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How to Pay Zero or Low Taxes in Panama (Territorial Tax)

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You’ve probably heard lots of rumors, half-truths, and downright falsehoods about how paying zero tax in Panama is possible. 

It’s not surprising, given Panama’s reputation over the years as a tax haven, a place to hide your money, and one that throws citizenships around like wedding confetti.  The fact is, we’ve never seen someone get citizenship there, if not by birth. 

The purpose of this article isn’t to burst the balloons, but we’re here to tell you that the party has ended. After the now-infamous Panama Papers leaks, the country had little choice. That was the past, but looking to the future, the good news is that you can still legally pay Zero or Low Taxes in Panama if you structure things properly. 

You won’t get citizenship very easily, and certainly not quickly.  Permanent residence, however, for five years, and the possibility of citizenship after that can significantly reduce your tax burden. It’s a pretty cool place to live, as well. 

Before we get into the tax stuff, let’s look at why you would want to live in Panama, even if it’s only for a few weeks or months every year. 

Why Live in Panama? 

Straight off the bat, this will especially appeal to you if you’re from North America. That’s not to say it won’t if you’re from anywhere else. The proximity to the US and Canada and the cultural dimensions of a Spanish-speaking Latin country could be a draw for many. 

The Island country, through its cosmopolitan capital, beach culture around the edges, and mountainous interior, has a bit of everything. The weather is tropical, and you will need bug spray, with warm to hot temperatures year-round.  

In terms of living costs, it’s not cheap, but it’s not that expensive. A meal in an inexpensive restaurant will set you back around US$12 per person; a three-course dinner for two in a mid-scale restaurant can be as much as $50. Of course, you could have some delicious empanadas and a beer for as little as five bucks. The official currency of Panama is the balboa (PAB), which is used alongside the US dollar. 

Like most places in the region, the sprawling Panama City has extremes of both wealth and poverty. Overall, though, it’s fairly exciting. The ‘Manhattan of Latin America’ has a lot to offer expats, from high-end shopping malls to bars, clubs, museums, and UNESCO World Heritage sites. Punta Pacifica is where many of the wealthiest live and is one of the most expensive areas in the city. 

So, in Panama, you get a mix of Spanish and Caribbean culture, English is spoken widely, and there’s plenty to enjoy. But how do you go about becoming a resident?

Getting Residency in Panama

Before you even get a sniff of a tax incentive, you’ll need to cement your status in the country by gaining residency. 

Panama is a fairly open country with many different programs for people who want to get in. The standard one, the Friendly Nations Visa, is a special immigration program where citizens of selected countries who have professional or economic ties with Panama are eligible to apply for permanent residency.

You then have the right to request a Panamanian ID and work permit. Before getting permanent status, you’ll receive a provisional residency valid for two years. After that, you can ask that it be made permanent. 

The Friendly Nations Visa applies to people from 50 countries, including the US, Canada, Australia, and the UK. It’s perfect for those looking for a second residence without spending too much time on the ground there. To be eligible, you must show economic or professional ties to Panama. There are three ways you can do this:

  • Own a Panamanian property with a value of at least US$200,000. 
  • Open a Panamanian corporation.  
  • Deposit at least USD 200,000 in a national bank in Panama. 

It takes three years to get permanent residency using this route. Technically, you can apply for citizenship after maintaining residency in Panama for five years. Technically, it may not be granted, but we’ll get to that later. 

The other route to permanent residency is the somewhat bizarrely named ‘Red Carpet’ program, Panama’s Golden Visa. It’s for those who want to establish permanent instant residence in return for investing a more significant sum in the country. It’s also for those whose nationality doesn’t fall into the friendly nations and who want to visit Panama often. 

You get the visa by putting $500,000 into any of a number of investments. As an extra incentive, until October 2024, the sum has been reduced to $300,000. 

Options include real estate, the Panamanian stock market, or a fixed back deport of the higher figure of  $750,000 for at least five years. With that, you become a five-year resident and must only go there for a few days each year to keep the Visa active. 

Let’s dispel a major misconception right here, though. 

Panama offers permanent residence with the above programs, not tax residency. Being a permanent resident and spending the one day every two years required to keep your immigration status active does little to help you with taxes. 

Despite its popularity, Panama’s fast track to residency is not the panacea many claim it to be. It may be part of the solution, but it won’t solve your tax problems alone. If you don’t plan it properly, it can make the situation worse. As with any residency program, you need to understand how residency there will fit your overall objectives. And if one of those is to pay less tax, read on. 

