PANAMA Law and Practice Contributed by: Anna Cristina Valdés, Edgar Herrera, José Manuel Motta and Ramón Arias, Galindo, Arias & López
leaves thresholds and application to individual trea - ties. • Construction, installation and assembly projects in Panama exceeding 183 days are considered a permanent establishment, while the OECD typically applies a 12-month threshold. • Panama also explicitly treats the use of equip - ment, drilling platforms and installations for natural resource exploitation as a permanent establish - ment if used for more than 183 days, whereas the OECD focuses more on substance than on detailed activity lists. 3. Taxation of Cross-Border Income 3.1 Income From Immovable Property Income derived from immovable property located in the Republic of Panama is subject to Panamanian income tax, regardless of the owner’s nationality, residence or domicile. The determining factor is the location of the property, as Panama applies a territo - rial tax system. Upon the transfer of Panamanian real estate, the seller is subject to the capital gains tax regime, whether the seller is an individual or a legal entity, Panamanian or foreign. The seller may choose between two alterna - tives: • they may file a tax return with the Panamanian Tax Authority, calculating the actual taxable gain (trans - fer price minus deductible costs and expenses allowed by law), and pay income tax at a 10% rate on the net gain; or • they may pay 3% of the higher of the transfer value or the assessed value of the property, as an advance payment of capital gains tax. The seller may elect to treat this 3% payment as the final and definitive tax on the transaction. If the 3% advance exceeds the tax resulting from applying the 10% rate to the actual gain, the taxpayer may request a refund or apply the excess as a tax credit.
Importantly, for notarial purposes, the public deed of transfer must include proof of payment of the corre - sponding income tax or advance payment. Furthermore, income derived from the lease of immov - able property located in Panama constitutes Pana - manian-source income and is therefore subject to Panamanian income tax in the hands of the recipient, at the applicable general rates for individuals or legal entities. Immovable property located in Panama will amount to a permanent establishment for its foreign owner, individual or corporate. 3.2 Business Profits Business profits derived from activities carried out within Panamanian territory are subject to income tax at the general rates applicable to individuals and legal entities, in accordance with Panama’s territorial tax system, under which only Panama-source income is taxable. Generally, in the context of cross-border transactions, income is considered Panama-source income when it is received by individuals or legal entities domi - ciled outside the Republic of Panama as a result of any service or act, whether documented or not (pro - duced within or outside the Republic of Panama), that benefits individuals or entities, domestic or foreign, located within Panama. This applies to the extent that the service affects the production or preservation of Panama-source income and the related expense has been treated as a deductible expense by the Pana - manian payor. For these purposes, the Panamanian payor must with - hold income tax by applying the general income tax rate to 50% of the gross amount remitted abroad and remit such tax directly to the Panamanian Tax Author - ity. Considering that the general corporate income tax rate is currently 25%, the effective withholding rate amounts to 12.5% of the gross amount remitted. In the case of payments made to individuals, the appli - cable rate may vary depending on the amount remit - ted and the total income received by such individual during the relevant fiscal period, in accordance with the progressive rates established under Panamanian law.
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