Panama Tax Residency: Do You Owe Taxes on Foreign Income?

How does Panama's banking and finance framework work for foreign individuals and companies?

Panama offers a US dollar-based, internationally oriented banking system combined with a territorial tax regime that attracts both individuals and multinational groups. Foreigners can bank and invest through local entities, but must navigate robust compliance, tax, and substance rules to avoid misclassification of income and regulatory issues.

Key features of the Panamanian banking and finance environment include:

• Currency and stability: Panama uses the US dollar as legal tender, which reduces FX risk for US and many international investors.
• Regulators:
  • Superintendencia de Bancos de Panamá (SBP): licenses and supervises banks under Decree Law No. 9 of 1998 (Banking Law).
  • Superintendencia del Mercado de Valores (SMV): regulates securities markets under Law 67 of 2011.
  • Superintendencia de Seguros y Reaseguros: supervises insurance and reinsurance companies.
  • Dirección General de Ingresos (DGI): tax authority under the Ministerio de Economía y Finanzas (MEF).
• Key tax framework: Panama's Código Fiscal (Tax Code), particularly rules on territoriality (for example, Article 694 and following), corporate tax (Impuesto sobre la Renta), VAT-style tax (ITBMS), and transfer pricing (Articles 762-A and following).
• Banking options: general license banks (can operate domestically and internationally) and international license banks (offshore operations, no retail business in Panama).
• Compliance pressure: KYC, Anti-Money Laundering rules, FATCA (for US persons), and CRS (for tax resident reporting) all strongly influence account opening and structuring.

For both private clients and businesses, the combination of territorial taxation and a sophisticated banking sector can be attractive, but only if structures and activities are carefully aligned with substance, tax residence, and transparency requirements.

What is Panama's territorial tax system and what counts as local vs foreign source income?

Panama taxes only income considered to be from Panamanian source. Income from activities, services, or assets located or used outside Panama is generally foreign source and not subject to Panamanian income tax.

Core principle of territorial taxation

The Panamanian Tax Code (Código Fiscal) establishes that only Panamanian-source income is subject to income tax, regardless of:

• where the payer is located,
• where the contract is signed, or
• the nationality or residence of the taxpayer.

Instead, taxability focuses on where the income is generated or used. In simplified terms:

• Local source income: income arising from activities carried out within Panama, or from assets or rights located or economically used in Panama.
• Foreign source income: income arising from activities performed and used abroad, or from assets or rights located and used abroad.

Examples of local vs foreign source income

Typical taxable categories under Panamanian law

Local source income typically includes:

• Business profits from activities performed in Panama.
• Services used or exploited economically in Panama, even if performed partly abroad.
• Rental income from property in Panama.
• Capital gains from disposal of assets located in Panama (for example, real estate or shares in Panamanian companies, with nuances).
• Interest paid by Panamanian residents or entities, unless a specific exemption applies.

Foreign source income usually covers:

• Consulting and professional services provided from Panama but used exclusively abroad.
• Income from foreign investments (shares, bonds, funds) where activities and assets are abroad.
• Profits from foreign branches or permanent establishments of Panamanian companies, when operations are entirely outside Panama.

The DGI examines substance and economic reality. You should document where services are used, where decisions are made, and where value is actually created to defend foreign source treatment.

Do digital nomads and remote workers for foreign clients pay income tax in Panama?

Most digital nomads who work from Panama exclusively for foreign clients, where the services are used abroad, generally do not pay income tax in Panama due to the territorial system. However, if they serve Panamanian clients or their work is economically used in Panama, those portions of their income can become taxable.

Typical digital nomad scenario

A common structure is:

• You live part or full time in Panama.
• You are employed by or contract with companies in the US, EU, or elsewhere.
• You are paid to a foreign bank account in USD or EUR.
• Your work product is used by foreign businesses in their markets.

Under Panama's territorial rules, this setup often qualifies as foreign source income because:

• The client is abroad.
• The services are used abroad.
• No Panamanian clients or business activities are involved.

As a result, in many cases, Panama does not tax this income, even if you are physically sitting in Panama when you work.

