Comprehensive US Tax Guide For Americans Living In Panama

Americans living in Panama can enjoy incredible beaches, a metropolitan city, tranquil mountain towns, and one of the region’s most important airports. Furthermore, Panama’s tax and business-friendly mentality make it easy for US expats to live, invest, and do business.

However, US taxes and reporting obligations can be complicated for US expats in Panama.

This comprehensive US tax guide for Americans in Panama covers the following:

1. Do you pay US taxes if you live in Panama?
2. How Americans in Panama can use the Foreign Earned Income Exclusion
3. Exclude or deduct housing expenses in Panama
4. Should US expats in Panama use the Foreign Tax Credit?
5. Taxes in Panama for US expats
6. File taxes with a Panamanian tax ID number
7. How US citizens can get residency in Panama
8. Reporting Panamanian bank accounts and assets to the US
9. US taxes for Panamanian corporations and foundations
10. Setting up a Panamanian IBC or LLC
11. Why nominative shares are more popular than bearer shares
12. Annual requirements for Panamanian corporations
13. Do you need to pay social security in Panama & the US?
14. Moving to Panama from the US and filing taxes

1. Do you have to pay US taxes if you live in Panama?

As a US citizen or Green Card holder, US taxes follow you wherever you go. If you meet the tax filing thresholds, you must file a US tax return, no matter where you live. US taxpayers that work abroad can save US income taxes by using the Foreign Earned Income Exclusion.

Other tax benefits are the Foreign Housing Exclusion or Deduction and the Foreign Tax Credit. We explain those and how they apply to US citizens in Panama in this tax guide.

Furthermore, the United States requires expats to report their foreign bank accounts and assets if those are over the reporting thresholds. And when Americans living in Panama hold their assets in a company, that triggers additional tax filings. More about those requirements further below in this US Tax Guide for Americans living in Panama.

2. How Americans living in Panama can use the Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is one of the best ways for Americans abroad to save. With the Foreign Earned Income Exclusion (FEIE) expats can exclude up to $107,600 in foreign earned income from US taxes (2020). Moreover, couples who both live and work abroad can exclude up to $215,200 from taxes.

To qualify for the FEIE, US taxpayers must pass either the physical presence test or the bona fide residence test.

To pass the physical presence test, expats must spend 330 days during a year on foreign soil. For bona fide residency, expats must establish residency in a foreign country with no intention of returning to the United States.

If you plan to use bona fide residency in Panama to claim the Foreign Earned Income Exclusion, consider obtaining a Panamanian national ID card (e-cedula), driver’s license, and taxpayer identification number (NIT).

3. Exclude or deduct housing expenses in Panama from US tax

In comparison to other Latin American countries, Panama has a relatively high cost of living. Fortunately, you may be able to exclude or deduct some of the housing expenses that you incur in Panama.

US expats in Panama who claim the FEIE and whose income exceeds the FEIE threshold can exclude or deduct certain Panamanian housing expenses using the Foreign Housing Exclusion or Deduction. This means that they can exclude or deduct eligible expenses such as rent, parking spots, furniture rentals, utilities, and more, from their taxes.

For 2019, Americans in Panama using the Foreign Housing Exclusion or Deduction can exclude or deduct eligible expenses that exceed $16,944 and are below $39,500. The IRS updates the threshold and the maximum for the Foreign Housing Exclusion or Deduction each year.

4. Should US expats in Panama use the Foreign Tax Credit?

The Foreign Tax Credit is only recommended for US expats in Panama when their taxable income exceeds the FEIE and the Foreign Housing Exclusion or Deduction. As discussed in the next section, Panama’s tax rates are fairly low. This means that US citizens in Panama may not be eligible to claim a foreign tax credit.

Plus, American retirees or those who earn income outside of Panama may not owe any taxes at all. Therefore, the Foreign Tax Credit is generally not the optimal tax strategy for Americans living in Panama.

On the other hand, expats who have extra Foreign Tax Credits from living in a high-tax jurisdiction may want to consider moving to Panama. While living in Panama they can use their saved up Foreign Tax Credits to reduce their US tax bill.

