases, a lean structure with a small office and one administrative employee is already sufficient – provided it meaningfully supports the actual business operations and meets the legal requirements.

If a company earns exclusively income from sources outside Panama and at the same time meets the substance requirements, considerable advantages can result. Beyond the tax treatment, many businesses benefit from significantly lower administrative effort than in numerous other jurisdictions – ongoing administration and advisory costs often drop substantially as a result.

Which obligations apply in an individual case depends on the specific corporate structure and the regulations in force.

Our approach

This is exactly where we support our clients. We help you to

find suitable office space,
set up a representative business address,
recruit administrative staff,
coordinate the cooperation with local lawyers and tax advisors
and create the organisational conditions for a legally sound corporate presence in Panama.

Our goal is not just the formation of a company, but a working structure that meets the legal requirements and can at the same time be run efficiently.

Anyone planning to move their residence or their business to Panama should not leave the planning to chance. Careful structuring from the outset creates legal certainty – and helps to make clean use of the tax opportunities.