Frequently Asked Questions plus information on Property, Capital Gains and Property Transfer Taxes.
Q: Are there property taxes in Panama, if so, how much?
A: Property taxes are only levied on properties that have a registered value of US$30,000 or more (registered value is the value stated on the public deed that is registered at the Public Registry). The maximum annual property tax is 2.1% for any property valued above $75,000. Possession Rights properties do not incur property taxes, since the property technically belongs to the government of Panama. (See more detailed information below.)
Q: Are there property title transfer taxes in Panama?
A: Yes, the government of Panama charges 2% of either the updated registered property value or the sales price --- whichever is higher. This is why most sophisticated investors utilize Panama corporations to hold ownership to property, so that when they sell the property, they simply sell the shares of the corporation as a whole, therefore avoiding a title transfer, and avoiding the 2% title transfer tax. (See more detailed information below.)
Q: Are there capital gains taxes on the purchase and sale of real property in Panama?
A: Yes, there are Short-Term and Long-Term Capital Gains tax rates in Panama. The rate also differs between individuals and corporations. Individual Capital Gains tax is 10%. The capital gains tax is triggered upon the transfer of the title at the Public Registry. (See more detailed information below.)
Q: Is there a way to minimize capital gains taxes on property sales in Panama?
A: Up until the tax laws were changed in 2006, real property owned by a Panama corporation could be sold avoiding the capital gains by simply selling the corporate shares instead of the real estate itself. Since the corporation still owned the real property, real estate title didn't transfer to the buyer who merely bought the corporation and all of its assets. That loophole has been abolished. There is still another loophole available so check with your attorney for details.
Q: Is there self-employment tax for real estate investors in Panama?
A: There are no "self-employment" taxes for real estate investors in Panama, however, local real estate investors are taxed on their income the same way any other person would be taxed on locally generated income, and they are required to file annual tax declarations. Please note that income taxes on real estate purchases and sales can generally be avoided through certain structuring techniques using Panamanian corporations and private interest foundations.
Q: If I am a US citizen, can I apply a 1031 exchange to buying property in Panama, thus deferring my US capital gains taxes?
A: This is a question for a US tax attorney or US CPA. LandAmerica Lawyers tax attorneys responded to this question as follows; "Assuming the case that a client is looking to relinquish a U.S. Property and purchase a replacement property in Panama, then the 1031 Exchange would fail, because foreign property is not considered to be "Like-Kind" to U.S. property under the IRS code. However, if the client is relinquishing foreign property, then an exchange into the Panama property might be possible. Of course, a tax-deferred exchange would only make sense in that situation if the client would be subject to U.S. Capital Gains tax liability for the relinquished property transfer because only U.S. taxes be deferred using Section 1031."
PROPERTY TAXES
Property Tax is paid every year based in a percentage established in the law. Property Tax is only paid if the registered value is above $30,000.00. Properties with a registered value of more than $30,000 should pay Property Tax according to the following combined scale (according to the Article 766 of the Fiscal Code):
Property Tax: Registered value of Property:
- 1.75% (Property Tax) - from $30,000 to $50,000 (registered value of Property); plus
- 1.95% (Property Tax) - from $50,000 to $75,000 (registered value of Property); and
- 2.10% (Property Tax) - on values above $75,000 (registered value of Property).
Example, a property valued at $100,000 would have the following annual tax:
Registered value of Property: Property Tax:
From $30,000 to $50,000: ($20,000 x 1.75%) = $350.00 , plus
From $50,000 to $75,000: ($25,000 x 1.95%) = $487.50 , plus
From $75,000 to $100,000: ($25,000 x 2.10%) = $525.00
Total yearly Property Tax = $1,362.50
The article 34 of the Law 6 of Feb.2, 2005, modified the article 766-A of the Fiscal Code, as follows:
The progressive combined alternative tariff of this tax, is the following:
a. 0.70% of the amount exceeding $30,000 to $50,000.
b. 0.90% of the amount exceeding $50,000 to $75,000.
c. 1% of the amount exceeding $75,000.
