Taxation of individuals in Panama
Panama still has a too negative connotation in (museum) Europe: one thinks about the unsafe Panama of the eighties which was in the clutches of the evil, drug-running military dictator Manuel Noriega. In reality, however, things have changed. Press the reset button because nowadays, Panama is a superb place to reside. Panama is doing very well with economic victories such as the expansion of the Panama Canal and investments in mining and construction. Ricardo Martinelli is the current president, a successful entrepreneur who managed to introduce a new, healthy, liberal political line in Panama.
Panama means clean air, beautiful beaches and unspoiled nature. The incredible flora and fauna exceed the power of imagination. Cosmopolitan Panama City offers pleasant boulevards, skyscrapers and an exciting nightlife. Above all, Panama is a tropical country with a climate like a perpetual summer. Panama has two seasons: the dry season tends to run between late December and early May while the rainy season runs between late May and early December. Temperatures in both summer and winter vary between 21 and 30 degrees Celsius (between 70 and 86 degrees Fahrenheit). During the rainy season, a refreshing shower generally lasts one hour maximum.
With an annual growth of 10.6% in 2011 and an estimated annual growth of 10.7% in 2012, Panama is doing extremely well! Panama is a great country to live in, to invest in, and to do business in. Panama City, one of the leading financial centres in the world, attracts money from individuals from all over the world who are looking for a ‘safe haven’. Panama took over the status of financial centre of Central America from Miami. Foreign investment in Panama is the highest in Central America and is still increasing. A notable recent multi-million investment was the construction of the tallest building (284 metres or 932 feet) in Latin America: The Trump Ocean Club, a luxury hotel and offices complex built by Donald Trump.
The international magazine ‘Life’ refers to Panama as the number one retirement destination for pensioners. The reasons are abundantly clear. Panama offers a fantastic climate to live in: it’s a safe country with a stable democratic government, lots of sunshine and it has a very favourable tax climate.
Panama has a territorial tax system, meaning that it exempts all income earned outside Panama. This zero taxation policy of foreign income applies to resident individuals residing in Panama as well as Panamanian companies. As an individual, you can become a resident of Panama in several ways. Let’s have a look at three of the most important residence schemes available in Panama.
Scope of the personal income tax
Individuals are subject to tax only on their Panamanian-source income, irrespectively of their residence. As a consequence, foreign-source income is not subject to tax. Because of this, the concepts “resident” and “non-resident” is not defined in the Tax Code. Individuals are subject to income tax at progressive rates on their taxable income.
Rates of the personal income tax
The taxable income of individuals is subject to income tax at progressive rates. Taxable net income up to PAB 11,000 is exempt from income tax. Taxable net income between PAB 11,001 and PAB 50,000 is subject to a tax rate of 15%. Taxable net income over PAB 50,000 is subject to a tax rate of 25%.
The taxable income
The taxable income includes all Panamanian-source income, such as salaries, compensations for personal services, income from investments, income from commercial, industrial or agricultural activities, and expenses paid by an employer on behalf of an employee (e.g. educational expenses, rental payments and entertainment expenses).
The following categories of income are exempt from tax: (1) taxable net income not exceeding PAB 11,000 per year; (2) employment income not exceeding PAB 10,400 per year derived by individuals which is their only source of income; (3) dividends and other profit distributions paid by small or medium-sized enterprises to their shareholders or partners; (4) payments of up to PAB 5,000 made to employees upon termination of employment; (5) gains from public lotteries, games or bets; (6) inheritances, legacies and gifts; (7) income of individuals engaged in farming, provided that the annual gross income does not exceed PAB 250,000; and (8) dividends on nominative preferred shares when certain conditions are met.
This is a special programme designed for pensioners who wish to retire in Panama. Panama’s pensionado programme is considered the gold standard of overseas retirement programmes!
In order to qualify for this programme, you need to be a pensioner who’s receiving a monthly pension income paid by a foreign government, private company or international organisation. The applicant needs to receive at least USD 1,000 a month and an additional USD 250 for each dependent. Applicants also need to provide a health certificate and a document proving a crime-free record in their last place of residence. There are no requirements to buy real estate in Panama in order to qualify for the pensionado programme and foreigners who obtain a residence permit under the pensionado programme are protected from changes in the law, allowing them to maintain their residence status until they pass away.
Foreigners with the pensionado residence status aren’t entitled to apply for Panamanian citizenship (read a Panamanian passport).
It’s also interesting to know that you can apply for the pensionado residence permit even if you’re not really ‘old’. The government of Panama reviews applications on a case-by-case basis. This means that if you’ve begun receiving your pension income at a young age you’re welcome to apply. For example, in the case of sudden disability.
Person of Means (POM) Visa
If you’re not a pensioner, and you’re not planning to be employed or start a business in Panama, the Person of Means (POM) visa may be the best option for you if you wish to live in Panama. In order to qualify, you must have USD 300,000 available.
Basically, you have three options available to obtain your POM visa:
– You must purchase real estate property in Panama in your own personal name, for a minimum value of USD 300,000 and you must submit proof of economic solvency to cover your daily living expenses in Panama;
– You must establish a fixed-term deposit in a Panamanian local bank, for a period of at least two years and for a minimum amount of USD 300,000;
– You can also combine the two previous options, provided the total adds up to at least USD 300,000. For example, if you buy real estate in your own name which costs USD 260,000, you may place the remaining USD 40,000 in a fixed two-year deposit to qualify for this permit. Simultaneously, you must submit proof of economic solvency to cover your daily living expenses in Panama.
