By Steven Rich, MBA
Marketing Manager for Panama Offshore Legal Services

Panama has many types of taxes. In this article, we will provide you with a summary of the major types of Panamanian taxes. Prior to relying on these summaries, consult with a Panamanian tax lawyer or accountant.

PROPERTY TAXES
Properties with a registered value of $30,000 or less do not pay property taxes.

Properties of a higher value will pay property taxes as follows:

1.75% from $30,000 to $50,000;
1.95% from $50,000 to $75,000; and
2.1% for any property valued above $75,000.

Alternative Property Tax Calculation: Under a 2005 amendment to the law, there is an alternative calculation:

0.70% over the amount exceeding $30,000 to $50,000
0.90% from $50,000 to $75,000
1% of the amount exceeding $75,000.

This amounts to an approximate savings of 50% compared to the Regular Tax Rate.

Availability: The Alternative Property Tax calculation is only available to properties which are up to date with their property tax payments and the taxpayer presents a sworn declaration of the property's estimated value countersigned by an appraiser within one year of this law coming into effect (by June 30, 2006). The Tax Department (Cadastre) may or may not accept the proposed value. If it does, the Cadastre Department cannot change the value for at least 5 years.

Exemptions: There is a 20 year exemption applicable to buildings (both residential and commercial) but not for the land. This exemption is limited to projects that have a construction permit before September 1, 2005 and have an occupation permit before August 31, 2006.

After those dates, the following exemptions will apply:

For Houses:

For Commercial Buildings:
Any value of the building: 10-year exemption

The exemption is transferable during the exemption period to any new buyer.

The land itself is not exempted and will continue to incur property taxes if its value is above $30,000.

CAPITAL GAINS TAX
Panama has Capital Gains taxes. The rates differ between individuals, real estate dealers, and corporations.

Individuals: Individuals who are not real estate dealers (not in the business of buying & selling) will pay a flat 10% Capital Gains tax rate. You are allowed to sell real estate on an occasional basis without being classified as a professional real estate dealer who pays the higher rate.

Real Estate Dealers: Individuals who are in the business of buying & selling real estate are considered "real estate dealers". Dealers will include the Capital Gain as normal income in their annual tax return and pay whatever level s-he is being assessed as income taxes. This could be up to a 27% maximum rate.

Corporations: Corporations who sell real estate will pay a flat 30% Capital Gains tax rate.

Taxable Base: Capital Gains taxes are determined by using a formula called "Taxable Base". The costs incurred with purchasing and making improvements on your property are called "Cost Basis". You determine Cost Basis by adding the purchase price + costs of improvements + Closing costs (purchase & sale). If you acquired the property by inheritance or as a gift, the Cost Basis is the official Public Record of land value + value of the permanent structures on the day title transferred to you.

Here's another way of putting it: Capital Gains are determined by the difference between the sales price and the property's Basis + sales expenses.

Payment: If you qualify for the flat 10% rate, you must pay it before the title transfer is registered with the Public Registry.

Tip: If the property is owned by a corporation, the corporation's shares can be sold (instead of the property), eliminating the need to pay the Capital Gains tax.

BUSINESS INCOME TAXES
Taxation in Panama is governed by the Fiscal Code which provides that only those incomes derived from business carried on in Panama itself are subject to taxation.

Capital Gains are counted as normal income after allowed deductions.

FILING DEADLINE: The tax year is the calendar year ending December 31st. Your tax return is due within 3 months (which can be extended to six months).

ESTIMATED TAXES: There are estimated tax payments made 3 times every year. Your previous year's tax return must be accompanied with a forecast of the current year's taxes. The three installments are then made after 6, 9 and 12 months. Any underpayments or over payments will be rectified when you file that year's tax return.

CORPORATE INCOME TAX
30% Flat Rate: Corporations pay a flat net income tax rate of 30%.

Dividends are taxed at a flat 10% rate.

Small Companies: The tax rate is different for corporations considered to be "small operation companies". Here the tax will be computed according to the rate for individuals up to the first net $100,000 plus 30% on the net income exceeding $100,000 up to $200,000. In addition small companies are exempt from the Complementary Tax and the Dividends Tax.

Small Companies are those that:

1. Are not the result of a sub-division of a large company;
2. Nor an affiliate, or a subsidiary controlled by another corporation;
3. The annual gross income does not exceed $200,000;
4. The shares are nominative; and
5. The shareholders are individuals.

NATIONAL INDUSTRIES & GOVERNMENT CONTRACTORS SPECIAL TAX RATE
The Income Tax Rate for Panama companies that are registered with the Official Registry of National Industry or that have government contracts is 30% of the net taxable income up to $100,000 rising to 42% on income over $500,000 after deductions.