If you need help with your US taxes, please schedule a consultation with our expat tax experts.

5. Taxes in Panama for US expats

US citizens living in Panama have several tax benefits to look forward to. One of the biggest benefits is Panama’s territorial taxation system. In this system, income earned outside of Panama is generally not taxed.

Territorial taxation is ideal for anyone with an online business or who provides services outside of Panama. However, US Americans should be aware that work performed or services provided in Panama may be taxable there.

Furthermore, Americans in Panama may incur taxes when they bring income earned outside of Panama into the country. For example, dividend distributions on foreign-sourced income from a Panamanian corporation are taxed at a rate of 5%. While this is lower than the 10% applied to dividends from local income, it is not tax-free.

Panamanian tax rates for income earned inside the country are reasonable and lower than in the US and many European countries. Below are the tax rates for individual income:

6. File taxes with a Panamanian tax ID number

Taxpayers in Panama must obtain a tax ID number (NIT) before they can file taxes. Typically, to request the tax ID number, you need to provide a utility bill for your address in Panama and a Panamanian national ID card (e-cedula).

It is free to request an NIT and the process can be completed online. However, for those who are not familiar with Spanish, it may be easier to ask a local accountant or attorney to assist. The tax ID number is requested through Panama’s tax office (Dirección General de Ingresos).

Tax returns can be filed online by making a declaration. Americans living in Panama can either file their taxes online through the tax office or they can hire an accountant to assist them.

Even US expats who do not owe taxes in Panama may still want to submit a tax return. Filing taxes where you live can help establish a connection to the country for the bona fide residency test. It also can be useful when working with banks in Panama.

7. How US citizens can get permanent residency in Panama

The Friendly Nations Visa and the Pensionado Visa are two of the most popular and fastest visas in Panama (If you’re also an Italian citizen be sure to consider the Panama-Italy Visa). To apply for these visas, an attorney must submit the application for you.

Generally speaking, applicants for residency in Panama will need a passport, a second ID, and an apostilled criminal record report. Pensioners also need proof of their pension or social security payments.

For the Friendly Nations Visa, plan to open a Panamanian bank account and to create an economic tie to the country. The economic tie can be a Panamanian corporation, property in Panama, or an employment contract in Panama. There are additional requirements if your spouse or children are applying.

Applicants of Friendly Nations Visa or Pensionado Visa should receive their permanent residency ID within six months of the application date. After receiving residency, expats can apply for a Panamanian driver’s license and request a Panamanian national ID card, called an e-cedula.

For the most up-to-date information please confer with a Panamanian attorney. The National Migration Service changes its requirements occasionally.  If you do not have an attorney in Panama, we would be glad to refer you to one.

8. Reporting Panamanian bank accounts and assets to the US

Americans with financial accounts in Panama may have to file a Foreign Bank Account Report (FBAR). When a US person’s foreign financial accounts have a combined highest value that exceeds $10,000 at any time during the year, they must file an FBAR.

This includes any savings accounts (referred to as cuenta de ahorros in Panama), checking accounts (cuenta corriente), certificates of deposit, and other types of financial accounts in Panama. Note that the term US person includes any US corporations, LLCs, corporations, partnerships, trusts, and estates.

If a US expat owns 100% of a Panama company and is the signatory on a company bank account that has a balance of over $10,000, they would have to file both IRS Form 5471 and the FBAR.  American companies that own foreign subsidiaries (such as a Panamanian S.A.) may also have an obligation to file.

Americans in Panama should also know IRS Form 8938. This form is used to report foreign accounts and assets. In other words, foreign bank accounts, plus foreign assets such as stocks, securities, bonds, retirement plans, insurance, estates, and more all must be reported on Form 8938 if their combined value exceeds the filing threshold.

The threshold varies depending on your residence and filing status.

Expats must file Form 8938 if the combined value of qualifying foreign accounts and assets is over $200,000 on the last day of the year or more than $300,000 at any time during the year. For expat couples filing a joint return, the threshold is $400,000 on the last day of the year or $600,000 at any time during the year. The thresholds are significantly lower for US taxpayers that reside in the United States.

