Panama is one of the freest countries in the world, it has no central bank or army, it applies a liberal policy regarding the use of arms, autarkic in terms of food and energy and also offers a very advantageous tax system.
On the other hand, Panama tries to actively attract qualified emigrants that want to invest in their country, which has led to interesting immigration and residency programs in Panama.
Above all, if you are an entrepreneur or digital nomad, Panama has all the cards to become the perfect residence for you. Permanent residence in Panama automatically converts you into a tax paying resident, but with the advantage that you will only pay taxes on Panamanian income (territorial taxation), that is, if your company works with clients outside of Panama, you will not pay.
In today’s article you have the most important information about taxes in Panama, as well as the conditions, costs and a description of the process to acquire permanent Panama residence.
We will also talk about how to open a bank account in Panama and how to (legally) acquire a Panama passport.
Unlike other countries, Panama doesn´t require a minimum stay. Therefore, you only have to be in the country once every two years in order to avoid losing your permanent residence.
This makes Panama a perfect place to move your tax residence to without having to move your physical residence. Also, its perfect for those wanting to travel without the danger of becoming tax residents of any of the countries they visit and saving the current expenses of a fixed home.
Nonetheless, in my eyes there´s no reason not to stay a while in Panama.
In addition to its fiscal advantages, Panama also offers unique nature, good weather and cities with a rich variety of options.
The attractive tax system and what it means to start a business in Panama
In Panama almost 90% of the population don´t pay direct taxes. Even though Panama is not a completely tax-free country, in comparison with western countries of high taxes, it offers extremly attractive conditions, that attract more and more entrepreneurs and investors to the country.
The central part of the Panamanian tax system is territorial taxation. This means that in Panama only the money generated from Panamanian sources is taxed. All the revenue that comes from aborad is completely tax-free.
Since Panama doesn´t have CFC rules, you can manage all tax-exempt organisations throughout the world outside of Panama and you will not pay any kind of tax, neither for salaries nor dividends.
Territorial taxation applies not only to the private sector, but also to Panama’s companies. These do not pay any kind of tax for the revenue obtained abroad. In any case, you have to take into account that money made from a Panamanian company is considered as national revenue once you have permanent residency.
Although the taxation for national revenue continues to be quite generous, it´s recommended that, having residency in Panama, the main business works through another country. If a Panamanian company has its income in Panama, it must pay 25% corporate tax and another 10% for the distribution of dividends. However, tax-free foreign revenue from a Panamanian company is only charged 5% for dividends.
Whatever revenue obtained in the country, either from a national company or from revenue for rentals or others, it is subjected to a tax exempt of $15,000 Since the average salary in Panama is lower than this amount, the majority of Panamanians dont pay income tax. Only those who earn more applies, from $15,000 until $50,000, a tax of 15% and, from $50,000, a tax of 50%.
Whoever wants to operate a company with physical products has the possibility to do so in the second largest free trade zone in the world: The Colón Free Trade Zone. This region that extends throughout the Panama Canal is a port free from customs charges, in which no coperation tax or added value are appplied. Therefore, the products can be imported, unloaded and exported easily from the two oceans through the Panama Canal. The rather high national corporate tax, of 25%, is mainly directed at the local financial industry.
This sector has been installed massively in Panama because the capital returns are tax-free provided they are generated abroad. This includes interests, dividends and all types of capital gains from shares. Only domestic capital returns from banks or deposits in Panama are taxed at 10%.
In Panama there are not many other taxes to take into account. Only the local VAT of 7% is applied (it´s difficult to avoid). The territorial tax in Panama is between 0.5% and 2%, although foreigners can submit an application to be exempted from this tax for 20 years.
The obligation to contribute to social security, for an amount of 12.25%, only extends to national salaries. Revenue obtained abroad and dividends are not subjected to any obligation to contribute to social security.
There are also certain exceptions. So, people who want to set up a company in Panama in the agricultural sector, for which the conditions are perfect (price and quality of the soil, as well as the climate), can benefit from a tax exemption as long as their profits are below $ 300,000.
Panama is one of the latest countries in the world to have introduced at the end of 2016 the obligation to maintain accounting records, an obligation that includes foreign income free of taxes.
However, you shouldn´t worry too much about this regulation since it is only an obligation to keep all the receipts and invoices, which in practice are not controlled anyway. On the other hand, in Panama it is not necessary to present the accounting of foreign income, which makes this law seem more like a pretext to improve the reputation of the country.
In practice, we can affirm that businessmen, digital nomads and investors with permanent residence in Panama retain all the advantages of the perpetual traveler (they do not pay taxes and can move freely) and also, thanks to the fact that they have a fiscal residence, they increase their legal security, in addition to having no problems opening bank accounts and performing administrative procedures.
Therefore, for example, you can easily manage a foreign company completely tax-free in Dubai and, as you prefer, make a profit from the business without paying taxes or spend it directly without having to jusitify your outgoings or maintain accounts.
Not even capital returns (small), rent charges or the sale to any other client in Panama will force us to pay taxes, since the free amount of income tax amounts to up to $15,000.