Example, a property valued at $100,000 would have the following annual tax:
Registered value of Property: Property Tax:
From $30,000 to $50,000: ($20,000 x 0.70%) = $140.00 , plus
From $50,000 to $75,000: ($25,000 x 0.90%) = $225.00 , plus
From $75,000 to $100,000: ($25,000 x 1%) = $225.00
Total yearly Property Tax = $590.00
The progressive combine alternative tariff will be applied to all real estate that is paid up to date in property taxes.
The properties that are not up to date in property tax will pay according to the tariff of the article 766 of the Fiscal Code.
CAPITAL GAINS TAX
Panama has Capital Gains taxes. The rates differ between individuals, real estate dealers, and corporations.
Individuals: Individuals who are not real estate dealers (not in the business of buying & selling) will pay a flat 10% Capital Gains tax rate. You are allowed to sell real estate on an occasional basis without being classified as a professional real estate dealer who pays the higher rate.
Real Estate Dealers: Individuals who are in the business of buying & selling real estate are considered "real estate dealers". Dealers will include the Capital Gain as normal income in their annual tax return and pay whatever level s-he is being assessed as income taxes. This could be up to a 27% maximum rate.
Corporations: Corporations who sell real estate will pay a flat 30% Capital Gains tax rate.
Taxable Base: Capital Gains taxes are determined by using a formula called "Taxable Base". The costs incurred with purchasing and making improvements on your property are called "Cost Basis". You determine Cost Basis by adding the purchase price + costs of improvements + Closing costs (purchase & sale). If you acquired the property by inheritance or as a gift, the Cost Basis is the official Public Record of land value + value of the permanent structures on the day title transferred to you.
Here's another way of putting it: Capital Gains are determined by the difference between the sales price and the property's Basis + sales expenses.
Payment: If you qualify for the flat 10% rate, you must pay it before the title transfer is registered with the Public Registry.
CAPITAL GAINS TAX ON THE SALE OF CORPORATE SHARES
In spite of misconceptions that there are no Capital Gains Taxes in Panama, the sale of a corporation's shares is taxable income.
Section 701(e) of the Panama Tax Code states that profits derived from the sale of corporate shares and personal property are taxable income.
On June 20, 2006, sub-section (e) changed in the following manner:
Except for publicly traded securities that are exempt from capital gains & income taxes, all profits earned from the sale of bonds, shares, participation quotas, and all other securities issued by legal persons, or derived from the sale of personal property, are taxable income in Panama. The taxpayer will be subject to Capital Gains tax at a fixed rate of 10%.
The buyer is obligated to withhold 5% of the total value of the sale from the seller as a prepayment of the seller's Income Tax from Capital Gains. The buyer shall remit this amount to the Panama Tax Department within 10 days of the sale's Closing. If the buyer fails to do so, s-he is jointly responsible for the unpaid taxes.
The taxpayer has the option to declare the amount withheld by the buyer as the income tax due on the capital gain. However, if the withheld amount is greater than 10% of the capital gain, the taxpayer can present a special affidavit claiming the excess as a Tax Credit against taxes owed during that tax year.
Any sale of shares, bonds, or other securities outside of Panama derived from a company producing income in Panama, are taxable income in Panama.
TRANSFER TAXES:
OPTION 1: TITLE TRANSFER TRANSACTION:
TITLE TRANSFER TAX: Title Transfer Tax is paid every time a Property Title is being transferred at the Public Registry of Panama. The Title Transfer Tax amount is 2% of the registered value or the transaction value, which ever is higher.
OPTION 2: SHARES TRANSFER TRANSACTION:
SHARES TRANSFER TAX: Shares Transfer Tax is paid every time Shares of a Corporation are being transferred. According to the Law, it is the obligation of the Buyer to "retain" (deduct) from the Shares sales price the 5% Shares Transfer Tax, and "pay" to the Ministry of Economic and Finance said Shares Transfer Tax.
From the Panama Offshore Services website
