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Clarification to the Rules about Capitals Gains Taxes*

*updated to include Law No. 18 (19th of June, 2006, published in Gazette 25,570, 20th of June, 2006)

Common Misconceptions

Capital Gains - a new tax? | No capital gains on the sale of shares

Capital Gains - a new tax?

One of the misconceptions about the Capital Gains Tax rules in Panama is that this is a "new" tax which has been introduced. 

This is not the case.  What has happened is that the Panamanian Tax Department (Ministerio de Economía y Finanzas) has finally woken up to collections. 

As you will have seen on the previous page, the capital gains produced by the sale of a property is considered part of the person's income.  This was to be reported on the seller's tax return, and paid together with regular income tax. 

Of course, there are many Panamanians that have never presented a tax return, because they earn a salary, from which all deductions are made, and were never aware of the requirement to declare the capital gain on the income tax return.  There are also many who were aware, and simply omitted to do so. 

The new rules, introduced in January 2006, guarantee collections for the government.  They require that the income tax due on the capital gains be paid at the moment of the sale, rather than being declared as part of the income tax return at year end. 

So, when the seller is filling in the forms to pay the 2% land transfer tax, there is an additional form to be filled in with respect to the capital gains.  This form is then filed together with the payment of the taxes, and the receipts are attached to the public deed which is presented to the public registry to transfer the property to the new owner. 

No capital gains on the sale of shares

A second common misconception in Panama is that there is no income tax (capital gains) payable on the sale of shares of a corporation.  That is, that you own the property through a corporation, and upon the sale of the corporation shares, you can avoid the taxable event.

While it is true that you can avoid the 2% land transfer tax through the sale of the company shares, this is not true with respect to the capital gains or income tax which is due on the income produced. 

Section 701 of the Tax Code (sub-section e.) mentions that the profits obtained upon the sale of shares (etc.) and chattels (personal property) are also considered income. 

As of June 20, 2006, sub-section e. has been changed as follows: 

Except for the rules established in subsections (1) and (3) of Article 269 of Law Decree 1 of the 8th of July 1999 (which is the securities legislation, establishing that publicly traded securities which are traded are exempt from capital gains/income tax), all profits earned from the sale of bonds, shares, participation quotas and other securities issued by legal persons, as well as those earned through the sale of other personal property, are taxable. 

... (deals with public offerings of securities), this shall be considered taxable income in Panama, as well as the sale of shares, participation quotas and other securities issued by legal personas, which constitute taxable income in Panama, the tax payer shall be subject to a capital gains tax, and shall therefore calculate the income tax on the profits earned at a fixed rate of ten per cent (10%). 

NOTE:   The buyer shall withhold from the seller a sum equivalent to five percent (5%) of the total value of the sale, as a prepayment of the Income Tax from the capital gains.  The buyer shall remit this to the Tax Department, within ten (10) days of the closing of the sale.  In the case of failure to comply, the company is jointly responsible for the unpaid taxes. 

The tax payer may opt to consider the amount withheld by the buyer as the Income Tax due on the capital gain.

However, where the withheld income tax is greater than ten percent (10%) of the capital gain obtained from the sale, the tax payer may present a special affidavit accrediting the withholding made, and claim the resulting excess in his/her favour as a tax credit which may be applied to Income Tax, within the tax period that the sale took place.  The profits earned shall not be added to any income earned by the tax payer. 

The Executive, through the Ministerio de Economía y Finanzas, has to regulate the procedures for handling these tax credits which result from the withholding in capital gains. 

NOTE:  Without prejudice to that established in existing legislation, the sale of such shares, securities or bonds outside of Panama, where the income produced by the underlying company is from Panama, shall be considered Panamanian source income (and taxable as such). 

For more information or a legal opinion regarding your particular circumstances, please do not hesitate to contact us.  You may also call our offices ++507 264-5630. 

Capital Gains - a new tax? | No capital gains on the sale of shares

All material included in the Gray & Co. web sites is for informational purposes only and may not reflect the most current legal developments, verdicts or settlements. The information should in no way be taken as an indication of future results. The material contained herein is not offered as legal or any other advice on any particular matter.  Translations of the law are provided for informational purposes only, and are not provided as legal translations of the law. 

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