Commercial License Tax
Panamanian companies (except Offshore companies and Free Zone companies) must pay an annual Commercial License Tax of 1% of the business' net worth (minimum $10 to a maximum of $20,000). Certain rural and/or small businesses are exempt from this tax. Municipalities may also levy an additional business license tax.

Social Security Taxes
Both employers and employees contribute to the social security of Panama.

The employer pays 10.75% of all salaries and wages, plus 1.5% education tax. The employer deducts the social security taxes from its income taxes.

The employee pays 7.25% (social security tax) plus 1.25% (education tax).

Self-employed and small business owners pay larger social security taxes.

PROPERTY DEVELOPERS
The government of Panama offers several tax breaks for developers, depending on the type of project and the location. For example, in certain areas of Panama, the government offers tax exonerations on importation of construction materials, equipment, automobiles, and more. In addition, property taxes are exonerated for up to 20 years on new construction, offering buyers tax incentives.

Tax Benefits for Developers: Since the enactment of Cabinet Decree No. 109 (1970), successive legislation has been passed offering tax benefits to developers. As the nation's largest employment sector, the construction industry received these incentives to help bolster investment in this sector, which would in turn benefit the country's overall employment picture. It has been widely accepted that, as a result of these incentives, purchasers of real property have also benefited.

Cabinet Decree No. 44 (1990), and its implementation through Resolutions No. 201-1622 in December 12, 1990, enunciates that the purchaser of residential units, apartments or single homes, built within the time table set forth in the Decree, is exempt from property tax (improvements value) for up to 20 years from when construction began. It is important to note that this exemption does not include property tax on land, but refers to the dollar value on all improvements on new construction.

Like Kind Exchanges: The developer also benefits from an exemption of income tax, if the earnings obtained from the construction are reinvested into new construction projects within two years. Certain conditions apply. This tax incentive is similar in nature to those referred to in the United States as the 1031 exchange or "the like kind exchange".

As mentioned above, article 3 of Cabinet Decree No. 44 (February 17, 1990), states the following:
"Starting February 1, 1990, income obtained from selling real property, which is reinvested in new constructions, will be exempt from income tax, as long as the cost of the new construction is at least four times applicable in each case. If the cost of the new construction does not exceed the amount mentioned above, the tax payer will be authorized to deduct from the income originally obtained, at least twenty percent (20%)........".

In other words, if you sell real property and purchase similar new construction real property (within 2 years)valued at four times your sales price, you will be exempt from paying Capital Gains taxes.

In Conclusion: Like many countries, Panama has too many taxes. We have provided you with a basic understanding of the types of taxes in Panama. We included certain exceptions, exemptions, and tax saving tips. However, this is only a layman's guide. You must use a qualified Panamanian tax lawyer or accountant before relying on this information or planning any tax saving strategies.

Panama's booming economy will soar by up to 8 percent in 2006, the government said on Wednesday, revising up a previous estimate following an upturn in construction and mining and a boost from consumer spending.

The finance ministry said in a statement it expected the economy to grow between 7.5 and 8 percent. The government previously expected growth between 6 and 6.6 percent.

First-quarter gross domestic product grew 7.9 percent.

The mainstay of Panama's economy is income from its interoceanic canal, a key trade route for China and the United States.

Many modern ships are bigger than its locks and a long-awaited expansion plan, costing $5.25 billion, was announced in April. It must be approved by the public in a referendum expected later this year.

Panama is Central America's largest issuer of sovereign debt, and the canal expansion calls for up to $2.3 billion of new borrowing, to be issued by the Panama Canal Authority.

Virgil Esguerra, a sovereign analyst at HSBC bank, gave a cautious welcome to the new projections, but advised prudence.

"It's definitely not a conservative estimate," he said. "Economic activity is gaining momentum, but I would shy against assuming that the first-quarter growth of 7.9 percent would be sustained for the rest of the year."

Panama's economic growth is dependent on that of other nations such as China, a major canal user.

"Any slowdown in global growth, especially in China or the United States, would definitely harm Panama," said Esguerra.

Museo de la Esmeralda, the only museum/boutique specialized in emeralds in Central America, has a new address. It is now located on Plaza Catedral, across from the Metropolitan Cathedral in San Felipe, Panama City’s old quarter.

The museum, the Panamanian branch of a Colombian-owned chain with stores in Cartagena and Spain, also doubles as a jewelry store and boasts a replica of Colombia's three largest emerald mines (Muzo, Coscuez and Chivor), where visitors learn about the history, chemical composition and the extraction process of the gem.

The jewelry store has a wide selection of polished or unpolished gems, which can be purchased individually or as part of elaborate rings, necklaces, bracelets or earrings, made of pure gold or fine silver. Prices range from as as low as $3.00 to prices worth several thousands of dollars.

For more intformation, send an e-mail to: info@museodelaesmeralda.com