Panama - Residency and Territorial Taxation

[andrew28fl]

I am a Canadian, digital nomad, comparing Panama and UAE for residency and company formation. I am trying to get my head around territorial taxation but either I am not understanding the concept, or countries seem to have different interpretation of what territorial taxation means.

To discuss Panama first, I qualify for friendly nations visa. One option to show economic ties with Panama is to form a company in Panama. Could this be an Panama Offshore Company? If so, if I live in Panama and manage/operate this Offshore Panama Company, does I still pay 0% tax on the income of this Panama Company? How about the salaries or distributions to me, the owner? I guess my main confusion is what revenue constitutes as revenue generated outside of Panama. If my clients are based out of Panama and the payments made to Panama company comes from outside of Panama, does it make it foreign sourced? Or because the owner, me, is living in Panama, does that revenue become Panama sourced?

If the latter is the case, my interpretation is that any territorial taxation country is only good if you form an offshore company in one country, while avoiding residency in that same country. So for example, Form your IBC in Belize, and live in Panama. Am I right in this interpretation?

UAE seems more straight forward, you can own the Free Zone Company, and also live in the UAE. 0% tax on both the company and personal income, as long as you're okay putting up with the local Sharia Law, and build life in the UAE accordingly. The common advise is to avoid an Offshore Company, which doesn't come with a Residency Visa which you need for you to get a Bank Account in UAE.

My apologies for multiple posts over the last 2-3 days. I am really trying to get a grasp on this complex subject

 

[andrew28fl]

This is relevant, so posting. My interpretation is that most e-commerce activities (like Amazon FBA or drop shipping), and software related services where your clients are abroad (lead generation, app development, website development) won't be construed as Panamanian source. Thoughts?

According to Paragraph 2 of Article 694 of our Fiscal Code, the income derived from the following activities is not considered from Panamanian source:

1. Invoice, from an office established in Panama the sale of merchandises or products for a higher amount of that for which such merchandises or products have been invoiced against the office established in Panama, always that such merchandises or products only move outside.
2. Manage, from an office established in Panama, transactions that perfect, consume or have effects abroad.
3. Distribute dividends or participations of juridical persons, when such dividends or participations derive from incomes that are not produced within the territory of the Republic of Panama, including those incomes derived from the activities mentioned in literals a and b of this paragraph.

 

[AdamT1]

countries seem to have different interpretation of what territorial taxation means.

Yes, indeed interpretation differs somewhat, but the main principle is that "sourcing of income" originates where ultimate decision maker is located at that time. In case of automated trading (e.g. e-commerce or digital products) it is also important where serves & major infrastructure is located.

And most important part of all this is that you shold keep documentarty proof of where all of it is located. it is usually not neough to claim that there is nothing e.g. in Panama. Usually you have to proove where it is/was actually loacated at the transaction time.

UAE seems more straight forward, you can own the Free Zone Company, and also live in the UAE.

yes, but you need to be carefull in terms of VAT

 

[Golden Fleece]

Could this be an Panama Offshore Company? If so, if I live in Panama and manage/operate this Offshore Panama Company, does I still pay 0% tax on the income of this Panama Company? How about the salaries or distributions to me, the owner?

Based on what I have read, Panama makes no distinction between onshore and offshore companies in regards to Panamanian corporations. So, you want to avoid a Panama IBC for two reasons. First:

Tax residency – A company is tax resident in Panama if is incorporated under Panamanian law or its management and control are in Panama.

https://incorporations.io/es/panama/corporation/pa1i
Second, a few years ago Panama imposed annual record-keeping and filing mandates.

Panama companies have grown more expensive and the requirements associated with owning one more onerous.

All Panama corporations, even those with no activity in Panama, now must file financial statements with their registered agents annually. This new requirement is intended to help increase transparency in the wake of the Panama Papers scandal.

https://www.offshorelivingletter.com/panama-corporations-just-not-worth-anymore/
So, you want a real offshore corporation (e.g., Nevis, BVI, Anguilla, etc.) without the tax obligations and the filing requirements.

