PANAMA Law and Practice Contributed by: Anna Cristina Valdés, Edgar Herrera, José Manuel Motta and Ramón Arias, Galindo, Arias & López
2. Territoriality, Residence and Permanent Establishment
1.2 Hierarchy of Sources Panamanian domestic tax law and related statutes establish the basic rules for Panamanian taxation, setting forth Panama’s principle of fiscal territoriality, which is the cornerstone of the Panamanian tax sys - tem. In that sense, all international obligations must be implemented in a manner consistent with domestic law, including treaties and OECD guidelines. Once approved and ratified, tax treatiesbecome part of domestic law and prevail over ordinary legislation in case of conflict. They may limit or modify how domes - tic tax rules apply, but they do not create new taxing rights. OECD guidelines and commentary are generally applied as a technical reference. 1.3 OECD Model/United Nations Influence on Treaty Practice Panama generally follows the OECD Model Conven - tion when negotiating its bilateral double taxation agreements. Most of its treaties adopt OECD provi - sions regarding permanent establishment, the allo - cation of taxing rights, exchange of information and mutual agreement procedures. However, in the past, the country has also incorporat - ed elements of the UN Model Convention in its treaties with countries seeking greater taxing rights at source, particularly in treaties with developing countries. Given that Panama operates under a territorial tax system, its treaties are often adapted to align with domestic source territorial rules. While Panamanian treaties are broadly consistent with the OECD Model, each treaty must be reviewed indi - vidually to identify such variations. 1.4 Multilateral Instrument Panama is a signatory to the Multilateral Instrument, which was ratified by Panama’s National Assembly on 15 October 2020.
2.1 General Principle of Territorial Taxation Panama’s tax system is founded on the principle of fiscal territoriality. Under this principle, Panamanian income tax generally applies only to income that is legally considered Panama-source income, meaning income generated within the territory of the Republic of Panama. The system is objective, as it does not take an individ - ual’s nationality, domicile or residence into account. In practice, this means that both Panamanians and foreigners are equally subject to taxation on income derived from Panamanian sources, regardless of where they live or hold citizenship or residence. 2.2 Tax Residence of Individuals An individual is considered a tax resident of Panama if they remain in the national territory for more than 183 days during a fiscal year or the immediately preceding year, whether consecutively or non-consecutively. An individual will also be deemed a Panamanian tax resi - dent if they have established a permanent home in the Republic of Panama. In that regard, the Panamanian Tax Authority interprets the concept of a permanent home as the individual’s centre of vital interests, which may include both economic and family ties. In prac - tice, this means that residency is determined not only by physical presence but also by the strength of the person’s personal, family and economic connections to Panama. 2.3 Taxation of Resident Individuals Individuals (either Panamanian or foreign), domiciled in Panama are taxed solely on the income they pro - duce within Panamanian territory. Panama’s individual income tax is progressive, and will apply as follows: • up to USD11,000: 0 % (no tax); • USD11,001 to USD50,000: 15 % on the amount over USD11,000; and • above USD50,000: USD5,850 plus 25 % on the excess over USD50,000. These brackets apply to net taxable income after allowable deductions.
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