Taxes and Tax Residency

Tax residency in Panama

3/12/2022 8:00:00 AM
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Panama is a great place to establish your tax residency. This Latin American country is located in Central America and is bordered by Costa Rica and Colombia.

In a nutshell, here are some of the reasons that make Panama the perfect destination to set up your tax residency:.

- Panama has a territorial tax regime that only applies to Panamanian-sourced income, which means that has a tax-free worldwide income for foreigners. 

- This country offers residency through an investment program that provides a safe haven for foreigners, and it is a safe path to have tax residency or even citizenship.

- It has treaties with 17 countries such as the United Kingdom, Mexico, France, and Luxembourg, to avoid double taxation.

- More than three decades of uninterrupted political stability, something really uncommon in Latin America, a region used to populism, hyperinflation, and civil unrest.

- An extraordinary climate all year long and sunny beaches that have nothing to envy Cancun or Mykonos.

The country of the Panama Canal has an extraordinary business climate and great incentives to set up your tax residency there. In this article, we will tell you all you need to know about it.

What does personal tax residency mean? Why is it important?

At some point of your life you may google tax resident meaning. In fact, we are not referring to a second residence that comes with a residence permit (permanent or temporary). Although they can be connected, they are two different things. 

A legal residential status gives you the legal permission to physically live in a country, on the other hand, tax residency is the condition in the eyes of the Tax Agency implying that someone is legally obligated to pay taxes. Every country has its own rules of how you are required to pay them. In some cases, you can even be a citizen of a country and not be a tax resident there, hence, not paying taxes.

Changing tax residency to a new country is becoming popular and many consider that it is becoming a trend. So, you may be asking, why is this important? Well, an individual's tax residency is essential in determining whether and how their individual or corporate income will be taxed.

Having a tax residency certificate in countries that have a favorable tax structure is a tool that can help citizens of countries with anti-double taxation treaties to optimize their taxes. If you are doing business abroad and want to choose the correct country for you and your company, you must consider this. This includes taxes for expats.

Panama tax residency: the Family Offices haven

Panama is a country that has a lot to gain from its location and its various advantages, such as its business opportunities and competitive advantage in business. It's one of the few Latin American countries that can be described like this.

This leads to a mixture of advantages that benefit companies to a great extent. It has a great investment climate due to a government that has been in charge of creating laws to promote investment in Panama and tax incentives.

That is why the term “tax haven” is basically a synonym of Panama; together with its warm climate with beaches, great food, fun people, and political/economic stability (something very uncommon in Latin American countries). Panama has a network of 17 treaties to avoid double taxation signed with countries such as Mexico, Barbados, Qatar, Spain, Luxembourg, France, Italy, Portugal, Ireland, the Czech Republic, the United Arab Emirates, and the United Kingdom.

Panama is known for its legal and tax structures that make it the perfect place to do business, primarily because worldwide income is entirely tax-free. This is something that Family offices’ beneficiaries can find very useful and profitable.

- Tax-free worldwide income: Panama has a tax system that is based on the Territorial Principle of Taxation, which means that foreign earnings are not taxed if they come from outside the country. So, if your income is derived from foreign sources, it's not taxed in Panama,

- For Family Offices, creating a company in Panama’s territory to manage all operations is a great choice. It has all the benefits: Management from an office established in Panama and the transactions that have effects abroad are totally tax-free.

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How to obtain tax residency through real estate investment?

There is something very important that anyone interested in obtaining tax residence in Panama should know: even if you have a permanent or temporary residence or are working in Panama legally, it does not mean that you automatically have a tax residence.

It is true that in order to obtain tax residence in Panama it is necessary to have a permanent residence, but having the latter does not mean that you will be granted tax residence. Therefore, we are going to tell you what you need to obtain a tax residence certificate in Panama:

Under the provisions of the Tax Code, you will be considered a Panamanian tax person if: 

For natural persons:

- You spend the magic number of days in the country (183): “Tax residents of the Republic of Panama are considered to be natural persons who remain in the national territory for more than one hundred and eighty-three (183) consecutive or alternate days in a fiscal year or the immediately preceding year”. 

