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Dividend Tax - Republic of Panama

When we talk about dividends, we are referring to the net income or profit that a company distributes to its shareholders.

Pursuant to Panamanian tax regulations, any legal entity that requires a notice of operation to carry out its commercial or industrial activities within the national territory or that generates taxable income within the Republic of Panama, must withhold from each shareholder and pay in his name and on his account, the tax levied on the dividend. 

This tax extends to dividends paid by companies established in the Colon Free Zone or in any other free zone or area, whose profits are derived from:

  1. Panamanian source or local operations.
  2. Foreign source or overseas or export operations.
  3. Income exempted from income tax, namely:
  • Interest paid or credited on securities issued by the State and profits from their sale (article 708.f of the Tax Code);
  • Interest recognized or paid on deposits in savings, installment or any other type of accounts held in banking institutions established in the Republic, whether they are local or foreign deposits. Also, the interest and commissions that such banking institutions recognize or pay to banks or international financial institutions established abroad, for loans, bank acceptances and other instruments for raising financial resources, even if the product of such resources is used by the borrowing bank in the generation of productive assets, according to the definition provided in article 2 of Cabinet Decree 238 of 1970 (literal l, article 708 of the Tax Code), shall not cause such tax.
  • Amounts received or accrued by persons abroad as royalties from persons located in the Colon Free Zone. Royalties are understood as payments, quotas, percentages or compensations in any form granted to third parties for the right to use patents, inventions, formulas, processes, techniques, trademarks or any other property of reserved or registered right (article 708.n of the Tax Code).

 

For an easier understanding, we have prepared the following matrix with the main dividend tax information.

Legal basis

–          Articles 708 / 733 of the Tax Code

–          Articles 106/107/108/109 of Executive Decree 170 of 1993 – Income Tax Regulation

Obliged to pay dividend tax

–          The shareholder

Obliged to withhold and report to the tax authorities

–          The company that distributes the profits

Event that gives rise to the tax liability

–          The distribution of profits

 

Taxable income

–          The portion of such profits that corresponds to each shareholder, according to its shareholding interest.

 

Applicable dividend tax rates

–          5% on profits derived from exempt source income, as well as income derived from foreign and/or export sources.

–          5% on profits derived from income in the Colon Free Zone, Panama-Pacifico Area or in any other free zone, whatever their source.

–          10% on profits derived from Panamanian source income.

–          10% on one hundred percent (100%) of the net taxable income obtained by the Panamanian branch (in the case of foreign legal entities), minus the taxes paid on that same income in the country.

–          20% in dividends corresponding to bearer shares.

Order of distribution of dividends:

–          Profits derived from Panamanian source income.

–          Profits derived from foreign source and/or export income.

–          Profits derived from income as provided for in paragraphs f, l and n of Article 708 of the Tax Code.

 

Settlement

–          The amounts withheld for dividend tax must be remitted to the tax authorities within ten (10) days from the date of withholding, by means of a sworn statement (form 07) found in the Etax 2.0 system.

Remarks and penalties

Failure to report the amounts withheld to the Tax Administration is the responsibility of the company that distributes the dividends, leaving it exposed to be sanctioned for tax fraud. In addition, failure to file form 07 in due time will generate surcharges of 10% and its respective interest on the amount declared.

 

When is the withholding on dividends tax not applicable?

–          In the case of exempt dividends, either by local regulations or because it is provided for in the treaty to avoid double taxation subscribed between the Republic of Panama and the country in question.

–          Companies that do not require a notice of operation or operating key code to carry out their commercial activities or do not generate income in national territory.

–          Dividends on dividends that have already been subject to the tax.

–          Dividends on dividends received from legal entities exempt from payment of dividend tax.

–          Dividends on dividends already subject to dividend tax in other jurisdictions.

 

Important notes:

 

  • In the distribution of dividends, the tax regime provided in the treaties to avoid double taxation signed by the Republic of Panama with the country in question shall prevail. If there is no treaty to avoid double taxation, it is mandatory to withhold the dividend tax, in accordance with the provisions of the Panamanian Tax Code.
  • The payment of the tax withheld to the tax authorities must be made in money, regardless of whether the profits or dividends have been distributed in shares, securities or in other forms.
  • Under our tax regulations, the limits to distribute dividends are as follows: (i) twenty percent (20%) of the amount of net profits for the corresponding fiscal period, for the cases in which the withholding of dividend tax at the rate of five percent (5%) is applicable.; (ii) forty percent (40%) of the amount of net profits for the corresponding fiscal period, for the cases in which the withholding of dividend tax at the rate of ten percent (10%) and twenty percent (20%) is applicable.
  • When profits are not distributed or when the distribution is less than the percentages stipulated by law, i.e., forty percent (40%) or twenty percent (20%), as the case may be, the amount withheld will pay the complementary tax, at the rate of ten percent (10%), which is an advance payment of the dividend tax.
  • Whenever a legal entity has distributed, at least, forty percent (40%) or twenty percent (20%), as the case may be, of the profits subject to dividend tax, or has paid ten percent (10%) of forty percent (40%) or twenty percent (20%) of these profits as complementary tax in a fiscal year, it must distribute partially or totally in said fiscal year, first of all the retained profits of previous periods caused at the rates of twenty percent (20%) or ten percent (10%), before distributing the profits caused at the rates of five percent (5%).
  • Currently, the capitalization of earnings is subject to dividend tax and is treated as a dividend payment.
Author(s)

Marleny Medina

Junior Associate

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