 

[jerseyuser]

Why not try channel island, it is zero tax of foreign income and close to metropolitan city

 

[JohnLocke]

So, you want a real offshore corporation (e.g., Nevis, BVI, Anguilla, etc.) without the tax obligations and the filing requirements.

Do they actually check if you run your company by the books?

Why not try channel island, it is zero tax of foreign income and close to metropolitan city

Some consultancy firm you can recommend to work with?

 

[arwell]

I am an EU national and I was recently granted a permanent residence in Panama.

So I'm interested in [B]andrew28fl[/B] question here, when an income from abroad is considered as a Panama sourced income, even if his thread is over one year old.

I have understood that a Panamanian company cannot easily be run in a tax-optimized manner while holding permanent residence in Panama. I assume that I that this fact remains undisputed.

What about the management of a i.e. US LLC out ofPanama, which is considered as a disregarded entity in the US?

In principle, we all know that US LLC income applies passed through taxation, to the members of the LLC, also in Panama. How will be this income now taxed in territorial-based taxation country Panama:

(1) in any case, natural person (LLC single member) will be 100% exempt from Panamian tax or
(2) in any case, is considered from Panamanian/local source in Panama (15%+ tax rate since LLC income is not a dividend which is taxed at 5% only) or
(3) Depends on the nature of the LLC's activities and where they are performed, i.e.
--(3a) office in panama performing i.e. local software development and "production" of any kind -> local sourced
--(3b) office in panama performing i.e. manage, "from an office established in Panama, transactions that perfect, consume or have effects abroad" (refer above as per Para 2 of Art 694 of Fiscal Code) -> not local sourced
--(3c) office and work performed in RoW -> not local sourced

I would be very grateful if this question would be taken up by someone.

 

[JackAlabama]

I am an EU national and I was recently granted a permanent residence in Panama.

So I'm interested in [B]andrew28fl[/B] question here, when an income from abroad is considered as a Panama sourced income, even if his thread is over one year old.

I have understood that a Panamanian company cannot easily be run in a tax-optimized manner while holding permanent residence in Panama. I assume that I that this fact remains undisputed.

What about the management of a i.e. US LLC out ofPanama, which is considered as a disregarded entity in the US?

In principle, we all know that US LLC income applies passed through taxation, to the members of the LLC, also in Panama. How will be this income now taxed in territorial-based taxation country Panama:

(1) in any case, natural person (LLC single member) will be 100% exempt from Panamian tax or
(2) in any case, is considered from Panamanian/local source in Panama (15%+ tax rate since LLC income is not a dividend which is taxed at 5% only) or
(3) Depends on the nature of the LLC's activities and where they are performed, i.e.
--(3a) office in panama performing i.e. local software development and "production" of any kind -> local sourced
--(3b) office in panama performing i.e. manage, "from an office established in Panama, transactions that perfect, consume or have effects abroad" (refer above as per Para 2 of Art 694 of Fiscal Code) -> not local sourced
--(3c) office and work performed in RoW -> not local sourced

I would be very grateful if this question would be taken up by someone.

1, it is like remote working which is also 1. (Or used to be) maybe they did some updates recently which we are not aware of.

 

[arwell]

Thanks JackAlabama, same private opinion here; I add the original fiscal code in Spanish Para 2 of Article 694 of Fiscal Code andrew28fl was also mentioning above. It shouhd be interpreted legally 100% correct what is meant with the highlighted words in the law . I will consult my Panamian lawyer anyway and get the latest legal opinion on it anyway (what are effects? what are transactions?):