When remote income becomes taxable in Panama

Your income can be treated as Panamanian source, fully or partially, if:

• You provide services to Panamanian clients (companies or individuals).
• Your services are used in Panama, such as:
  • supporting a foreign company in its Panamanian operations,
  • managing Panamanian assets or staff, or
  • activities that directly affect Panamanian customers or markets.
• You run a local business operation (office, employees, local advertising) that targets the Panamanian market.

In those situations, income attributable to Panamanian source is subject to income tax at individual rates (up to 25 percent, with progressive brackets) and may also trigger obligations like social security or business registration.

Digital nomad visa and tax perspective

Panama created a Short Stay Remote Worker Visa (often called the digital nomad visa) by Executive Decree No. 198 of 2021. This visa is designed for individuals who work for employers or clients abroad while physically staying in Panama.

From a tax angle:

• The visa targets foreign source income from employers or clients outside Panama.
• Holders are expected not to work for Panamanian employers or provide services to Panamanian clients.
• If you respect those conditions, your income typically remains foreign source and not taxable in Panama.

However, visa status does not automatically equal tax residence or non-residence. You still need to analyze your day count, center of vital interests, and source of income to understand both Panamanian tax exposure and your home country rules.

How are individuals and companies taxed in Panama under the territorial principle?

Individuals and companies in Panama pay income tax only on Panamanian-source income, but resident status can influence rates, reporting, and access to tax residence certificates. Corporate tax is generally 25 percent on net local source profits, while individuals face progressive rates up to 25 percent.

Resident vs nonresident taxation

Corporate tax in practice

• Corporate rate: 25 percent on net Panamanian-source income.
• Annual franchise tax: most companies pay a fixed annual fee (tasa única, often around PAB 300) to keep the entity in good standing with the Public Registry.
• Dividend withholding:
  • 10 percent on dividends from Panamanian-source income.
  • 5 percent on dividends from foreign-source income or certain exempt income.
  • Complementary tax can apply if profits are retained instead of distributed.
• ITBMS (VAT-type tax): 7 percent standard rate, charged on many local sales of goods and services, but not on pure foreign-source services.

A Panamanian company that only earns foreign-source income can be tax resident in Panama but owe little or no income tax locally, while still needing to comply with annual filings, substance expectations, and care regarding transfer pricing and CFC rules in the shareholder's home country.

How can you obtain a Panamanian Tax Residence Certificate for use in your home country?

You obtain a Tax Residence Certificate from the DGI by proving you meet Panama's residence criteria and that you are registered and compliant as a taxpayer. The process usually involves submitting forms, supporting documents, and evidence of ties to Panama, with issuance often taking 2 to 6 weeks.

Who typically needs a Tax Residence Certificate?

You usually request a Panamanian Tax Residence Certificate when:

• Your home country tax authority asks for proof you are tax resident in Panama.
• You want to claim treaty benefits (where a tax treaty exists) or avoid double taxation.
• You must demonstrate that certain foreign bank or investment accounts should be reported under Panama, not another country.

Criteria for individual tax residence in Panama

While details depend on regulations and DGI practice, common tests for individuals include:

• Physical presence: usually at least 183 days in Panama in the tax year or over a rolling 12-month period, evidenced by passport stamps and migration records.
• Center of vital interests: having your main home, close family, or key economic interests (company, employment, main business) in Panama.

An individual can be considered tax resident even if their income is mostly foreign source and not taxable in Panama, which is often the goal for mobile professionals.

Step-by-step process to obtain the certificate

1. Register as a taxpayer:
   • Obtain a Panamanian tax ID (RUC) with the DGI.
   • If you have a company or practice, register that as well.
2. File required tax returns:
   • Even if you have only foreign-source income, you may still need to file annual returns declaring that fact.
   • Non-filing or late filing often leads to automatic denial of the certificate.
3. Gather evidence of residence and ties:
   • Copy of passport with entry and exit stamps.
   • Migration records, if available.
   • Lease or property ownership in Panama.
   • Utility bills, local bank account statements, or employment/contract documents in Panama.
4. Submit formal request to DGI:
   • File the DGI's application form for Tax Residence Certificate (Certificado de Residencia Fiscal).
   • Attach supporting documents and sometimes a letter explaining the purpose (for example, to present to a foreign tax authority).
5. Pay fees and stamps:
   • Government charges are relatively modest, often in the range of PAB 20 to 50 including stamps.
   • Professional fees for a law firm or accountant commonly range from PAB 300 to 800 or more, depending on complexity and urgency.
6. Wait for review and issuance:
   • Processing time is often 2 to 6 weeks, but can be longer around filing season.
   • DGI may request additional details or clarification regarding your days in Panama or your income profile.

