Panama has established itself as one of Latin America’s leading business centers thanks to its economic stability, use of the U.S. dollar, international infrastructure, and a tax system based on the principle of territorial taxation.
Panamanian corporations (Sociedades Anónimas) are widely used by entrepreneurs, investors, and international business groups due to the corporate flexibility provided by Panamanian law and the advantages derived from its tax regime.
However, it is important to understand that Panamanian corporations may be subject to various tax and compliance obligations depending on the nature of their operations and the source of their income.
How Does the Territorial Tax System Work in Panama?
Panama’s tax system is based on the principle of territorial taxation.
This means that Panama taxes only income that is considered to be generated within its territory.
In general terms:
✓ Panamanian-source income is subject to taxation.
✓ Foreign-source income is not subject to Income Tax in Panama.
This principle has historically been one of the main factors that have made Panama an attractive jurisdiction for international investment and cross-border business structuring.
What Is Considered Panamanian-Source Income?
Examples include:
- Sale of goods within Panama.
- Provision of services performed in Panama.
- Commercial activities carried out in Panama.
- Operations physically conducted within the national territory.
- Operations physically conducted within the national territory.
The determination of the source of income must be analyzed on a case-by-case basis, as it has a direct impact on the applicable tax obligations.
Taxes Applicable to Panamanian Corporations
Summary of the Main Corporate Taxes
| Tax | General Rate |
| Corporate Income Tax (ISR) | 25% |
| Dividend Tax | 10%* |
| ITBMS | 7% |
| Annual Franchise Tax (Tasa Única) | US$300 |
The rate may vary depending on the origin of the distributed profits and other factors established under tax legislation.
Corporate Income Tax (ISR)
Corporations that generate Panamanian-source income are subject to Corporate Income Tax.
The general corporate tax rate is:
25% on taxable net income
Taxable net income is determined after applying deductions, costs, and expenses allowed under Panamanian tax legislation.
Depending on the nature of the economic activity, special rules may apply to certain industries or taxpayers.
Dividend Tax
When a corporation distributes profits to its shareholders, dividend tax obligations may arise.
As a rule:
10% on dividends derived from Panamanian-source profits
The proper classification of the origin of profits is essential to determine the applicable tax treatment.
Dividend distributions are one of the areas that most frequently require professional review in order to avoid potential tax contingencies.
ITBMS (Tax on the Transfer of Tangible Movable Goods and the Provision of Services)
ITBMS operates similarly to the Value Added Tax (VAT) used in many other countries.
The current general rate is:7%
7%
This tax applies to the sale of goods and the provision of taxable services within Panama.
Certain activities may be exempt or subject to special treatment under current legislation.
Foreign Passive Income and Economic Substance
Law 526 of 2026 introduced significant changes affecting certain international structures.
Under this regime, certain categories of foreign-source passive income may become subject to special tax and compliance rules.
These include:
- Dividends.
- .Interest
- Royalties.
- Capital gains.
- Certain income derived from investments.
What Is Economic Substance?
Economic substance aims to demonstrate that an entity carries out genuine and effective activities within Panama.
Depending on the specific circumstances, the authorities may evaluate factors such as:
- Employees and personnel.
- Effective management and control.
- Operating expenses.
- Physical infrastructure.
- Decision-making activities carried out within the country.
Entities subject to these provisions should carefully assess their particular circumstances to ensure compliance with applicable regulations.
Tax Obligations of Inactive Corporations
There is a common misconception that a corporation with no commercial activity has no obligations.
In reality, even inactive corporations must comply with certain corporate and regulatory requirements.
Main Obligations
Payment of the Annual Franchise Tax (Tasa Única)
Panamanian corporations must pay an annual franchise tax of:
US$300
Failure to comply may result in surcharges and penalties.
Maintenance of Accounting Records
Panamanian legislation requires corporations to maintain:
- Accounting records.
- Supporting documentation.
- Financial information when applicable.
Updating Corporate Information
It is important to keep information related to the following up to date:
- Directors.
- Officers.
- Resident agent.
- Corporate address.
Compliance with Applicable Tax Obligations
Depending on the activities carried out, additional tax filings and reporting obligations may apply.
Taxation of Foreign Corporations in Panama
Corporations incorporated outside Panama may also incur tax obligations when conducting economic activities within the country.
This commonly occurs through:
- Branches.
- Permanent establishments.
- Local commercial operations.
In these cases, income attributable to such activities may be subject to taxation under Panamanian law.
Tax Advantages of the Panamanian System
Panama continues to be one of the most attractive jurisdictions for investors and international businesses.
Among its main advantages are:
Territorial Tax System
As a general rule, foreign-source income is not subject to Income Tax in Panama.
Free Zones and Special Regimes
Panama offers various incentives designed to attract foreign investment.
Examples include:
- Zona Libre de Colon.
- Ciudad del Saber.
- Panama Pacifico.
- Special manufacturing and export regimes.
Double Taxation Treaties
Panama maintains international agreements that help prevent situations of double taxation
Legal Stability
Panama’s corporate legislation continues to be one of the most widely used legal frameworks for international business structuring.
What Is the Main Tax Advantage of a Panamanian Corporation?
The principal tax advantage of a Panamanian corporation is that, under the territorial tax system, income generated outside Panama is generally not subject to Panamanian Income Tax, except for specific exceptions established under current legislation.
Frequently Asked Questions (FAQs)
As a rule, no. However, certain categories of foreign-source passive income may be subject to special rules
Even if they do not engage in commercial activities, inactive corporations must still comply with certain corporate and regulatory requirements.
The corporation may be subject to penalties, surcharges, and administrative restrictions.
Yes. Foreign corporations may be subject to taxation when they generate Panamanian-source income or maintain local operations that are subject to tax.
Yes. Dividend taxation may apply depending on the origin of the profits being distributed.
Yes. Panama maintains international tax treaties with various countries to help prevent double taxation.