Is foreign income taxed in Panama?
No. 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 a Panamanian company receives it.
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Detailed Explanation
## The territorial principle
Panama taxes residents and non-residents only on Panama-source income. Income that does not arise in Panama is exempt from Panamanian tax. This applies even when the income is invoiced through, or received by, a Panamanian company.
## Why the source matters
The source of income decides three things. It decides whether the income is part of net taxable income for the 25% ISR. It decides which dividend withholding rate applies, 10% on dividends from Panama-source income and 5% on dividends from foreign-source and export income. It also affects how costs that relate to that income are treated.
## How to decide the source
The test is where the activity, contract or transaction is completed or takes effect, not where the company is registered or which bank account receives the money. A contract performed and used entirely outside Panama is foreign-source. A sale to a customer in Panama is Panama-source. Mixed cases need facts, so a Panamanian contador p煤blico autorizado (CPA) should confirm anything borderline.
## Records to keep
Record the source of each income stream when you invoice it. Keep contracts, delivery evidence and invoices that show where the work was done and used. A source split made at year-end is hard to support if the DGI asks.
## What Finn does
Finn asks about the source when income is recorded, carries the split into the ISR figures and the dividend calculation, and flags unclear cases for your CPA.
Source: https://dgi.mef.gob.pa/
Real-World Examples
Overseas software client
A Panamanian company builds software for a client abroad, and the work is performed and used outside Panama. That income is foreign-source and exempt from Panamanian income tax.
Panama retail customer
The same company sells a service to a business in Panama City. That income is Panama-source and part of the 25% ISR base.
Mixed contract
A contract has work in Panama and work abroad. The income needs splitting on a documented basis, and a CPA should confirm the split.
Common Mistakes to Avoid
- Treating registration in Panama as the test, instead of where the income arises
- Not recording the source when invoicing
- Quoting one dividend rate without checking the source of the profit
- Assuming every overseas invoice is automatically exempt without checking where the work takes effect
Frequently Asked Questions
Is income from foreign clients taxable in Panama?
Income from activities, contracts or transactions completed or having effect outside Panama is exempt. Borderline cases should be confirmed with a CPA.
Does the bank account matter?
No. The currency or bank account the income is received into does not change its source.
Does the territorial system affect dividends?
Yes. Dividends from foreign-source or export income are taxed at 5%, against 10% for dividends from Panama-source income.
Do I still file a return if all income is foreign?
A company with an active Aviso de Operaci贸n still files an income tax declaration, including a zero-income one.
Does ITBMS follow the same test?
Exports are zero-rated for ITBMS. Confirm the treatment of each supply with the DGI.
Practical Tips
- Record the source on every invoice at the time of sale
- Keep contracts that show where work is performed and used
- Ask a CPA to confirm any contract that mixes Panama and overseas work
- Keep foreign-source and Panama-source income in separate accounts
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