- You established your permanent home in Panama: “Those natural persons who have established their permanent home in the territory of the Republic of Panama will be considered tax residents of the Republic of Panama”. 

For legal persons:

- If the legal persons have “material means”: “Legal persons constituted in accordance with the laws of the Republic of Panama and that have material means of management and administration within Panamanian territory are also considered tax residents of the Republic of Panama”

- If the legal entity has management/administration in Panamanian territory: “Legal entities incorporated abroad that have material means of management and administration within Panamanian territory and that are duly registered in the Public Registry are considered tax residents of the Republic of Panama. The Executive Branch will regulate this matter.”

In summary: 

Natural people: Those who have remained in Panamanian territory for 183 consecutive or alternate days, or those who have established their permanent home in the Republic of Panama.

Legal persons: Those that are constituted in accordance with the laws of Panama and have their means of management and administration within Panamanian territory.

After that, it is understood that you can request the tax residence certificate, and there are a number of ways to obtain it. The first step is to secure your Permanent Residence in Panama from the immigration point of view, as we already explained. If you are looking for a method to obtain your tax residency certificate by investing in the country’s economy, the “Self Economic Solvency scheme” is for you.

There are four options available using this route, but keep in mind that the money has to come from foreign sources.

These are the options:

- Two of them are through the purchase of real estate: 

- First, buying a real estate property: This item is going to pass through a transformation this year. The Panamanian laws are changing and the amount of investment in real estate will increase from $300.000 to $500.000, starting on October 15, 2022. 

- Purchase of real estate but under a preliminary contract of sale of a construction that hasn't begun: The investment is $500.000 and has to be managed by a local bank.

- The purchase of shares in the Panamanian stock

- Creating a term deposit in a local bank

You may acquire the real estate option on your behalf or through a Private Interest Foundation. 

Which are the requirements?

1. Period of ownership: The investment must be maintained for a period of at least five years, and for those years, once a year, you will have to check in at the Migration Service of Panama to confirm the authorities that you own real estate and that your investment still exists. 

2. Don’t sell: Take in mind that if you decide to sell the real estate before that period, your residence permit will be canceled. 

3. Certificate: If the investment is by buying real estate, you’ll need evidence of ownership through a certificate of the Public Registry of Panama in which the name of the petitioner is stated, indicating that the property is free from encumbrances. 

On the other hand, if you decide to invest in real estate under a preliminary contract of sale, you’ll need: a) An authenticated copy of the preliminary certificate of the property, duly registered in the Public Registry, b) a Certified copy or original of the escrow in which it must be established that the entire amount given in escrow will be disbursed in installments depending on the obligations.

How much will you have to wait?

The time to obtain the permanent residence permit is just 30 working days, or a month and a half. In order to apply, the presence of the investor is not necessary; a legal representative is enough. But if you, as an investor, decide to go in person, you will need to be accompanied by a lawyer. The reason for this is not the difficulty of the process; this is simply a legal requirement. 

You don’t need to live in Panama

Another great thing about the Panamanian system is that, if you are the beneficiary of this type of residence, (real estate/investment) you are not required to establish your residence in the country. You will only have to travel to Panama at least every two years to keep this residence and consequently its benefits.

Panama Taxes for expats

Panama is a paradise for expats. The reasons are many: sunny weather all year, a relatively low cost of living, extraordinary retirees visa programs and taxes. Remember that worldwide income is not taxable in Panama. Also, taxes are under a proggresive scheme up to 25%, 

If you want to know more about Taxes in Panama for expats, request a consultation with our experts now.

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What can we do for you?

Mundo is a website where dozens of world-class experts analyze and discuss key aspects of Family Offices, trusts, and tax residency mechanisms all around the world. 

We are based in Panama, because of the great business opportunities that this tiny country has to offer. Besides tax residency, our experts can help you with the following services:

- Company formation

- Creation of bank account

- Real estate investment projects

- Residency and citizenship

- Financial Licenses

- Foundations

If you are considering obtaining a second residency to optimize your taxes, then Panama may be the ideal place. 

Contact us and get a consultation with our experts.

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