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:
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:
Jose Agustin Preciado
Senior Partner