There is a lot of talk about Tax Residency, but what exactly is it? And why should a global citizen be interested in understanding this concept? In this article, we’ll explore the answers to these and other questions on the topic in detail.
Tax residency doesn’t have a concrete definition; however, it is understood to be a condition acquired through significant presence within a state, among other criteria, which makes a person, whether an individual or a company, eligible for taxation. At this point, we consider it essential to clarify that tax residency is not necessarily linked to nationality, as a person can have a nationality but have tax resident status in another country.
However, the status of tax resident in a state acquires greater value when said residents are required to pay taxes on their income in that state, but at the same time must pay taxes in their country of origin. This is considered double taxation, which significantly affects their earnings.
Understanding the criteria used to determine tax residency is crucial for individuals and companies operating in different countries, as it allows them to access the use of double taxation treaties, among other tax relief unilaterally granted by some jurisdictions. This results in taxes being paid in only one country at a time, resulting in fairer taxation for citizens of the world. Therefore, it is a topic that should be of interest to global citizens.
It is important to note that each country has its own rules for determining tax residency. However, in the case of Panama, the Tax Code, further developed by Executive Decree 983 of 2013, establishes the criteria to be evaluated to determine residency for tax purposes. Therefore, we will first address individuals, who, to prove their tax residency status, must demonstrate that they have a home in the country, as well as their economic and family interests.
Regarding companies, they are understood to acquire
tax resident status by having executives, whether resident in Panama or traveling, attend meetings related to decision-making that impact the management and administration of the business. Similarly, having offices becomes relevant for the development of any economic activity, in addition to having hired personnel to carry out their activities.
The tax authority, known in Panama as the General Directorate of Revenue, is the entity responsible for recognizing tax residency status through the issuance of a certificate, which is valid for one year.
This implies that the interested party must present his formal petition through the representation of a lawyer, state the reasons for which he is considered a resident and provide evidence that has the validity required by national laws. It is extremely important to emphasize that filing an application without sufficient supporting documentation and evidence of the required quality can lead to the denial of recognition of resident status and trigger lengthy reconsideration processes before the same authority or appeal before the Administrative Tax Court.
Understanding tax residency as a tool to avoid double taxation is essential for any individual or company operating internationally, but it is equally important to have appropriate advice for proper handling of your case before the tax authorities, as we have previously explained.
If you have questions about whether your situation qualifies Tax Residency recognition or whether you require expert assistance to begin this process, LAC TAX is your best option.
Note: For more information write to ibonilla@lacgrp.com