How to Run a Business Tax Free from Panama
Panama is a beautiful country that offers many personal and business benefits. More than a safe and peaceful place to live and raise your family, Panama provides special tax benefits for individuals and companies interested in investing or operating in the country. Historically, Panama has evolved as a primary global financial center and is now considered to be a ‘safe haven’ for monetary and real estate investments.
Tax Free Business
According to basic Panamanian law, individuals do not pay tax on any income originating from outside the country, including retirement, dividends, and interest income. For this reason, many leading internet-based businesses have set-up headquarters in Panama.
But, remember, if your business provides services or sales directly to Panama residents, your income will be taxed in Panama. Also, any salary you draw from a Panamanian company will be taxed in Panama. There are easy workarounds to this (such as an offshore company in Nevis or Belize), but you should be aware of these issues.
Note that I’m only considering Panama tax here. If you’re a US citizen, you will need to qualify for the Foreign Earned Income Exclusion and your tax picture is much more complex than presented here.
For a detailed post on these tax issues, see my Step by Step Guide to Taking Your Business Offshore
Visa to Live and Work in Panama
Panama’s zero taxation policy of income earned outside the country applies to everyone living in the country. Becoming a resident of Panama is relatively easy. In fact, Panama is well-known for the simplicity of the residency programs.
The most efficient way to become a Panamanian resident is through the Friendly Nations Visa– which applies to citizens of 50 major countries around the world, including the US, Canada, most European countries. If you are from a friendly nation, you can invest $20,000 in teak, or set up a business in Panama to gain residency.
If you are not from a friendly nation, such as India, Pakistan, Lebanon, UAE, etc., then you can use the Reforestation Visa to gain residency in Panama. This required an investment of $80,000 in teak, not including government and legal fees. Click here for an article on using the Reforestation program from India.
In Panama, one’s resident or non-resident status is not defined within the scope of the tax code. While all sources of income based in Panama are taxed locally, there are many categories of tax-exempted income. These include: net income under PAB 11,000 per year, dividends and distributions paid to shareholders, inheritances and gifts, and annual gross income under PAB 250,000 earned by farming activities.
- The conversion from USD to PAB is fixed at an exchange rate of 1:1. Panama doesn’t really have it’s own currency. Paper money is the US dollar and PAB or the Panama Balboa is used only for coins.
The Panama Pacifico Special Economic Zone
There is another opportunity for businesses wanting to operate in Panama: the Panama Pacifico Special Economic Zone
Established in 2004 on the former Howard Air Force Base, the Panama Pacifico Special Economic Zone is a mixed use area combining a range of business activities with residences, amenities, and a large sprawl of natural parks. Panama Pacifico itself is operated by London & Regional Panama, a multinational company that oversees development of the project. It is nicely situated just 15 minutes from Panama City.
Panama Pacifico is an enormous development with a landmass larger than Panama City. You won’t find a tax free zone anywhere in the world that can compete with the size, scope or benefits of this project.
Businesses operating in the Panama Pacifico Special Economic Zone include: corporate and bank offices, logistics and call centers, offshore services, tech industries, aircraft maintenance and repair, and export services.
Multinational corporations such as Dell Panama, 3M and Caterpillar are in Panama Pacifico, and the Google is in discussions for a massive data center.
One of the reasons they have selected Panama Pacifico, in addition to the zero tax rate, is direct access to the Internet backbone. Like Los Angeles, New York and the U.K., Panama Pacifio is a major hub of submarine Internet cables on the Pacific side. Cables from the Atlantic and Caribbean Sea come in to Colon, a major shipping port directly across from Panama Pacifico.
Panama Pacifico is an especially attractive and compelling site because it has existing infrastructure from its days as a US Air Force base. It is also directly connected with a major public works supplier associated with the Panama Canal, has potable water, excellent electrical and internet functionality via submarine telecommunications, superb roads, and efficient modes of transportation. There is a streamlined shuttle and commuter bus transportation system for onsite employees.
The developed Panama Pacifico area comprises 3,450 acres and will feature roughly 20,000 homes upon completion. London & Regional Panama founded the project along with 17 other international firms in 2007, on a 40-year licensed contract with commitment to invest over $400 million in the first 8 years. So it won’t be going away anytime soon.
Another key highlight of the Panama Pacifico is its significant tax benefits offered by its Special Economic Zone. The main benefits of conducting business in or from the Panama Pacifico Special Economic zone include a variety of tax incentives and benefits: indirect tax exemption for all companies; tax exemptions on income, dividends and transfer for specific business activities; and 10 years of guaranteed legal stability. Businesses and individuals also have easy on-site access to 15 government entities, customs operations, and a full-time workforce training center.
Maximum tax incentives in Panama Pacifico are received by the following specific business activities: multinational corporations’ distribution centers; corporate headquarters; multimodal and logistics services; back-office operations; on-site companies’ stock transfer; high-tech manufacturing and maintenance; aircraft repair; product and service sales to aviation industry, ships and passengers; offshore services; data transmission; call centers; and radio, TV, audio, video and film industries.
Specific Panama Pacifico tax benefits include tax breaks on: income, international phone calls, dividends, remittance licensing, exports, real estate property and transfer, and stamps. There is also a tax benefit on import duties.
Further benefits of conducting business in Panama Pacifico include friendly labor laws, such as extra Sunday and holiday pay, and ability to negotiate preferred days off and vacation time.
Immigration visas, family visas, and work permits are readily available for foreign workers in the Panama Pacifico Special Economic Zone. Plus there are special 3-5 year visas for investors and laborers. Add to this, personal effects with values up to $100,000 can be imported duty free, and you have a great place to build a business.
The Panama Pacifico Special Economic Zone also offers valuable labor incentives, including superb (and fixed) pay rates for overtime (25o/o) and holidays (50o/o). As a business you will experience a greater flexibility to operate through the options of being open on Sundays and holidays, assigning specific employee holidays, and hiring a greater number of foreign workers. There is also greater flexibility to fire employees for just cause or due to fluctuations in the market – which is a boon for businesses.
Doing business in Panama offers major advantages to the discerning company, which are only amplified if one is able to situate in the Panama Pacifico Special Economic Zone.
Whether you chose to operate from Panama Pacifico, or you prefer Panama City, we can help. We offer US tax compliant tax plans and structures, banking offshore as well as in Panama, and have 55 years of combined experience living, working and doing business in Panama.
Please contact HERE for a free consultation on setting up your business in Panama. All conversations are confidential and we will be happy to help you find space, negotiate visas, cut through the red tape, and find qualified English speaking employees.
Here are a few articles that will aid in your thoughts about Panama:
How to Structure a Business in Panama
Personal and Financial Advantages of Panama’s Friendly Nations Visa
A History of Panama’s Friendly Nations Visa
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