This is mostly a post I wrote in August 2010 but after a recent conversation with a friend I think it is worthy of repetition. This friend is trying to sell property and suddenly discovered that there is an outstanding tax obligation on the land.
People are told there is no tax on property in Panama, that is a flat out lie. You may have a property that is not taxed if the value is low and you may have an exoneration on improvements, or you may not. If you own or buy here you need to do your due diligence or you may find yourself with a surprise tax bill, penalties and interest when you try to sell your property. Panama does not notify you of tax obligations it is your obligation to uncover them. You an signup on the DIG website and uncover your obligations, LINK to DIG
Property taxes: Panama does have property taxes, but it offers exemptions on new construction. The term of the exemption changes regularly but for some time it was twenty years on any new home construction. Now it is less and depends upon the value of the construction, the higher the value the shorter the exoneration. However you must file the correct paperwork with the correct agencies or you will have no exoneration. Your lawyer can help with this.
In addition, up to $30,000 of land is tax free. If you have a lot with a recorded purchase price of less than $30,000 it is tax free. If it is more than $30,000 there is a progressive tax schedule for the land up to 2.1% of the value.
Taxable Amount Rate percentage (%) Accumulated (US$)
Under US$30,000 zero
US$30,001 to US$50,000 1.75%
US$50,001 to US$75,000 1.95%
Over US$75,000 2.1%
Improvements, your house, are taxable from dollar one, unless you have an exoneration.
The information below is relevant as tax time for US Citizens approaches.
Income taxes: Panama does have an income tax. The most relevant portion to many expats is that income earned outside of Panama is tax exempt. You can run an internet business from your home and not pay one penny of income tax legally if your revenue is from outside of Panama.
Many countries in this world do not tax their citizens if they move to another country. The United States is an exception, US citizens are supposed to file and pay regardless of where they live. Still many people call Panama a tax haven, there are a few reasons why Panama can fit that title. However if you are from the US, you still need to file and pay US income taxes.
There is one big loophole in favor of US taxpayers who live outside of the US and work outside of the US. It is the Foreign Earned Income Exclusion.
“The foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction are based on foreign earned income. For this purpose, foreign earned income is income you receive for services you perform in a foreign country during a period your tax home is in a foreign country and during which you meet either the bona fide residence test or the physical presence test.
Earned income is pay for personal services performed, such as wages, salaries,or professional fees. The list that follows classifies many types of income into three categories. The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both.” IRS
For details read IRS Publication 54
If you qualify by working in Panama, meet the residency test or physical presence test you have a nice tax benefit, legally.
“You must be either:
A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.”
Many CPA who do not work in the area of international taxation are not familiar with this exemption and if you work in Panama it is worth spending the time to read the rules. This alone might make being her a tax haven for you.