Tax neutrality of financial instruments in Panama

A peculiarity of Panama's tax structure is the territorial nature of the tax system. Based on the principle that income from abroad is not taxed, regardless of who the beneficiary is; Panama has developed a regional service economy.

However, the territorial nature of the tax system created some negative biases particularly in financial and investment instruments. The exempt nature of financial income from abroad produced an additional return that put local instruments, which should always be taxed, at a disadvantage. Thus, a Citibank share traded on the New York Stock Exchange, in which a Panamanian investor obtained a non-taxable gain, had a tax advantage over a capital gain obtained. For example, in the sale of an ASSA share in the Panamanian market where the gain was taxable.

In order to eliminate this tax bias, which also promotes capital flight, Panamanian tax legislation has granted local investment instruments a tax treatment that equalizes returns. The treatment has been not to consider the product of investments in financial instruments as taxable income. Thus, from the tax point of view, the decision to invest outside or inside Panama would be neutral.

Tax treatment

The first provision is when it is legislated that interest from bank deposits, and from banks duly authorized to operate in the system, are not considered taxable income. In this way it is neutral for a resident, from the fiscal point of view, to save in Panama or outside Panama.  

Subsequently, the tax legislation extended this tax treatment to securities; which suffered the same unequal treatment with respect to investments made abroad. That is to say, a resident of Panama could invest his money in foreign securities and keep all the profit of his investments, while he had to pay taxes on local securities.