Transfer of property under Panamanian tax laws may be subject to:
- income tax over capital gains;
- transfer taxes, depending on the type of property or assets, as further described in question 6; and
- stamp taxes on agreements signed in connection with the transaction.
An important difference between the tax treatment of an acquisition of stock and an acquisition of business assets and liabilities is that the transfer of stock involves a single tax assessment for income tax relating to capital gains. An acquisition of assets and liabilities will involve both a capital gains assessment and transfer taxes relating to the property being transferred.
Income tax from capital gains is applicable to a transfer of property including chattels, real property, and stock and securities issued by companies with taxable or local source income. Capital gains tax is set at 10 per cent. However, the criteria for assessing and collecting capital gains income tax are contingent on the type of property being transferred, as described below.
Direct or indirect transfer of securities issued by companies with underlying economic investments in Panama
A 10 per cent capital gains tax is applicable to income deriving from a direct or indirect sale of stock or any type of securities issued by companies with economic investments within Panamanian territory. Companies that keep economic investments within and without Panamanian territory will only be taxed in Panama over the value of the investment portion located in Panama.
The capital gains tax is applicable when the stock or securities transferred are issued by a non-resident foreign company or held by non-resident individuals or companies and when the transfer takes place outside Panama.
The taxable gain is the difference between the book and sale or transfer value of the stock or securities.
Under an acquisition of stock or securities, Panamanian tax law requires buyers to retain 5 per cent of the total transfer value as an advance payment of capital gains tax. The buyer has the responsibility of forwarding the 5 per cent retention within 10 days from the date when a payment obligation arises. The buyer, the seller and the target entity or issuer of transferred stock or securities are jointly liable for any unpaid taxes.
Once capital gains tax is withheld and paid, the seller has the option to:
- consider the retained amount as the definitive income tax paid over the transaction, and take no further action; or
- request a tax credit over any amount paid in excess of the 10 per cent rate of the gains arising from the transaction. The taxpayer may elect to use any resulting tax credit to settle other tax obligations or request a tax refund within three years of the year when the transaction and payment took place. Tax credits thus obtained cannot be assigned.
The Panamanian taxable basis of a company that maintains economic investments within and without Panamanian territory is the greater of:
- the transfer value of the portion of the equity of the legal entities that generate Panamanian source income out of the total equity subject to the transaction; or
- the transfer value of the portion of the assets economically invested in Panama from the total assets subject to the transaction.
The transfer of securities issued by a Panamanian company or through the acceptance of a public offer for the acquisition of shares pursuant to Panamanian securities law is subject to capital gains tax. However, Panamanian securities legislation creates an exemption from capital gains tax in the event of a transfer of securities registered at the Panamanian Securities Market Superintendence (SMV), provided such transfer:
- is made through an organised securities market or stock exchange; or
- results from a merger, consolidation or corporate reorganisation, and the transferring shareholder receives only stock of the subsisting entity, or an affiliate of the same, as consideration. Nevertheless, the subsisting entity may pay up to 1 per cent of the value of stock issued to the receiving shareholder in cash or other assets to prevent dividing the stock into fractions.
The following transfers of securities are exempted from capital gains tax:
- transfers where the government is the acquirer;
- transfers between parents and children and between spouses; and
- court-ordered transfers.
Transfers of stock or securities that do not generate gains are not subject to capital gains tax. Where a transfer does not yield a gain, the taxpayer must file an application with the tax authority. The application will require the taxpayer to submit evidence of the tax-neutral transfer. The tax authority will review the taxpayer’s application and supporting evidence and may order an audit.
Under double taxation treaties (DTTs) approved and ratified by Panama, a foreign transferor of stock or securities of a company with underlying economic investments in Panama may be taxed in Panama for capital gains stemming from the transfer. To levy Panamanian capital gains tax over a transfer of securities, DTTs generally require that the foreign transferor meet threshold participations and a minimum holding period of the target entity. A minimum capital gains tax rate of 5 per cent of the gross transfer price or 10 per cent of the capital gains is also included in certain DTTs signed by Panama.
