Most Central American Countries have established as the basis for the collection of income tax the application of the principle of territoriality in tax related matters. In Panama, a modern tax system has developed in which it is only valid the payment of income tax on income obtained from operations made within the national territory. Generally speaking, such system may be defined as the obligation of the taxpayer to pay taxes for net income obtained within the territory of the country in which the collection is made. The territory is thus the first basic element of such system.
According to the tax code, all incomes generated by sources located within the territory of Panama are subjected to the payment of income tax, independently of the place where they are paid or received, and independently of who may be the person who pays for them, also independently from the nationality, domicile or residence of the person who receives them.
The law clearly establishes such concepts in article 694 of the Tax Code, as follows:
Article 694. The object of this tax is the taxable income that is produced, from any source, within the territory of the Republic of Panama whatever may be the place where it is received.
Taxpayer, such as the term is used in this Title, is the natural person or legal entity, national or foreign, who receives the taxable income that is the object of the tax.
Such taxpayers who sporadically serve outside the national territory to offer consultancies, make professional presentations, give lectures and similar activities, will be exempted from this stipulation even if the periods of stay outside the country within a given year correspond to less than 30% of the days of the calendar year.
If the services rendered outside the national territory are not economically related to the taxable activities that the natural person taxpayer carries out within the national territory, the income produced will be considered to come from a foreign source.
The income derived from the following activities will not be considered as generated within the territory of the Republic of Panama:
- Invoicing, from an office established in Panama, the sale of merchandise or products for an amount higher than the one for which such merchandise or products have been invoiced against the office established in Panama, provided that such merchandise or products only move abroad. For these purposes the merchandise or products that move exclusively abroad, with knowledge of loading, the documents in which it is indicated that they are sent to persons who do not live in the Republic (of Panama) and the goods that come to the country from persons who are resident in the Republic with knowledge of loading, the documents in wich it is indicated that those products are sent abroad immediately after they have arrived (will not be considered as generated within the territory of the Republic of Panama).
- To direct from an office established in Panama transactions that are perfected, consumed or have effects abroad. This stipulation will also be applied to the holders (visitors) of temporal special visas who receive their income directly from their main offices located abroad notwithstanding that they live in the country to carry out the activities referred to in this paragraph.
- To distribute dividends or participations of legal entities, provided such dividends or participations come from income generated within the territory of the Republic of Panama, including income from the activities mentioned in the previous points of this paragraph.
- Interests, financial commissions or other similar benefits received by natural persons or legal entities, independently from their place of origin or domicile, from loans, deposits of money or any other financial operation performed with borrowers whose domicile is outside the national territory, provided that the services rendered and the use of the money are effective outside of Panama, even when the reimbursement of capital or interest is effective within the country.
- Interests, financial commissions or similar benefits coming or resulting from loans, lines of credit or any other type of financial operation peformed with legal entities, independently from the place of their origin or domicile provided that those legal entities exclusively receive incomes not generated or that are considered not generated within the territory of Panama, including those incomes received in the Republic of Panama due to interests, financial commissions or similar non taxable benefits, will not be considered to come from a Panamanian source.
- Reinvoicing of merchandise that arrives to national ports or airports of Panama in transit to another destination. Such merchandise must remain under the official safekeeping of the custom authorities who will guarantee that they will not be illegally introduced in the fiscal territory of Panama.
- Reinvoicing of merchandise or products from an office established in Panama for amounts that are higher than the amount charged to the company located in Panama, provided that the merchandise or the products sold will exclusively be moved to a foreign country.
- Dividends or income resulting from the distribution of benefits received by natural persons or legal entities, provided that they come from income not generated within the territory of the Republic of Panama.
- Trusts set up in accordance with Law No. 1 of January 5, 1984, regarding assets located abroad, moneys deposited by natural persons or legal entities whose income do not come from a Panamanian source, shares or stocks of any kind issued by corporations whose income does not come from a Panamanian source, even if such moneys, shares or stocks are deposited in the Republic of Panama.
- Leases that are paid to lessors in cases of international leasing contracts referred to in article No.2 of Law No.7 of July 10, 1990.
- Premiums that come from insurances and reinsurances that cover risks for persons and assets abroad and premiums from reinsurances assigned to reinsure the companies located outside the territory of the Republic of Panama.
- Sale of shares and quotas of participation of legal entities set up under the laws of the Republic of Panama, when the activities of such corporations are carried out exclusively outside the national territory.
- Incomes generated by natural persons or legal entities domiciled abroad who receive payments for merchandise or services completely financed, contracted or executed outside of the national territory in favor of taxpayers, such as hotels, international car rental, naval or aerial repairs of ships or aircraft engaged in international operations, transport or other collections done to naval agencies by naval lines and international tour operators, as well as other activities of international commerce.
- Incomes generated by natural persons or legal entities who, due to their activities of international businesses that include the provision, as well as the receipt, of merchandise and services, perform operations outside the national territory.
Incomes generated by natural persons or legal entities, Panamanian or foreign, engaged in the operation of cruises or passenger ships, rendering international services, even when they transit in Panamanian waters or make a stop in Panamanian ports, the benefits received from the sale of boarding passes, of sale to their passengers of tours in the Republic of Panama that third parties operate in the Panamanian territory, of promotions on board or of publications or of advertising material of cruise, of business establishments located in Panama, of the services offered to their passengers during their stay in Panamanian waters and ports, nor of payments received from the Republic of Panama for the disembarkation of passengers in Panamanian waters.