Getting Tax Residence in Panama
We are seeing an increasing number of entrepreneurs in online or internet businesses, such as developers of software and applications for mobile platforms or simply individuals that work out of their laptops and keep moving around the world doing business and retirees that are looking for a solution in order to keep their financial privacy and/or simply gain protection of the assets they accumulate and flexibility to do business.
However, individuals looking for solutions may be misled with so much information online because gaining residence, from an Immigration point of view, will not be sufficient in light of the OECD’s closing loopholes and forcing countries and subsequently Banks, to do more due diligence on their clients to determine where a client is tax resident. Faking a relocation will not work, it will not be enough as you will need to prove you actually live in that new country you say you are resident of, you will effectively have to choose between playing by the new rules or leave your country and relocate to countries that are friendly to you. In addition, Banks are getting increasingly difficult with clients that are not tax residents anywhere, thus be aware that your bank account could be closed or not open because of this.
In this sense, showing a bank that you have a utility bill with an address from X country may not be enough in the future. Therefore, you should start planning how to become a tax resident in a country that offers you stability, good communications, good infrastructure and flexibility tax wise.
Why Panama? The answer is simple: Panama has it all, warm climate year-round, beaches, mountains, great food, great internet and air connectivity, but above all, has stability as it is a proud member of a select group of Latin American countries (Chile, México, Brazil and Peru) that have Investment Grade. On March 23, 2010, Fitch Ratings granted Panama the rating of BBB- with a positive perspective. Since 2010 the Investment Grade has been sustained every year, the latest ratings are: Standard & Poor's credit rating for Panama stands at BBB with stable outlook. Moody's credit rating for Panama was last set at Baa2 with a stable outlook. Fitch's credit rating for Panama was last reported at BBB with a stable outlook.
In addition to the above, by doing business from Panama your income is not taxable in Panama, so long as such income generates from foreign sources. It’s not even reportable to the Panamanian Revenue Agency. What does this mean? It means that Panama has a Tax System that is based on the Territorial Principle of Taxation. This principle that Panama has embraced means that only Panama-sourced income is taxed.
An entity or an individual which has its activities outside of Panama will automatically escape taxation. On the contrary, an entity or an individual which engages in a business activity within Panama, receiving Panamanian source income, will be subject to pay income tax annually.
According to Paragraph 2 of Article 694 of our Fiscal Code, the income derived from the following activities is not considered from Panamanian source:
- Invoice, from an office established in Panama the sale of merchandises or products for a higher amount of that for which such merchandises or products have been invoiced against the office established in Panama, always that such merchandises or products only move outside.
- Manage, from an office established in Panama, transactions that perfect, consume or have effects abroad.
- Distribute dividends or participations of juridical persons, when such dividends or participations derive from incomes that are not produced within the territory of the Republic of Panama, including those incomes derived from the activities mentioned in literals a and b of this paragraph.
In this sense, Panama is the perfect place for clients to relocate, establish their base of operations and create the necessary history, to acquire a tax resident status. And remember, the latter, does not necessarily translate into filing tax returns and paying income tax in Panama, due to the Territorial Principle of Taxation.
How to become a tax resident in Panama?
The first step is to secure your Permanent Residence in Panama from the Immigration point of view and Panama does offer several programs to this effect.
One of the most popular programs is the Friendly Nations Visa, that allows nationals of the following 50 countries to apply for Permanent Residence in Panama:
- Costa Rica
- Czech Republic
- Great Britain
- Hong Kong
- New Zealand
- Republic of Korea
- San Marino
- South Africa
- United States of America
The immigrant must prove economic solvency to the immigration service and professional and economic ties with the Republic of Panama. An “Economic Activity” means the applicant owns either a Panama corporation or a Panama company (new or an existing business). Foreigners are prohibited from operating a Panama retail business though.
Another option is to prove “Professional Activity” by means of being employed by a professional Panama company, obtain a work permit and register with Panama’s Social Security system.
To prove the economic solvency, the foreigner would need to open a personal bank account in Panama and deposit a minimum of USD5,000 (plus USD2,000 for each dependent – spouse and children under 18 or up to 25 years of age if still studying).
There are other interesting programs to acquire Permanent Residence, such as the Pensionado Visa (better known as the Retiree Visa) and the Self Economic Solvency Visa (Requires an investment of minimum USD300,000).
To become a tax resident in Panama and therefore be eligible to apply for a Tax Residence Certificate, the following rules apply:
- Remain for more than one hundred eighty-three (183) calendar or alternate days in the fiscal year in the national territory of Panama.
- Also, natural persons who have established their place of residence in the territory of the Republic of Panama.
Remember, faking a relocation will not work, it will not be enough as you will need to prove you actually live in that new country you say you are resident of.
We remain at your disposal for any queries you have on this matter.