The current position in relation to DTTs is as follows:
- Panama has subscribed to and ratified DTTs with Barbados, the Czech Republic, France, Ireland, Israel, Italy, Luxembourg, Mexico, the Netherlands, Portugal, Qatar, Singapore, South Korea, Spain, the United Arab Emirates and the United Kingdom (the DTT with Italy has not yet come into force);
- Panama has negotiated DTTs with Austria, Bahrain, Belgium, Colombia and Vietnam; and
- Georgia, Greece, Poland and Switzerland have all expressed interest in negotiating DTTs with Panama.
Transfers of stock and securities of Panamanian companies are also subject to stamp taxes. Please see question 6 for a discussion of the applicable rates.
Transfer of real property
In real property transfers, the taxable capital gain is the difference between the amount or value of the transfer and the sum of the ‘basic cost’ of the property plus the value of any improvements and any disbursements or expenses required to complete the transaction. In a transfer of real property, the ‘basic cost’ is the lower of the official property value or its book value.
When the transfer is within the ordinary course of business of the taxpayer, revenue will be treated as regular income and must be reported within the annual income tax return for the corresponding tax period. From 1 January 2012, first-time transfers of residential properties by professional transferors will be subject to a capital gains income tax rate ranging from 0.5 per cent to 2.5 per cent, depending on the value of the property. First-time transfers of commercial or business properties by professional transferors will be subject to a 4.5 per cent tax rate.
If a transfer of real estate is not within the ordinary course of business of the taxpayer, the applicable capital gain income tax rate is fixed at 10 per cent. In such cases, the taxpayer must make an advance payment corresponding to 3 per cent of the higher value between the sale price stated in the purchase or sale document or agreement, or the official property value. Such amount is payable, together with the corresponding property transfer tax, prior to and as a requirement for the filing of the transfer deed at the Public Registry. Further, the seller has the option to:
- consider the 3 per cent as the definitive income tax of the transaction, and take no further action; or
- request a tax credit over any amount paid in excess of the 10 per cent rate of the gains arising from the transaction.
Under this second option, the taxpayer may elect to use the credit to settle other taxes or request a tax refund in cash. Tax credits thus obtained may be assigned to other taxpayers.
Under approved and ratified DTTs, a foreign transferor of real estate located in Panamanian territory may be taxed for capital gains in Panama. DTTs generally refer to the definition of real estate under the applicable laws of the jurisdiction where the property is located. However, DTTs generally provide that real estate includes property affixed permanently to the land, livestock and equipment used in agriculture and forestry.
Transfers of Panamanian real estate are also subject to a 2 per cent transfer tax. Please see question 6 for a discussion of the real estate transfer tax.
Transfer of chattels
The taxable capital gain for the transfer of chattels is 10 per cent over the difference between the amount or value of the transfer and the original cost of acquisition, plus depreciation. The original cost of acquisition includes:
- the initial invoice value for the asset;
- any expenses relating to its acquisition, installation, assembly and delivery, including sales commissions, insurance and the cost of shipping and handling;
- import taxes; and
- any other expenses or disbursements related to the original acquisition of the asset.
Chattels that are categorised as fixed assets and that are permanently connected to an income-generating business activity may be depreciated on an annual basis. Depreciation is calculated based on the economic lifespan of each asset, which is contingent on the particular use of the asset, maintenance requirements, prospective asset obsolescence and generally accepted depreciation tables. For depreciation purposes, the lifespan of the asset may not be less than three years.
If the transfer of chattels is within the ordinary course of business for the taxpayer, income must be included and taxes paid within the annual income return for the corresponding tax period.
Transfers of chattels belonging to a permanent establishment in Panama may be levied with local capital gains tax under approved and ratified DTTs. Under DTTs approved by Panama a permanent establishment includes business headquarters, branches, offices, factories and workshops, as well as mines, oil or gas wells, quarries or any other site for extraction of natural resources. Building sites and construction or installation projects with a minimum duration of six months depending on applicable treaty provisions are also generally considered as permanent establishments under DTTs approved by Panama.
Transfers of chattels and personal property are also subject to value added tax, domestically known as ITBMS. See question 6 for a discussion of this.
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