Panama tax residency w/US C-Corp

[reelay]

Polish citizen, planning on moving to Panama (friendly nations) and operating my US C-Corp (digital marketing agency) out of Panama. All of our clients are in the USA btw.

I found conflicting views about foreign income in Panama not being taxed. Some say it is taxed if the work performed for your off-shore company was done in Panama and you should pay 15% withholding tax, some say no you don't owe any tax since it's a foreign income.

My plan was living in Panama 7-8 months out of the year, and the rest of the time travel.

Would I owe any tax in Panama?

Any advice/feedback appreciate

 

[Sols]

Income from work done inside Panama is technically taxable in Panama. So your C Corp pays taxes in the US and should pay taxes in Panama as well, as there is no tax treaty between US and Panama and Panama doesn't apply tax credits without a tax treaty.

However, it's unlikely Panama would seek to tax the company nor your income from it, so long as you don't give them a reason to (i.e. you're a societal nuisance).

If you want to go above and beyond, though, you could rent an office in the US and even hire a US resident to do work for the company.

 

[Marzio]

So your C Corp pays taxes in the US and should pay taxes in Panama as well, as there is no tax treaty between US and Panama and Panama doesn't apply tax credits without a tax treaty.

That's why you should trash the C-Corp plan and use a US LLC instead.

 

[reelay]

That's why you should trash the C-Corp plan and use a US LLC instead.

That's what I thought initially to do. But from what I understand it works well for low gross companies let's say under $200K/year. If you have a multi-milliion dollar company generating millions of dollars from US-based customers, it would be a bad move.

So in my case, it's risky, because all my clients are in the USA so the IRS can make a claim about the US-sourced income must be taxable.

Income from work done inside Panama is technically taxable in Panama. So your C Corp pays taxes in the US and should pay taxes in Panama as well, as there is no tax treaty between US and Panama and Panama doesn't apply tax credits without a tax treaty.

However, it's unlikely Panama would seek to tax the company nor your income from it, so long as you don't give them a reason to (i.e. you're a societal nuisance).

If you want to go above and beyond, though, you could rent an office in the US and even hire a US resident to do work for the company.

Thank you for your reply.

My plan was to pay myself a salary/dividend from my C-Corp to myself while living in Panama. Which is the salary to the CEO of the company is considered a company deduction so I would pay very little to no corporate tax at all. And since I would be residing in Panama I wouldn't have to pay income tax on that salary/dividend payment to myself.

Do you think it would work in practice like that? because in theory sounds good

 

[Marzio]

If you have a multi-milliion dollar company generating millions of dollars from US-based customers, it would be a bad move

I don't see why if you don't have any presence in US

Effectively Connected Income (ECI) | Internal Revenue Service

Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States other than certain investment income, is considered to be Effectively Connected Income (ECI).

www.irs.gov

 

[reelay]

I don't see why if you don't have any presence in US

Effectively Connected Income (ECI) | Internal Revenue Service

Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States other than certain investment income, is considered to be Effectively Connected Income (ECI).

www.irs.gov

Here's what I found:
Taxation of Nonresident Aliens – International Tax Gap Series | Internal Revenue Service.
Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income that is non-effectively connected income.

Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S., as well as personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person.

However, found this as well and looks like there's a withholding

Withholding Exemption on Effectively Connected Income | Internal Revenue Service

This page contains information about withholding tax on ECI income.

www.irs.gov

Generally, if you are not a partnership, you do not need to withhold tax on ECI income (income which is effectively connected with a U.S. trade or business) if you receive a Form W-8 ECI on which a foreign payee represents that:

The foreign payee is the beneficial owner of the income,
The income is effectively connected with the conduct of a trade or business in the United States, and
The income is includible in the payee's gross income.
The W-8 ECI must include the payee’s U.S. TIN.
Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding under FATCA.

Income from work done inside Panama is technically taxable in Panama. So your C Corp pays taxes in the US and should pay taxes in Panama as well, as there is no tax treaty between US and Panama and Panama doesn't apply tax credits without a tax treaty.

However, it's unlikely Panama would seek to tax the company nor your income from it, so long as you don't give them a reason to (i.e. you're a societal nuisance).

If you want to go above and beyond, though, you could rent an office in the US and even hire a US resident to do work for the company.

Panama - Corporate - Corporate residence

Detailed description of corporate residence rules in Panama

taxsummaries.pwc.com

Panama Corporate - Corporate residence

A company is considered as a tax resident when it has been incorporated in Panama and if Panama is regarded as the place where the central management is located. Entities incorporated abroad may also be registered with the tax administration in order to avoid WHT.

 

[Sols]

Thank you for your reply.

My plan was to pay myself a salary/dividend from my C-Corp to myself while living in Panama. Which is the salary to the CEO of the company is considered a company deduction so I would pay very little to no corporate tax at all.

Just be careful. Such deductions have to be reasonable. You can't take out 100% of the profits as salary. The risk of getting caught is quite low, though, but it can and does happen.

And since I would be residing in Panama I wouldn't have to pay income tax on that salary/dividend payment to myself.

If we go by the letter of the law, both the company and you personally may be in scope of Panamanian taxation.

