PANAMA Law and Practice Contributed by: Rafael Rivera, Javier José Vallarino, Juan Vallarino, Karen Y. Tejeira and Carolina Lino, BDO Legal Panama
5. Tax Law 5.1 Taxes Applicable to Employees/ Employers
5.2 Taxes Applicable to Businesses Companies operating in Panama may be subject to several taxes, including the following. • Corporate Income Tax: companies must pay a 25% tax on their net taxable income. • Dividend Withholding Tax: when a company distrib - utes dividends or profit shares to its shareholders or partners, it must withhold: (a) 10% if the income is from Panamanian sourc - es; and (b) 5% if the income is from foreign or tax-exempt sources (eg, export activities). • Complementary Tax: if a company is subject to dividend tax but does not distribute at least 40% of its after-tax income, it must pay a 4% comple - mentary tax on its net earnings. If the applicable dividend withholding rate is 5%, and the company distributes less than 20% of its after-tax income, the complementary tax is 2%. • Withholding Tax on Payments to Non-Residents: payments made by Panamanian companies to non-residents for services, royalties, licences, or similar charges are subject to a 12.5% withholding tax, provided the expense is deductible for income tax purposes in Panama. • Value Added Tax (VAT): VAT applies to imports, transfers of tangible goods located in Panama, and services rendered within Panama, regardless of where the contract is signed or where the payment originates. The standard VAT rate is 7%. • Passive foreign-source income: Law No 526 of 2026 introduces an exceptional tax regime applica - ble to certain categories of passive foreign-source income when such income is received by entities incorporated under Panamanian law, which are members of multinational groups, and which fail to demonstrate that they possess adequate economic substance in the Republic of Panama. It provides for the application of a 15% rate on the net taxable income for the relevant fiscal period, without giving rise to any additional tax, without prejudice to the provisions contained in Article 733 of the Fiscal Code. 5.3 Available Tax Credits/Incentives Panama has a number of special regimes which offer a variety of tax credits and incentives designed to
Based on their employment relationship, both the employee and the employer, are subject to income tax, social security’s contributions and educational tax. Income Tax The employer is obligated to withhold income tax on behalf of the employee and remit it to the Panamanian Tax Authorities. The Panamanian legislation establish - es that individuals will be subject to income tax at a progressive rate, as follows. • An employee earning a salary of up to USD11,000 is exempt from paying income tax. • An employee earning a salary ranging from USD11,000 to USD50,000 is subject to a 15% tax rate on the surplus. • An employee earning a salary exceeding USD50,000 will be subject to a tax of USD5,850 for the first USD50,000 and a 25% rate on the surplus. Social Security The employer and employee are subject to the paying social security. Employers must contribute 13.25% of the salary of each employee, and employees must contribute 9.75%. With the recent change in law, the percentage of contribution by the employer will rise to 15.25% of the salary of each employee. Additionally, the law provides for the payment of pro - fessional risk insurance which must be paid by the employer at a rate of 0.56% up to 5.67%. Educational Tax The educational tax is divided between the employer and the employee, with the employer being obliged to contribute 1.50% of the employee’s salary and the employee contributing 1.25% of their salary. Both social security and educational tax contributions should be withheld by the employer.
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