Even if you decide to use a Panamanian coporation (for this it is necessary to obtain permanent residence in Panama), foriegn revenue will remain tax-free. In a company in Panama you only have to pay salary tax if your income is higher than $15,000 (15%), or distribute dividends (5%).
Requirements for obtaining your residence in Panama
It is still relatively easy to migrate to Panama, although it is inevitable to make some kind of investment in order to obtain permanent residence.
Fortunately, if you are from Australia, Canada, the UK and many other courtries you have the possibility of obtaining permanent residence fairly easily through the Friendly Nations Visa. In this way, Panama facilitates this migration to a country of around 50 “friendly nations”.
One of the requirements to participate in this programme is establishing a business in Panama that can then be used or not. Moreover, you should deposit $5,000 (plus $2,000 for each member of the family) into a private account in Panama within 4 to 6 months.
After two trips to your local immigration office and a lot of paperwork, you must wait for a temporary residence permit together with an ID card that, after 4-6 months, becomes permanent residence. Thanks to a multiple entry visa, during this time you can leave and enter Panama as much as you want.
By the way: Panama has a special friendship pact with Italy. If you´re Italian, you only need your business to emigrate to Panama. Permanent residence is also granted to Italians much faster.
To obtain permanent residence in Panama you will need the following documents:
- Identification document/Driving licence
- Criminal record certificate (no history) with apostille for Panama.
- 6 passport photos
- Medical certificate (lawyers office deals with this)
- Proof of housing or hotel stay
- Passport and bank reference for establishing the company
- Various forms
To open the necessary bank account you must be well equipped to face the conservative banking sector of Panama. But it´s easier than it seems:
- 2 bank references
- 2 personal references
- Financial report
- Proof of the business/earnings
- Passport and driving licence/identification document
- Various forms
A pleasant surprise, yes, you don´t need to provide any kind of utility bill. They allow you to provide the tax settlements from the last few years. You can also get away with not providing bank and personal references.
In this sense, Panamanian banks are flexible. But the less references you provide the more questions the bank will ask you. You will at least have to explain your business acitivity or talk about your income.
All the important documents will have to be translated from English to Spanish. If you don´t have the documents in these languages the law firm that organises the paperwork will help you with these translations (or you can request the sworn translation services of our friend; the translation agency Mondo Agit).
By the way, to this day the Panamanian bank account (this is something that, like everything, could change in the future) has the additional advantage of not participating in the automatic exchange of bank data.
Procedure to acquiring Panama residency (permanent residence)
If you want to obtain permanent residence, you will have to have made at least 2 visits to Panama. For the first application it usually takes two or three weeks, although with good planning, its possible to present a successful appplication in a week. Once you have been granted permanent residence, a three day visit is enough to retrieve it.
To speed up the application procedure you should try and sort out as many things as possible before arriving in Panama. This includes the setting-up of the company, the preparation of all documents with their requiered translations, the payment of government fees and attorney’s fees, as well as having the $5,000 available for the bank deposit.
Since transfers to Panama are usually complicated and take quite a lot of time, its reccommended in case of emergency to transfer the bank deposit previously to the fiduciary account of a trustee (the corresponding lawyer), who will then send the money immediately when the necessary bank account is opened. That way you can save valuable time.
For example, a quick on-site application process could be as follows:
Before arriving: Preperation of the documents, payment of company and money in fiduciary account
Working day 1: Verification of documents and preparation of all forms, obtain hotel letter and payment of government fees and attorney fees on site (credit card)
Working day 2: First appointment with the immigration offices and opening of the account with deposit
Working day 3: Second appointment with the immigration offices with issuance of the identity card
In absence: Travelling around Panama
Once the provisional certificate is issued, your passport remains in the power of the Panamanian authorities in order to issue a multiple entry visa for Panama. This is granted within three working days and it is then necessary to re-enter and leave Panama. If you don´t have the multiple entry visa when leaving the country, they may impose a fine of $2,000.
In this sense, you could complete the entire process in five working days. Then, you could travel for two days around Panama and, the following Monday, pick up your passport with the multiple entry visa before returning home. Therefore, within two weeks you can request permanent residence and at the same time spend a few days relaxing in your new country of residence.
After 4 to 6 months you will be granted permanent residence, that is necessary to collect on another visit to Panama. Thereafter, Panama may appear on your passport as your country of residence. An additional Panamanian driving license may also be issued without having to provide your driver’s license from your country of origin.
Cost of permanent residence in Panama
Despite being so easy through the Friendly Nations Visa, obtaining permanent residence in Panama is naturally not exempt from expenses. However, investment is affordable and legal security is offered with tax exemption for decades.
You should have around $10,000 in liquid assets when requesting permanent residence. The following costs are understood as the prices of my associated firm, which of course can be compared with other suppliers. Keep in mind that you must have a lawyer when applying for permanent residency.