Do you think it would work in practice like that? because in theory sounds good

It'll probably work out. Panama doesn't spend a lot of effort going after wealthy foreigners who cause no problem.

 

[reelay]

Just be careful. Such deductions have to be reasonable. You can't take out 100% of the profits as salary. The risk of getting caught is quite low, though, but it can and does happen.


If we go by the letter of the law, both the company and you personally may be in scope of Panamanian taxation.


It'll probably work out. Panama doesn't spend a lot of effort going after wealthy foreigners who cause no problem.

Noted, thank you! You're the man

 

[Marzio]

Here's what I found

What you found will not help you if don't read / understand what ECI means.

You said you offer digital marketing services from Panama.

Now you tell me how this is considered a trade or business in US.

You are free to pay taxes to Uncle Sam if you like but why would you if don't need to?

 

[reelay]

Thanks, yeah I did more reseach about it. Looks like it should be fine with LLC pass through

 

[saintjohnny]

Thanks, yeah I did more reseach about it. Looks like it should be fine with LLC pass through

That’s correct.

And I believe Panama looks at the LLC as an opaque entity… so… that + territorial tax = bingo.

 

[reelay]

That’s correct.

And I believe Panama looks at the LLC as an opaque entity… so… that + territorial tax = bingo.

That's the goal, check out my post here, lmk what you think about Option 1 here > How I plan to restructure my US C-Corp $1M/Year *Digital Marketing Agency*

 

[Don]

That’s correct.

And I believe Panama looks at the LLC as an opaque entity… so… that + territorial tax = bingo.

A company is considered as a tax resident in Panama when it has been incorporated in Panama and if Panama is regarded as the place where the central management is located. So managing a single-member US LLC from Panama as Panama tax resident you leave yourself 100% exposed to tax risk in Panama, in other words your whole structure is based on hope of non-enforcement of Panamanian tax laws.

 

[saintjohnny]

A company is considered as a tax resident in Panama when it has been incorporated in Panama and if Panama is regarded as the place where the central management is located. So managing a single-member US LLC from Panama as Panama tax resident you leave yourself 100% exposed to tax risk in Panama, in other words your whole structure is based on hope of non-enforcement of Panamanian tax laws.

Got it. I thought Panama didn’t have any CFC rules.

 

[Don]

Got it. I thought Panama didn’t have any CFC rules.

Thats right there are no CFC rules and Panama has territorial tax system.
No CFC rules means that just because a foreign company's owner resides in Panama it does not make the foreign company a resident for tax purposes in Panama.
This doesn't mean that one can simply incorporate and run a foreign company in Panama with no tax in Panama.

 

[reelay]

Thats right there are no CFC rules and Panama has territorial tax system.
No CFC rules means that just because a foreign company's owner resides in Panama it does not make the foreign company a resident for tax purposes in Panama.
This doesn't mean that one can simply incorporate and run a foreign company in Panama with no tax in Panama.

Don, so just to recap for everyone who might be looking for this in the future:

If you're European (non-US citizen/resident) living in Panama and have a US SMLLC serving USA clients over the internet (service-based freelancing, marketing, websites etc.) and all the money flows to your personal bank in the US/Panama/ you DO or DON'T owe 15% tax in Panama ?

 

[Don]

Don, so just to recap for everyone who might be looking for this in the future:

If you're European (non-US citizen/resident) living in Panama and have a US SMLLC serving USA clients over the internet (service-based freelancing, marketing, websites etc.) and all the money flows to your personal bank in the US/Panama/ you DO or DON'T owe 15% tax in Panama ?

if Panama is regarded as the place where the central management is located of your LLC then it could become liable for tax in Panama.

 

[Marzio]

if Panama is regarded as the place where the central management is located of your LLC then it could become liable for tax in Panama.

That's correct but i've yet to hear from somebody that Panama is taxing any income coming from clients outside Panama, even if work was performed in Pamana.

If you keep a low profilem, don't bill anybody in Panama and don't hire anybody in Panama it's very likely that they will leave you alone.

 

[Don]

That's correct but i've yet to hear from somebody that Panama is taxing any income coming from clients outside Panama, even if work was performed in Pamana.

If you keep a low profilem, don't bill anybody in Panama and don't hire anybody in Panama it's very likely that they will leave you alone.

Not arguing with this, and well I can just wish GOOD LUCK! (as it will be needed)

But then you have jurisdictions with even more lacking enforcement. Take Somalia for instance, the official corporate tax is up to 30%, but most businesses don't do accounting or pay any taxes, yet they can boast with online company formation.
You could invoice your US LLC to shift all the profits to a Somalian company and then cash everything out (using crypto payments).

 

[Radko]

Don, so just to recap for everyone who might be looking for this in the future:

If you're European (non-US citizen/resident) living in Panama and have a US SMLLC serving USA clients over the internet (service-based freelancing, marketing, websites etc.) and all the money flows to your personal bank in the US/Panama/ you DO or DON'T owe 15% tax in Panama ?

I have an LLC and I have residency in Panama... If you work from your home in Panama and you behave while living in Panama, you have nothing to worry, they will not come after you.