The certificate is typically issued for the specific tax year requested. You may need a new certificate each year if you continue to claim Panama as your tax residence abroad.

How do transfer pricing rules work in Panama for multinational companies?

Panama applies transfer pricing rules based on the arm's length principle to transactions between Panamanian taxpayers and related parties abroad, especially where those transactions affect Panamanian-source income. Multinationals must prepare transfer pricing documentation and file annual informative returns with the DGI.

Scope of Panama's transfer pricing regime

Key features include:

• Legal basis: Transfer pricing provisions are in Articles 762-A and following of the Panamanian Tax Code, introduced and expanded by laws such as Law 33 of 2010 and later reforms.
• Who is covered:
  • Panamanian taxpayers (companies and certain permanent establishments) with cross-border transactions with related parties.
  • Some domestic related party transactions when one party benefits from a preferential regime.
• Income affected: Transactions that impact Panamanian-source income, including exports of goods, services, financing, royalties, and management fees.

Arm's length principle and methods

Panama follows the OECD-inspired arm's length principle. Taxpayers must show that prices and conditions between related parties match what independent parties would have agreed in comparable circumstances.

Acceptable methods (following OECD concepts) typically include:

• Comparable Uncontrolled Price (CUP).
• Resale Price Method.
• Cost Plus Method.
• Transactional Net Margin Method (TNMM).
• Profit Split Method.

Taxpayers must select the most appropriate method given the nature of the transaction and data availability and must apply it consistently.

Documentation and reporting obligations

• Annual TP report (Form 930):
  • Taxpayers with qualifying related party transactions must submit Form 930 to the DGI each year.
  • The form details the nature, amount, and pricing of related party transactions.
• Transfer pricing study:
  • A formal TP study is not always filed with the return but must be kept on file.
  • It should include functional analysis, comparability analysis, method selection, and benchmarking.
• Thresholds:
  • Thresholds for mandatory reporting and documentation have changed over time; current thresholds are tied to transaction amounts and taxpayer size.
  • Large Panamanian entities in multinational groups almost always fall within scope and should assume TP obligations apply unless confirmed otherwise.

Risks and strategic considerations

• Adjustments: If the DGI considers prices non-arm's length, it can adjust taxable income and assess additional tax, interest, and penalties.
• Withholding tax alignment: Transfer pricing can influence the characterization of payments (royalties, interest, services), which impacts applicable withholding taxes.
• Substance and BEPS: Panama is under ongoing international scrutiny. Multinationals must align TP policies with real substance (staff, decision making, functions) in their Panamanian entities.
• Interaction with foreign TP rules: If another country in the group also adjusts prices, there is a risk of double taxation if no corresponding adjustment is available.

For groups using Panama as a regional hub, logistics center, or holding jurisdiction, early TP planning and robust documentation are essential to keep the territorial tax advantages without triggering aggressive audit positions.

How are banks and financial services regulated in Panama, and what should investors expect?

Panama's banking and financial sector is heavily regulated, especially regarding licensing, capital, and compliance with AML, FATCA, and CRS. Investors and businesses must expect detailed KYC procedures, ongoing reporting, and potentially long account-opening timelines.

Banking regulation highlights

• Licensing:
  • General license banks: can operate in Panama and internationally, providing full banking services to residents and nonresidents.
  • International license banks: operate mainly offshore, serving nonresident clients and restricted from retail operations in Panama.
• Key law: Decree Law No. 9 of 1998 (Banking Law), along with regulations issued by the SBP.
• Supervision: SBP conducts on-site and off-site supervision, requires capital adequacy, risk management, and compliance systems.

