Panama and Double Tax Treaties

According to guidelines and requirements of the Organization for Economic Cooperation and Development (OECD), which require countries considered "tax havens" to adopt certain measures in order to be removed from their "grey list", the Panama Government has signed Double Tax Treaties with different countries to meet these requirements.

Lately, Panama has signed Treaties with Mexico, Spain, France and Qatar among other countries, but the question is: do these treaties affect Panama's perspective as a country offering financial services worldwide? What about the choice of Panama by foreign businesses or individuals for the incorporation of Offshore Companies and Private Interest Foundations? Many businesses choose Panama to move the money resulting from legal activities taking advantage of our legal and financial system with the aim to expand their operations globally: will their privacy and security be affected?

It is worth noting that agreements to avoid double taxation were created by countries that have a global tax system, where if, for example, a native from a country like Spain works or generates income in a country like England, both countries, the country of origin and the country of residence, have the right to tax that income.

Alternatively, Panama has a territorial tax system, meaning that if a native works or generates income in a country like the United States, Panama as the country of residence won't tax said income. On the contrary, if an American generates income in Panama, the latter has both the right and the obligation to tax that income, as does the United States for being the country of residence. Here is where Double Tax Treaties come into play and can benefit individuals or businesses in cases like the ones mentioned before; knowing that by following the guidelines of the treaty, the tax burden of the countries of residence can be decreased by the granting of tax credits.

Who could benefit from Double Tax Treaties?

Foreign corporation branches established in Panama, with the required notices of operations, that declare their income in the country and have executives or employees that, although they generate income in Panama, are not permanent residents.

Regarding the payment of dividends, interests and bonuses, for example, a branch in Panama that pays dividends to their shareholders outside of Panama must deduct 5%; however if the shareholders are residents in some of the countries Panama has a treaty with, the branch or the shareholder, according to the treaty guidelines, could demand its government a tax credit on the tax withheld by Panama, thus avoiding the double tax imposition.

Those foreign corporations looking into establishing in Panama as branches of companies abroad, that generate operations and income and that have the required notices of operations may benefit from these treaties. Additionally, this will be an incentive for those foreign corporations to establish in Panama, apart from ending the financial and legal restrictions many countries have on Panama for considering it a tax haven, thus resulting in an injection of foreign capital.

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