Panama’s Territorial Tax System 

Let’s be clear: to pay less tax in Panama, you first need to be a tax resident. You must meet two vital criteria – spend at least 183 days in a tax year in Panama and prove you have a permanent home there. 

Regarding taxation, Panama residents are required to pay income tax. Still, it’s estimated that around 90% of residents there do not pay any direct taxes because the first $11,000 of income is entirely exempt from taxation.  

Since most people earning a high income only make money outside the country, Panama does not collect a large income tax.  You will have to pay some income tax in Panama if you technically run your business from the country or work there on the ground. 

Therefore, you pay 15% in income tax for anything you earn between 15k and 50k; anything over that is taxed at 25%. There is no capital gains tax, inheritance, or wealth tax. Still, a small withholding tax of 5% on foreign revenue from a Panamanian company and 10% on dividends from domestic profits. If interest and royalties are paid to a non-resident, the withholding tax rate increases to 12.5%.

How to Pay Zero or Low Taxes in Panama

Panama is not a zero-tax jurisdiction. There is a tax in Panama, and local companies pay it. However, income sourced abroad is not taxed in Panama due to our territorial taxation system.

Once you’re a tax resident, Panama’s tax system – territorial with higher taxes for locally-sourced income – can be structured so that you have little or no tax to pay in Panama if everything is foreign-sourced. 

Panama entities can pay 0% if they operate outside the country and deal with international businesses. Those who operate inside the territory can pay as little as 7.5% in corporate tax if they qualify as a micro or small entity. 

However, there is another side to that. While you could follow some basic protocols, set your company up properly, and pay 0% in Panama, you also need to consider whether you will pay taxes where you’re from. 

Panama is not like the UAE, where there is simply no tax. There is no tax on foreign income for people who live there, under certain conditions, or for companies set up to do business offshore. Part of planning to pay low or zero taxes requires you not to live in a high-tax country. 

If you are from a country that taxes based on your residence, you may pay taxes on the Panama company in your country.  

The Issue with Panama Citizenship 

In past years, Panama was considered a decent option to get on the path to a second citizenship. Then stories started to emerge about people who had spent a decent amount of time there, not being naturalised because they needed to meet specific requirements. 

People living there would file an application, go through the process, and sit in the president’s office, not being signed off on. 

If you’ve been told that it’s fast, cheap, and easy to get citizenship in Panama, and you can get a lawyer there, they will tell you that Panama is a good bet. 

In a country like Panama, you have to accept the risk that the party might end, and it might tighten up the laws. That, in a nutshell, is what has happened in Panama.

Panama is a great place to live; it’s a great place to make your tax home or as a back-pocket, Plan B residence. If you want an appealing place to go, particularly if you’re American, Canadian, or perhaps from the UK – it’s a comfortable place that’s pretty close in distance or culture. 

If you want to escape high taxes or have an alternative if events take a turn for the worse in your home country, spending a few days, weeks, or months there each year is an excellent option. 

You can put money in one of the banks, set up a company, or buy real estate or forestry to achieve residency, but rely on something other than it as a citizenship option. 

People still claim that Panama is one of the easiest countries in the world to become a citizen of, but that is not true. Getting citizenship through naturalization is increasingly rare there, and even if you’re one of the lucky ones, it could take considerably more than ten years. 

Lower Your Tax Obligations

In general, having a second residency offers a number of benefits, including the chance to lower your tax obligations. Panama offers this and more for international citizens and location-independent entrepreneurs. It will also appeal to those who want a middle-ground country in Latin America with good connectivity. 

It’s a place where a cheaper permanent residence is possible, with little or no physical presence requirement. 

But If you’re from the US, you could still be subject to tax in your own country unless you renounce. The issue is that you may not be accepted. 

That said, you get a relatively cheap permanent residence in Panama with little or no physical presence requirement. It works for people who want to be close to America and Canada, get permanent residence, and visit once or twice a year. It’s also a good backup residency option. 

For those who want to be tax residents and spend six months a year there, structured In the right way, you will only pay tax on Panama-source income. In other words, very little if you set up the right business entity. 

There is no guarantee of zero percent tax simply by having a toe in the water; you must be fully in. Countries like Panama, with a carve-out for offshore income, are under pressure to harmonise their tax regimes. We will see what happens in the future, but if you want to act, now is the time.

Nomad Capitalist is a turnkey solution for offshore tax planning, dual citizenship, asset protection, and global diversification. We have helped 1,500+ high-net-worth clients and can help you, too. Find out how here

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