KYC, FATCA, and CRS

When opening bank or investment accounts in Panama, expect:

• Know Your Customer (KYC):
  • Passport, second ID, proof of address (utility bill), and bank or professional reference letters.
  • Corporate documents for companies: articles, incumbency, good standing certificate, ownership chart.
  • Source of funds and source of wealth documentation, such as contracts, tax returns, or sale agreements.
• FATCA for US persons:
  • US citizens and residents must complete W-9 forms.
  • Accounts will be reported to the US Internal Revenue Service under FATCA rules.
• CRS for other tax residents:
  • Panama participates in the OECD Common Reporting Standard (CRS).
  • Banks identify your tax residence and report account data to the DGI, which exchanges it with your home country.

Costs and expectations for banking services

Panama is no longer suitable for anonymous or lightly documented banking. To benefit from the jurisdiction, you must be prepared to be fully transparent with both banks and tax authorities.

When should you hire a Panamanian tax or banking expert?

You should involve a Panamanian tax or banking expert whenever you plan to establish residency, form a company, or move meaningful capital into or through Panama. Professional advice is especially critical if you are a digital nomad seeking tax residency, or a multinational group subject to transfer pricing and cross-border reporting.

Situations where expert help is highly advisable

• Digital nomads and remote workers:
  • To confirm that your income qualifies as foreign source.
  • To structure your contracts and invoicing so they align with Panamanian territorial rules and your home country tax requirements.
  • To obtain and renew Tax Residence Certificates, and respond to foreign tax authority questions.
• New Panamanian companies or holding structures:
  • To choose the right entity type and understand annual costs and tax implications.
  • To design substance and governance in line with international standards and local expectations.
• Multinational groups:
  • To implement transfer pricing policies that work both in Panama and in other jurisdictions.
  • To prepare TP documentation and manage Form 930, as well as respond to DGI inquiries.
• Banking and investment structures:
  • To navigate account opening, KYC, and compliance for individuals, companies, and trusts.
  • To map how FATCA and CRS reporting will interact with your tax residence choices.

A qualified local lawyer or tax adviser can also coordinate with advisers in your home country to avoid conflicts between Panama's territorial system and worldwide taxation rules elsewhere.

What are the next steps if you want to use Panama for banking, residency, or tax planning?

Your next steps should be to clarify your goals, map your current tax residence and reporting obligations, then design a Panama strategy that is both compliant and efficient. This usually involves parallel work on immigration, tax, and banking tracks.

Action plan for individuals (including digital nomads)

1. Clarify your home country tax exposure:
   • Confirm when you stop being tax resident in your current country, if that is your goal.
   • Check exit tax, CFC rules, and reporting on foreign companies and trusts.
2. Design your Panama stay pattern:
   • Decide whether you want to qualify for Panamanian tax residence (for example, 183+ days) or remain nonresident while using the territorial advantages.
   • Choose the right immigration path (residence program or digital nomad visa).
3. Structure your income and contracts:
   • Review contracts with foreign clients or employers to confirm that services are clearly used abroad.
   • Consider whether to operate as an individual, via a Panamanian company, or via a foreign company.
4. Set up banking and reporting:
   • Open accounts that match your residence and reporting profile.
   • Ensure you comply with FATCA/CRS declarations and keep copies of all tax residence certificates.
5. Prepare for annual compliance:
   • File Panamanian returns, even if declaring only foreign-source income.
   • Secure or renew your Panamanian Tax Residence Certificate each year you rely on it abroad.

Action plan for companies and multinationals

1. Review current and planned Panamanian activities:
   • Identify which functions, assets, and risks sit in Panama.
   • Separate clearly Panamanian-source and foreign-source income streams.
2. Optimize legal and tax structure:
   • Choose entity forms and locations in line with substance and business reality.
   • Review the impact of Panamanian rules on withholding, VAT (ITBMS), and free zones.
3. Implement transfer pricing policies:
   • Map all related party transactions involving Panama.
   • Prepare TP studies and internal guidelines that can withstand DGI and foreign audits.
4. Align banking and treasury:
   • Choose Panamanian or regional banks that match your risk and reporting profile.
   • Document intercompany financing, cash pooling, and guarantees with TP-compliant terms.
5. Institute ongoing compliance and monitoring:
   • Calendar all filing deadlines (corporate tax, TP Form 930, franchise taxes, financial statements).
   • Monitor law changes in Panama and internationally that could affect the territorial benefits.

Handled correctly, Panama's territorial system and financial sector can offer real advantages. The key is to build transparent, well-documented structures that fit both Panamanian law and your global tax and regulatory environment.