Setting-up the company: 1.500$ first year, $514 from the second year onwards (alternatively: Private Interest Foundationfor $2,500), dissolution for $1,000, possible after the granting of permanent residence
Deportation rates: $800
Fees for multiple entry visa, identification document, translations and others: Aprox. $600
Introduction to banks: $250 (plus $50 for the fiduciary service)
Costs of attorney: $2,000
This comes to a total cost of approximately $5,000, which in any case you should be able to invest. On top of this, you also need to make the bank deposit of $5,000, which you only have to do once and then you can freely use your Panama account.
You shouldn´t forget the additional expenses of the flight and your stay in Panama.
Even though you can fly very easily and fairly cheaply from Europe to Panama city, it´s not a cheap place. The prices are similar to those in the United Sates if you don´t want to go without anything. In rural areas, of course, everything is much cheaper.
Obtaining nationality in Panama
Some people want to go even further and are interested in acquiring Panamanian nationality. Unfortunately, Panama is not the best option for a second passport.
This isn´t because the Panamanian passport doesn´t offer you any liberties, because it actually offers quite a lot: You can travel to most countries in the world, in fact, there are 127 states to which you can travel to without a visa, among them include all those found in Latin America, the Schengen area and Russia.
For the USA you need a visa, but this is very easy to obtain. Panama is also one of the few states for which the Global Entry Programme with the USA is possible.
As we mentioned earlier, the special friendship pact between Panama and Italy allows Italians to migrate to Panama very easily. It´s also the same the other way around as Panamanians can also enter into Italy without any problems (and in this way into the EU). This is something worth keeping in mind in case you want to acquire Panamanian nationality.
For the majority, to acquire Panamanian nationality means losing their original, because Panama only recognizes one nationality.
However, since its not necessary to prove in Panama that ýour original nationality has been abandoned, some people do not obey this rule and maintain the other nationality.
If you decide to acquire Panamanian nationality, you have to take into account various points. The application takes quite a long time and there are many necessary steps. You have to have constinuously lived in Panama for at least a year. As well as having to speak Spanish fluently, you will also have to pass an exam on the history and culture of Panama.
At first, after 5 years of permanent residence in Panama you can request Panamanian nationality. However, in order to obtain it, it will not be enough to have spent short periods every 2 years there. If you really want Panamanian nationality after 5 years of residence you will have to have gone at least once every 4 months to Panama.
Of course, this is not impossible, but it must be taken into account if you really want this passport. Without a doubt, if you are really going to live in Panama, you will not have any problems obtaining nationality after said 5 years.
Frecuently asked questions about acquiring Panama residency
1. I read that Panamanian companies need at least 3 employees, is this true?
Not at all. It´s true that companies in Panama need at least 3 managers, however, its not more than a formality when setting-up the company. The reality is that anyone can sign as manager.
You can also opt for using the services of a fiduciary director. If you want to remain anonymous, the costs of setting-up the business in Panama is around $300 (including the 3 directors).
It´s generally recommended that the owner appears as ¨president¨ and adds 2 fiduciary directors (who are usually lawyers).
2. What does it refer to when speaking about “personal references”?
Personal references are short written references signed by professionals who have worked with you in the past, especialy tax consultants, accountants, lawyers, and the like. Partners and associates are also valued.
They just have to confirm that you are an righteous person with whom you can work with.
This kind of reference is not completely necessary (you can provide a bank reference instead), but nonetheless it can help the opening of your new bank account in Panama.
3. What do I have to take into account in order to obtain my medical certificate? What tests do I have to undergo?The medical certificate is issued by the firm or agency that assits you with the paperwork, without having to see a doctor.
4. Is it completely necessary to provide two bank or personal references? I don´t see how you can do it.
At first it is not completely necessary to present references from two different banks, although you could always open an additional account to be able to do it, if you need to.
The ultimate question is demonstrating to the bank that we are good clients and that they won´t have any problems with us. The more proof you have, the less questions they will ask. And on the contrary, if you dont have the documents they ask of you, the questions will be more numerous and more complicated.
5. Do I need a property?
No, you don´t need to have a property in Panama in order to obtain residence there. This is one of the biggest advantages to residing fiscally in Panama.
If you don´t have housing you will have to show the immigration authorities a letter issued by the hotel, certifying that you reside there.
Warning: If you have rented a flat or house via Airbnb you could have problems with this step.
6. Can I have second house in Panama?
Yes, you can have all the houses you want. You can have a property in Panama, another in the UK, another in Canada and then another in Australia without losing your permanent residence in Panama. Ultimately what is important is where your centre of vital interests is and the rule of 183 days.
7. Is there any disadvantage of setting-up a business in Panama if I still reside in a country with CFC rules?
At first no, as long as you don´t use it. Companies in Panama are anonymous and there are no exchanges of data. Anyway, as soon as you have permanent residence you can deregister the company. In this way instead of paying $514 every year, you would only have to make a one-off payment of $1000 in order to deregister it.
8. Is it necessary to speak Spanish to obtain permanent residence?
No, it is not necessary.
If this article has aroused your interest in moving your residence, it will interest you to know that if you get in contact with us we can help you through our partners to establish residence in Panama and/or establish a Panamanian business.
Though, of course, you can also choose to do it on your own.
Because, as you already know: Its your life.