PANAMA Law and Practice Contributed by: Anna Cristina Valdés, Edgar Herrera, José Manuel Motta and Ramón Arias, Galindo, Arias & López
It is important to note that an individual may be con - sidered a taxpayer in Panama without being a tax resident. Therefore, the term “tax resident” should not be taken into consideration for assessing tax liability under Panamanian law. 2.4 Taxation of Non-Resident Individuals Individuals domiciled abroad and earning Panamani - an-source income are generally subject to withholding tax on employment or professional income derived within Panama. In practice, the same progressive tax rates that apply to residents are also used to calcu - late the tax on Panama-source income for individuals domiciled abroad. For withholding purposes, the payor is responsible for withholding and remitting the income tax to the Pana - manian Tax Authority. The withholding is calculated on 50% of the total amounts paid to the individual, using the applicable progressive tax rates outlined in 2.3 Taxation of Resident Individuals . Such withhold - ing tax rates may be reduced by the application of a double tax treaty. 2.5 Tax Residence of Legal Entities Legal entities will be considered tax residents of Pan - ama if they are incorporated in Panama or properly registered as foreign entities in the Panamanian Public Registry, and if they maintain the material means of management and administration within Panamanian territory. In practice, this generally entails the following. • Board of directors’ meetings in Panama: the company’s board must hold meetings in Panama to show that strategic decisions are made locally, supporting the determination that the place of effective management is in Panama. • Substantive commercial or support activities: the company must actively conduct commercial opera - tions or provide services to affiliates or third par - ties. Mere existence on paper is not sufficient. • Personnel in Panama: the company must maintain employees in Panama to carry out its business operations.
• Physical office space: the company must have a functional office in Panama from which its staff per - form day-to-day activities. 2.6 Definition of Permanent Establishment Panama’s concept of permanent establishment is generally aligned with the OECD Model Conven - tion. However, the definition contained in Panama’s domestic regulations does have certain deviations. In Panama, a foreign individual or legal entity is con - sidered to carry on business in the Republic of Pana - ma through a permanent establishment when, directly or through an agent, employee or representative, it maintains in Panamanian territory any fixed place of business or any centre of activity where its business is conducted, in whole or in part. Foreign individuals or legal entities are also considered to have a per - manent establishment in Panama when they maintain a head office, branch, offices, factories, workshops, facilities, warehouses, stores or other establishments in Panama, and also in cases in which such individual or legal entity: • carries out construction, installation or assembly projects (including related supervision) for more than 183 days within a 12-month period; • provides services, including consulting, directly or through personnel, for the same or related project for more than 183 days in a 12-month period; • uses equipment, facilities or platforms for natural resource exploration or exploitation for over 183 days in a 12-month period; or • conducts activities in mining, hydrocarbons, agriculture, forestry, livestock or other natural resource extraction, or maintains workplaces for professional or artistic activities, directly or through personnel. Regarding deviations to the OECD Model’s permanent establishment concept, please note the following. • Service permanent establishments are recognised when services, including consulting, are provided for more than 183 days in a 12-month period, even without a fixed office, whereas the OECD Model recognises service permanent establishments but
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