An Expat Guide to Panama Taxes and the Territorial System

Explore Panama taxes and the territorial system in this expat guide, where you’ll find the information you need on tax rates, foreign income rules, and essential knowledge for living abroad.

If you do business internationally or you’re thinking about moving abroad, you’ve probably heard people talk about “territorial tax systems.” Maybe you’ve heard that some countries only tax local income, or that places like Panama offer special tax advantages. But what does all this actually mean?

This guide explains territorial tax systems in clear, simple terms. You’ll learn what these systems are, how they work, and why they matter to people doing business across borders, with a special focus on Panama taxes and the territorial system in that country.

So if you’re relocating to Panama, starting an international business, or just want to understand how territorial tax works, this guide will give you the basics you need.

The Basics: Understanding Territorial Tax

Most people are used to paying tax based on where they live. If you live in the United States, for example, you pay US tax on everything you earn – whether you earned it in New York, London, or Tokyo. But territorial tax works differently. Under this system, you only pay tax on money you earn inside that country’s borders.

Every country in Central America operates under a territorial tax system. Let’s use Panama as an example. Under Panamanian law, if you earn money from activities in Panama, it’s taxable. If you earn it outside Panama, it’s not. The law doesn’t care where contracts are signed, where payments come from, or what nationality the people involved are. The only thing that matters is where the income-producing activity takes place.

This distinction is particularly important today with remote work becoming common. Consider an online marketing consultant living in Panama who serves clients in the United States and Europe. She pays no Panamanian tax on that income. However, if she takes on local Panamanian clients, she’ll pay tax on those earnings. Meanwhile, someone doing identical work from the United States pays U.S. tax on every dollar, regardless of where their clients are located.

Income is considered Panamanian-sourced when it comes from operations within Panama’s borders, services performed inside the country, local real estate, or capital invested within Panama. For example, if you run a hotel in Panama City, that’s clearly local income. If you import goods from abroad to sell in Panama, you’ll need to separate your income sources – the sales in Panama are local income, while the foreign portions aren’t.

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Taxes in Panama

Panama’s tax structure strongly favors those who do business internationally. If your income comes from outside Panama, you pay no tax on it. If your income is from Panama-based activities, personal income tax follows a simple progressive scale: no tax on the first $11,000, then 15% on income between $11,000 and $50,000, and 25% on anything above $50,000.

For businesses, Panama charges 30% corporate tax, but remember – this only applies to income generated within Panama. A company operating in Panama but earning its money from foreign sources pays no Panamanian tax on that foreign income.

Panama adds to its appeal by not imposing wealth tax, inheritance tax, gift tax, or tax on cryptocurrency gains. The country is particularly well-known in the international tax sector, even more so since the Panama Papers scandal, but this hasn’t diminished its popularity among Americans and Canadians who see it as an ideal destination.

Another significant advantage of Panama is the possibility of achieving zero tax through the use of tax-free offshore companies, as Panama has no Controlled Foreign Company rules. However, potential investors should note that Panama has relatively few double taxation treaties – just 17 in total. It also remains on the European Union’s list of non-cooperative jurisdictions, which can affect certain international business strategies.

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Company Registration in Panama

Panama is also known for its offshore companies, offering both tax advantages and privacy. The same territorial principle that applies to individuals extends to corporate taxation – a company in Panama pays zero tax on income from sources outside the country. This foreign-source income doesn’t even need to be declared to the tax authorities.

Panama’s corporate structure offers strong privacy protection. The country maintains strict banking secrecy laws, and corporate books are protected. Company assets and accounts are fully shielded under Panamanian law, preventing third parties from accessing details about business operations and assets. Ownership can remain anonymous through the appointment of nominee directors.

The registration process is straightforward and quick. There’s no minimum capital required to form a company. However, it’s important to note that while Panama provides privacy, it’s not the regulation-free environment it once was. The country has implemented stricter due diligence requirements in recent years, though these mainly affect the registration process rather than the tax benefits.

Living Under a Territorial System

Understanding how territorial tax works day-to-day requires careful attention to where your income comes from. The key is keeping clear records that show the source of every dollar you earn. This isn’t just good practice – it’s essential if you’re ever asked to prove your income is genuinely foreign-sourced.

Some common mistakes can create problems. For example, running an online business from Panama doesn’t automatically make your income foreign-sourced. If your clients are in Panama, that’s local income regardless of how you bill them or get paid. Similarly, working remotely for a Panama company counts as Panama-source income, even if the company’s customers are all abroad.

Banking needs careful consideration too. Interest from Panamanian bank accounts is considered local income, but interest from foreign banks isn’t taxable. Investment income follows similar rules – dividends from Panamanian companies are local income, while foreign investment returns aren’t taxed.

For Americans especially, understanding these distinctions is crucial because U.S. tax obligations continue regardless of Panama’s territorial system. The IRS still requires reporting of worldwide income, even if Panama doesn’t tax it.

Making Territorial Tax Work For You

Understanding territorial taxation is essential for anyone considering international business or living abroad. While all countries in Central America use this system, Panama stands out for its straightforward approach and clear benefits.

The key points to remember are simple: income from outside Panama isn’t taxed, and the source of your income matters more than where you live or where you’re from. For many international entrepreneurs and retirees, this creates significant advantages – but it requires proper planning and careful record-keeping.

However, territorial tax isn’t a magic solution for everyone. You need to consider your whole tax picture, including any continuing obligations in your home country. While Panama offers strong privacy and tax advantages, recent international scrutiny means these benefits need to be balanced against increased reporting requirements and fewer tax treaties.

The territorial system remains one of Panama’s strongest attractions for international business and residence. But like any tax system, it works best when you understand both its benefits and its limitations.

Idaliz Guiraud is the managing partner and founder at Guiraud Law, specializing in banking, commercial, immigration, real estate, trade, tax, and wealth structuring. She lives in Panama City, Panama.