PARÁGRAFO 2. No se considerará producida dentro del territorio de la República de Panamá la renta proveniente de las siguientes actividades:

a. Facturar, desde una oficina establecida en Panamá, la venta de mercancías o productos por una suma mayor de aquella por la cual dichas mercancías o productos han sido facturados contra la oficina establecida en Panamá, siempre que dichas mercancías o productos se muevan únicamente en el exterior.
b. Dirigir, desde una oficina establecida en Panamá, transacciones que se perfeccionen, consuman o surtan sus efectos en el exterior.
c. Distribuir dividendos o cuotas de participación de personas jurídicas que no requieran Aviso de Operación o no generen ingresos gravables en Panamá, cuando tales dividendos o participaciones provienen de rentas no producidas dentro del territorio de la República de Panamá, incluyendo las rentas provenientes de las actividades mencionadas en los literales a y b de este Parágrafo.
El Órgano Ejecutivo establecerá las normas y procedimientos para determinar la porción de la renta total que se considerará renta gravable del contribuyente que perciba rentas gravables, además de las rentas exentas a que se refiere este Parágrafo, dentro de un término no mayor de seis (6) meses.
Artículo modificado según artículo 3, Ley 1-2014

Thanks, guys,
A.

 

[JackAlabama]

Thanks JackAlabama, same private opinion here; I add the original fiscal code in Spanish Para 2 of Article 694 of Fiscal Code andrew28fl was also mentioning above. It shouhd be interpreted legally 100% correct what is meant with the highlighted words in the law . I will consult my Panamian lawyer anyway and get the latest legal opinion on it anyway (what are effects? what are transactions?):

PARÁGRAFO 2. No se considerará producida dentro del territorio de la República de Panamá la renta proveniente de las siguientes actividades:

a. Facturar, desde una oficina establecida en Panamá, la venta de mercancías o productos por una suma mayor de aquella por la cual dichas mercancías o productos han sido facturados contra la oficina establecida en Panamá, siempre que dichas mercancías o productos se muevan únicamente en el exterior.
b. Dirigir, desde una oficina establecida en Panamá, transacciones que se perfeccionen, consuman o surtan sus efectos en el exterior.
c. Distribuir dividendos o cuotas de participación de personas jurídicas que no requieran Aviso de Operación o no generen ingresos gravables en Panamá, cuando tales dividendos o participaciones provienen de rentas no producidas dentro del territorio de la República de Panamá, incluyendo las rentas provenientes de las actividades mencionadas en los literales a y b de este Parágrafo.
El Órgano Ejecutivo establecerá las normas y procedimientos para determinar la porción de la renta total que se considerará renta gravable del contribuyente que perciba rentas gravables, además de las rentas exentas a que se refiere este Parágrafo, dentro de un término no mayor de seis (6) meses.
Artículo modificado según artículo 3, Ley 1-2014

Thanks, guys,
A.

You should also highlight this: "desde una oficina establecida en Panamá"

 

[D0naldDuck]

Thanks JackAlabama, same private opinion here; I add the original fiscal code in Spanish Para 2 of Article 694 of Fiscal Code andrew28fl was also mentioning above. It shouhd be interpreted legally 100% correct what is meant with the highlighted words in the law . I will consult my Panamian lawyer anyway and get the latest legal opinion on it anyway (what are effects? what are transactions?):

PARÁGRAFO 2. No se considerará producida dentro del territorio de la República de Panamá la renta proveniente de las siguientes actividades:

a. Facturar, desde una oficina establecida en Panamá, la venta de mercancías o productos por una suma mayor de aquella por la cual dichas mercancías o productos han sido facturados contra la oficina establecida en Panamá, siempre que dichas mercancías o productos se muevan únicamente en el exterior.
b. Dirigir, desde una oficina establecida en Panamá, transacciones que se perfeccionen, consuman o surtan sus efectos en el exterior.
c. Distribuir dividendos o cuotas de participación de personas jurídicas que no requieran Aviso de Operación o no generen ingresos gravables en Panamá, cuando tales dividendos o participaciones provienen de rentas no producidas dentro del territorio de la República de Panamá, incluyendo las rentas provenientes de las actividades mencionadas en los literales a y b de este Parágrafo.
El Órgano Ejecutivo establecerá las normas y procedimientos para determinar la porción de la renta total que se considerará renta gravable del contribuyente que perciba rentas gravables, además de las rentas exentas a que se refiere este Parágrafo, dentro de un término no mayor de seis (6) meses.
Artículo modificado según artículo 3, Ley 1-2014

Thanks, guys,
A.

Hi, do you have any news on this?