Panama is open for business. Few countries in the Western Hemisphere offer a business environment as friendly as Panama. The country welcomes Fortune 500 companies to set up regional headquarters here, and many have done so. Panama also offers an attractive business setting for entrepreneurs and small business owners. There are a slew of reasons behind why Panama’s business climate is so robust, especially for Americans. Panama uses the US dollar as its currency, so there’s no need to worry about exchange rates. Also, the dollar goes a lot further in Panama. Everything is less expensive, allowing you to do more with less money. Most importantly, business taxes in Panama benefit business owners and entrepreneurs.
Business Taxes in Panama
Before discussing specific rates, knowing Panama’s tax rules is essential. Like any nation, it has rules and regulations for paying and collecting taxes. Panama’s tax system is territorial. People who live in Panama pay taxes only on the income they earn inside the country. That includes non-residents who pay taxes only on income generated in Panama.
If you run a business in Panama, you must pay personal income taxes and income taxes on your business.
Tax rates for businesses in Panama
What does it mean to say that business taxes are advantageous? It means that they’re easy and low. Panama also has double tax treaties with the United States, Canada, and multiple European countries. Double tax treaties potentially reduce companies’ tax burdens in both countries and could also state which country has the right to levy the tax. That is one of the many reasons why it’s essential to consult a tax attorney when setting up a business.
The date to file your taxes in Panama without paying penalties is March 31. Additionally, there are key things to know about business taxes in Panama.
Corporate Income Tax
Every business in Panama, whether a sole proprietorship, partnership, or corporation, is charged a 15% corporate tax rate. However, some businesses can take advantage of deductions and exemptions.
Value Added Tax (VAT)
If your business is involved in the selling of goods and services in Panama, there is a 7% standard value-added tax. Essential items like food and medicine have a lower tax rate of 5%. Businesses must report all VAT monthly to the Investment Programming Directorate (Dirección de Programación de Inversiones, or DPI). VAT tax reporting is due by the 15th of the following month. The DPI operates within the Ministry of Economy and Finance.
Municipal Taxes
Companies operating in Panama are also required to pay municipal taxes. These are paid once per year when filing income taxes. The municipal tax ranges from 0.5% to 1% of a business’s net operating income. All companies must register under the municipality district in which they operate.
Electronic Invoicing
Since 2022, all businesses with tax IDs must comply with electronic invoicing requirements. A free DGI system is available for companies that generate 200 or fewer monthly invoices. A paid system called PAC PAX offers a more robust system for issuing electronic invoices. Failure to comply with this new system will incur a $1000 penalty.
The rates businesses pay on these taxes vary depending on the type of tax and type of business. That is another area where it’s critical to consult a tax attorney when establishing your business in Panama.
Are you interested in starting a business in Panama? The Agency Panama can assist you in finding the best location for your business. We can also recommend tax attorneys to ensure a smooth process in establishing your business. Contact our team to learn more about the variety of ways we can help!