What is Territorial Tax System?
Panama taxes only Panama-source income. Foreign-source income, meaning activities, contracts or transactions completed or having effect outside Panama, is exempt from Panamanian tax even when it passes through a Panamanian company.
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Current Rate (Applies to every tax year)
Panama-source income taxed; foreign-source income exempt
Example
A Panamanian company invoices a client abroad for consulting work performed and used entirely outside Panama. That income is foreign-source and outside Panamanian income tax. The same company's sales to a customer in Panama City are Panama-source and taxable.
How Territorial Tax System works in Panama
The territorial principle is the most important fact about Panamanian tax and the one that surprises founders coming from worldwide-taxation countries. The test is where the income arises, not where the company is registered, where the invoice is issued or which bank account receives the money.
The principle also reaches dividends. Dividends paid out of foreign-source or export income are taxed at 5%, against 10% for dividends paid out of Panama-source income. Before quoting any figure, establish how much of the underlying income was Panama-source and how much was foreign-source.
Whether a particular contract is foreign-source depends on the facts. Finn flags the question and records your answer, and a Panamanian contador público autorizado (CPA) should confirm borderline cases.
Related terms
Impuesto Sobre la Renta (ISR) is Panama's corporate income tax. It is a flat 25% on net taxable Panama-source income for resident companies such as the S. de R.L. and the S.A.
Dividends paid out of Panama-source income are subject to a 10% withholding tax. Dividends paid out of foreign-source income or export income are taxed at a reduced 5%.
CAIR (Cálculo Alterno del Impuesto sobre la Renta) is an alternative minimum tax for companies with gross taxable income above US$1,500,000 a year. The company pays the higher of the standard 25% calculation or 4.67% of gross taxable income.
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