Since Panama is a country with a territorial tax regime, it makes sense to have specific criteria to determine, on a case-by-case basis, if a person can be considered a Panamanian tax resident. A territorial tax regime implies that a taxpayer is only subject to the payment of taxes in Panama if its net monetary income has been obtained from commercial activity carried out within the Panamanian territory. Financial, legal and logistics services are among Panama's most robust economic drivers and these are attractive industries for foreign investment. This incoming foreign capital brings with it foreign individuals and corporate entities, which in turn leads to discussion on whether such foreign individuals and corporate entities should be considered Panamanian tax residents.
In accordance with Panamanian tax law, the Panamanian Tax Authority (Dirección General de Ingresos) will certify the tax residence of a person or corporate entity by issuing a tax residence certificate.
Generally speaking, in order to obtain tax residency in Panama, foreign individuals must remain in the Panamanian territory for a period of at least 183 days (intermittently or consecutively), within a fiscal year, or establish their physical residency in Panama. On the other hand, corporate entities that have economic or commercial ties in Panama, may be considered Panamanian tax residents, provided that they maintain material means of management and administration within the Panamanian territory.
When applying for a tax residence certificate, the burden of proof lies with the applicant. As a result, Panamanian tax residency is not granted as easily as in other jurisdictions. Unlike in other jurisdictions, obtaining Panamanian tax residency can be a burdensome process, mainly because the Tax Authority tends to carry out a rigorous evaluation of tax residency applications and the territorial income system obliges the country to exercise caution when issuing tax residence certificates.
Although it is good for the country to attract foreign investment, it is important that the parties involved, whether individuals or legal entities, have sufficient ties with the country to be considered Panamanian tax residents. Panama must always consider the stability of its financial system, thus Panamanian lawyers tend to agree that a person or corporate entity must be able to demonstrate sufficient substance to be considered a Panamanian fiscal resident.
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Ana Cristina Negrón |