The Legislative Branch adopts Law 27 of 2015 and the Ministry of Finance issues Executive Decree 263 of 2015
Through Law 27 of 2015, published in the Official Gazette No 27,772-A of May 4th, 2015, reforms are introduced into the regime for Income Tax withholding of remittances abroad.
A. Provision of services from abroad for a person based outside of Panama
A change was made to item e) in paragraph 1 of Article 694 of the Tax Code, which considers as taxable income produced within Panamanian territory, any income that is paid for services that a person domiciled abroad renders to a person or entity located within the Republic of Panama, insofar as these services meet the following assumptions: (i) they have an incidence in the generation or conservation of income from a Panamanian source; (ii) the payment or expense is considered a deductible expense by the beneficiary of the service provided abroad.
Nonetheless, it has been established that (1) all public entities, be they from the Central Government, autonomous, semi-autonomous, local government, state companies or limited liability companies in which the State owns at least 51% of the shares; as well as (2) all entities that do not pay Income tax; and (3) taxpayers that are at a loss, must withhold Income Tax for remittances abroad, product of services rendered from abroad, by a person located abroad, without taking into account:
a. That the service received affects the production of income from a Panamanian source or its conservation in relation to the person who receives the service; and
b. That the expense is considered a deductible expense by the person that receives it.
In all of these cases, the withholding will be applied to 50% of the amount to remit, to the fees of the Income Tax contemplated in Articles 699 (legal person) and/or 700 (natural person) of the Tax Code. In practice, if the service was rendered by a legal person, the withholding is still 12.5% of the total amount of the payment to be remitted.
Regulation
Article 1 of the Executive Decree 263 of June 17th 2015, published in the Official Gazette No 27, 806-B, has modified point i) of Article 9 in Executive Decree 170 of 1993, regulating Income Tax, which describes the items that are considered income from a Panamanian source.
With regards to point i) of the aforementioned Article 9, income from a Panamanian source contemplates those payments that are remitted abroad for services rendered from abroad to a person domiciled in Panama, as long as those services (i) affect the production or conservation of income from a Panamanian source; (ii) the payment or expenditure is considered a deductible expense by the beneficiary of the service rendered from abroad.
Nonetheless, in accordance with the reforms to Law 27 of 2005, the regulation which considers income produced within the Republic of Panama as that which is paid or accredited to natural or legal person abroad is maintained, for:
1. Public Rights Entities, be they from the Central Government, autonomous, semi-autonomous, local governments, state companies or limited liability companies in which the State owns at least 51% of shares;
2. Tax payers at a loss.
It is established that in the case of tax payers with more than one source of income, that are at a loss, the withholding shall be applicable insofar as the payment or accreditation affects the generation of taxable income or its conservation.
With regards to the above provision, we recall that when a tax payer is at a loss, he has generated his gross income in Panama, except that his costs and deductible expenses are higher than his income, such that the difference does not result in taxable income, but in loss, however, the remitted payments surely affected the generation or conservation of taxable income.
3. Non-profit entities.
All non-profit entities, and therefore non Income Tax payers, that carry out payments or accreditations abroad, must withhold taxes.
To this effect, in these three assumptions, the withholding will also be applied to 50% of the amount to be remitted, to the fees for the Income Tax contemplated in Articles 699 (for legal persons and/or 700 (natural person) of the Tax Code. In practice, if the service was provided by a legal person, the withholding is still 12.5% of the total amount of the payment to be remitted.
Exemptions
The regulations clarify that they will not be subject to the obligation of performing the withholdings for natural or legal persons whose income is exempt in light of a treaty, special law or legal contract, such as:
- Headquarters of Multinational Companies (HMC).
- Those registered in the Panama Pacific Area.
- Operators or developers in free zones and petroleum free zones, as well as companies established in these zones.
- International organizations.
- Those recognized by the City of Knowledge Foundation.
- Those that have an international license regulated by the Banking Supervisory Agency.
- Those regulated by the Stock Exchange Supervisory Agency, as long as they generate income exclusively from foreign sources.
- Others that generate income exclusively from foreign sources, according to paragraph 2 of Article 694 of the Tax Code1.
Lastly, these provisions will not affect the application of treaties to avoid double taxation that are in effect in Panama.
B. Provision of services in Panama, by a person based abroad
Law 27 of 2015 has also modified point k) of Article 733 of the Tax Code, regarding the withholding of Income Tax for payments or remittances made to persons based or domiciled abroad, for services rendered in Panama. This withholding obligation, now also affects the same entities or persons mentioned below:
- Public entities, be they from the Central Government, autonomous, semi-autonomous, local government, state companies or limited liability companies in which the State owns at least 51% of shares;
- Non-profit organizations; and
- Tax payers that are at a loss
In this assumption, the aforementioned entities must also practice tax withholdings without taking into account: a) That the service received affects the production or the conservation of income from a Panamanian source, with regards to the person that receives the service; and b) that the expenditure be considered as deductible expenses by the person that received them.
Now, for these assumptions (services rendered in Panamanian territory), the withholding will not apply in the event that the natural or legal person whose domicile is outside Panama, has registered as an Income Tax payer before the General Income Bureau, regardless of who is the beneficiary of the service, as established by law.
Regulations
Article 3 of the Executive Decree 263 of 2015, modified Article 148 of the Executive Decree 170 of 1993, along the same lines as the changes incorporated into letter i) of Article 9. In consequence, the same regulations and exemptions would apply for the withholding of Income Tax for remittances abroad, as a product of services rendered from abroad or in the national territory, for a person domiciled abroad.
Moreover, it has been considered that the natural or legal persons that, due to their business activities, perform operations outside national territory that are required for the generation of income declared in Panama, will not have to carry out the tax withholding on payments that are remitted abroad for those goods and services that are financed, hired or performed totally outside national territory, in light that they will not be considered taxable income in Panama.
1 Refers to activities: a. Invoicing from an office established in Panama, the sale of merchandise or products for an amount higher than the amount for which this merchandise or products were invoiced at the office established in Panama, as long as said merchandise or products are moved exclusively abroad; and b. Directing from an office established in Panama transactions that are perfected, consummated or have their effects abroad.
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