A provisional POM visa is granted for one year and permanent residence is granted from the second year onwards (together with the right to obtain an official Panamanian identification card). Five years after obtaining the permanent visa, holders will also have the option to apply for Panamanian citizenship (read Panamanian nationality).
Immediate Permanent Residence Permit
On the 16th of May 2012, the government of the Republic of Panama issued a decree with regard to a new immediate permanent residence permit. The Republic of Panama offers permanent residence to nationals of 47 countries based on the friendly, professional, economic, and investment relationships between the Republic of Panama and these countries. In other words, nationals of these 47 countries (which will be listed shortly) can qualify for the immediate permanent residence programme.
Origin of the immediate permanent residence permit
Panama is experiencing unprecedented growth but has a limited domestic workforce. Currently, the population of 3.5 million people doesn’t consist of enough qualified, educated and English-speaking workers. Panama has been attracting foreign businesspeople in growing numbers for the past decade and the businesspeople are facing a major problem with regard to the job market. Because of the limited supply of workers and the increasing demand for skilled workers, salaries are rising and often, employers can’t find and attract the employees they need. In other words, the Panamanian job market is dominated by the supply and demand game where the demand is extremely high but the supply of skilled labour is low. The long-term solution for this unbalanced situation is education, but this takes time. And the growing economy doesn’t have that much time. Panama’s president Ricardo Martinelli therefore decided that the only possible solution would be to import workforce. In other words, the lack of educated, skilled workers is the motivation behind this new immediate permanent residence permit.
Applicants are eligible in two cases. On the one hand, there could be professional reasons such as in the case where the applicant signed an employment contract with a Panamanian employer. On the other hand, there could be economic and investment relationships between the applicant and the Republic of Panama. In the latter case, the applicant must prove to have a commercial relationship with Panama (investing in Panamanian real estate or ownership of a Panamanian company with business licence). In both cases, once the applicant obtained the residence permit, he/she can request an indefinite work permit.
Easy application process
The immediate permanent residence programme avoids the red tape of the other residence programmes currently in place: it can be considered as the fast-track option to residence in Panama. Nationals of the following countries can qualify for the immediate permanent residence programme:
Andorra, Argentina, Australia, Austria, Brazil, Belgium, Canada, Chile, Croatia, Cyprus, Czech Republic, Denmark, Estonia, France, Finland, Germany, Greece, Hong Kong, Hungary, Ireland, Israel, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Norway, Malta, Monaco, Montenegro, Netherlands, New Zealand, Poland, Portugal, San Marino, Serbia, Singapore, Slovakia, South Africa, South Korea, Spain, Switzerland, Sweden, Taiwan, United Kingdom, United States and Uruguay.
There’s only one application form and applicants are required to deposit at least USD 5,000 in a local bank account, plus an additional amount of USD 2,000 for each dependent. As you can see, applying for residence in Panama definitely doesn’t cost the earth. Applicants will also have to prove that they have a genuine investment interest in Panama. This could be investment in Panamanian real estate, ownership of a Panamanian company with business licence or an employment letter and contract from a Panamanian employer. Other basic requirements are having a crime-free record in your last place of residence and having a valid passport.
Benefits and advantages
It’s possible to qualify for a work permit under this programme. This can be an advantage, even for pensioners. Some pensioners just love to be busy while others can’t afford not to work. Panama’s pensionado programme specifically restricts residents under this programme from undertaking a job. As a pensioner, you can now qualify as a resident of Panama under the immediate permanent residence programme in order to be able to undertake a job if you would like to.
Once an application is approved, the applicant and any dependents are entitled to permanent residence and a national identification card. The approved applicant can also apply for a work permit if desired. After five years, permanent residents also have the right to pursue naturalisation (read the right to apply for Panamanian citizenship). This differs from residents under the pensionado programme who don’t have this ‘application for citizenship’ option.
If you’re a national of one of the aforementioned 47 countries, you can apply for immediate permanent residence in Panama. Not only you, but also your spouse, children under 18, family members with disabilities, dependent parents and also children aged between 18 and 25 if they’re still students. And we’re not talking about temporary residence here, which requires a series of renewals, but fast-track permanent residence!
As a resident under the immediate permanent residence programme, you can also benefit from Panama’s territorial tax system: all your overseas income is tax-exempt in Panama. This offers splendid opportunities to create your own creative but legal story. For the entrepreneurs with a lack of imagination: you can always start a Panamanian company which will fulfil a (tiny) task out of one of your business processes. A Panamanian company which fulfils the online advertising requirements could be an option, for example!
And the best part: once you’re a resident of Panama under the immediate permanent residence programme, you’re as free as a bird. Indeed, Panama doesn’t impose specific requirements about how much time you should spend in Panama. To put it differently, you don’t have to reside a minimum number of days per year in Panama. It’s completely up to you. You’re designing your own life here: complete freedom, really enjoyable, just lovely!
Another positive note
Panama has one of the best programmes for foreign pensioners: the pensionado programme. However, until mid-2012, other people than pensioners faced substantial capital requirements to become a resident of Panama (for example, USD 300,000 in the case of the POM visa). Luckily, the new immediate permanent residence permit grants immediate permanent residence and this at a very low cost!