Benefits of Panama's Territorial Tax System

Panama residents are only obligated to pay tax on income earned in the country thanks to Panama’s system of territorial taxation.

Panama income tax benefits

Panama is a country in Central America with all the known American brands, Olive Garden, Tony Romas, TGI's, P.F. Chang's and more. The United States government had a military base in Panama and therefore many Panamanians speak fluent English.

Panama is one of the fastest growing countries in Latin America which makes it an ideal market for offshore investment opportunities. 5% of the worlds economy transits thru the Panama Canal making it the most hyper connected country in the Americas.

Panama does not have a standing army. The capital, Panama City has fast internet and stunning views of the Pacific and Atlantic Ocean. Real estate property rights are strong in Panama in comparison to other countries like the United States.

Panama Currency

The main currency in Panama is the balboa (B), however they use primarily the US dollar.

If you’re looking for an easy second residence in a desirable place to live, Panama may tick many of the boxes you are looking for. If you want to escape the death grip of the tax system in your home country, the low taxes in Panama (or even zero taxes) offer a great alternative.

Unlike the tax system in the United States and European countries where citizens have to pay tax on income generated abroad, Panama only taxes what you earn within its borders. Your offshore earnings, foreign investments, and foreign salaries are essentially tax-free.

And for entrepreneurs looking for a warm, tax-friendly place to live, moving to Panama can have a very positive effect on the capital of your company too, especially if you know your way around the tax rules. You don’t have to live on a tiny island somewhere to enjoy a zero-tax lifestyle as an entrepreneur or investor.

Where does Panama get its tax revenue ?

While Panama’s residents are required to pay income tax, almost 90% of the population does not pay direct taxes because the first $11,000 of taxable income is exempt from taxation. And, since most residents who earn a higher income only make money outside of the country, Panama does not collect a large amount of income tax.

This begs the question: where does Panama get its tax revenue?

The government of Panama gets the majority of its tax revenue from the VAT, which is set at 7% for basically every item that is sold in the country. Certain accommodations are charged a special rate of 10% and alcohol is taxed at a rate of 10%.

Whether you’re eating dinner at Panama City’s Hard Rock Hotel or hiring a lawyer to set up a Panama foundation, you’ll pay VAT on almost every purchase, and that money supports a good deal of the government’s programs. Funny how such a small VAT, at least compared to Europe, can support the government.

Of course, Panama also generates a large amount of revenue from import duties collected from the famous Panama Canal linking the Pacific and Atlantic Oceans. This is one of the reasons Panama can afford to keep taxes relatively low.

However, if you operate a physical products company, you can do so from the second largest free trade zone in the world — The Colón Free Trade Zone that stretches along the entire Panama Canal — and enjoy shipping from a port free of customs charges and other taxes.


You will have to pay some income tax in Panama if you technically run your business from the country, or if you’re working in the country as an employee. Luckily for you, the income tax isn’t very high and the system is kept fairly simple.

As stated, any income earned under $11,000 is exempt from taxation. You will need to pay 15% income tax for anything you earn between $11,000 and $50,000, and income over $50,000 is taxed at a rate of 25%.

There is no capital gains tax and no inheritance or wealth taxes, but there is a small withholding tax of 5% on foreign revenue from a Panamanian company and 10% on dividends distributed out of domestic profits. If interest and royalties are paid to a non-resident, the withholding tax rate increases to 12.5%.


Real estate investments in Panama can be profitable in tourist

Buying real estate in Panama can be profitable if you pick the right properties, especially in Panama City and the expat and tourist hotspots. Property prices in these areas have been going up significantly, with the stable economy as its most important booster.

Although Panama does not tax bank interest or income earned abroad, investing in real estate does require you to pay some tax. However, real estate taxes are not always due immediately, and capital gains taxes are only 10%.

One of the best things about Panama is how benefits tend to stack on top of each other. As if a hot, high-yield real estate market wasn’t enough, owning real estate in Panama is one of the ways to qualify for the Friendly Nations visa, but we’ll get to that in a minute.

If you choose to move to Panama and live in your property, you won’t be required to pay any import taxes on interior items for your real estate in the first twenty years. The minimum amounts to qualify for most government programs and visas is quite low, so unlike countries like Thailand or Malaysia, there is no formal minimum investment.

If, however, you choose to rent your property out, any rental income generated will be taxable at progressive rates of up to 27%. Most investors won’t see the highest bracket because it starts at $250,000 in income, and you can deduct municipal and national taxes, depreciation losses and maintenance and administration costs from your income.

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