You do not need to report tangible assets such as gold, real estate, antiques, cars, and jewelry.

9. US taxes for Panamanian corporations and foundations

US persons who are officers, directors, or shareholders of a Panamanian S.A. (Sociedad Anonima), S. de R.L. (Sociedad de Responsabilidad Limitada), or foundations are typically required to file Form 5471 in the US.

It is very common for real estate or even cars to be owned by Panama companies and foundations. This may provide legal protection and make the purchase or sale of the asset easier.

However, if the shareholder of the company is a US person, they may need to file Form 5471. Furthermore, owning real estate in a foreign company makes it a foreign financial asset, reportable on Form 8938.

If the real estate is owned in an individual’s personal name, it would not be considered a financial asset and therefore not be reportable (assuming it is not an income-producing asset).

Form 5471 is an informational return that includes questions about ownership, income, assets, and more. This form is due at the same time as your tax return. A late or incomplete filing of Form 5471 can trigger an automatic $10,000 fine.

In Panama, some attorneys refer to an S.A. as an IBC and an S. de R.L. as an LLC. If you are unsure of which type of corporation you have, check the articles of incorporation.

10. Setting up a Panamanian IBC or LLC and shareholder privacy

Most Friendly Nations Visa or Panama-Italy Visa applicants use a Panamanian IBC or LLC as their economic tie to Panama because it is generally the fastest and cheapest option. Depending on the law firm, one to two weeks is the typical timeframe for incorporation.

Panamanian IBC’s must have three directors and three officers. Natural persons such as friends, family, and business partners or legal persons, such as foreign corporations, can fulfill the director and officer roles.

An individual or legal person can be a director and an officer, but they cannot fill two director or two officer roles. Therefore, you need at least a minimum of three people or entities to fill the director and officer roles. If you do not have enough people to fill the roles, then your attorney in Panama may offer nominee director services.

Nominee directors are also useful for individuals who are concerned about their privacy. In Panama’s public registry, the names of the directors and officers of an IBC are publicly listed. The name of the shareholder is not. By using nominee directors for all officer and director roles, the shareholder can ensure that their name is not listed in the public registry.

When considering whether privacy is important for you, keep in mind that some watchdog organizations publish the names of any officers and directors associated with Panamanian corporations.

Panama LLCs do not offer the same level of privacy. This type of entity must have a minimum of two managers and two partners. A natural or legal person can be both a manager and a partner. This means that only two natural or legal persons are needed to fill the roles and open the LLC.

However, both partners must be shareholders (even if one partner owns only a small part of the company, for example, 1%). Moreover, all managers and partners of a Panama LLC are publicly listed in Panama’s public registry. This means that a Panamanian LLC does not offer shareholder privacy.

11. Why nominative shares are more popular than bearer shares

Another common question about Panamanian corporations is whether bearer shares are available. Bearer shares were previously a popular type of share for Panamanian IBCs. With this type of share, the name of the owner was not listed on the share and the owner was whoever held it. In short, the owner was whoever was the physical bearer of the document.

After significant international pressure, the nature of bearer shares has changed. They are no longer frequently used because bearer shares need to be registered with the Panamanian government. Additionally, most banks will not work with corporations that issue bearer shares.

Fortunately, nominative shares are still a good option. With this type of share, the owner is the person whose name is printed on the share. While the shareholder is still known to the law firm, the shareholder is still largely private.

12. Annual requirements for Panamanian corporations

Panamanian corporations and companies are required to pay an annual maintenance tax (tasa unica). The tax is $300. Typically, the attorney that opens the corporation will also charge a registered agent fee. Expats who use nominee directors or officer services will also likely need to pay an annual fee. These payments are either due in January or July depending on when the entity was created.

Failure to pay tasa unica will result in government fines. Eventually, the corporation or company will fall into bad standing and after several years, the government will close it.

If an entity is in bad standing, no changes can be made to the corporation or its assets until it is restored, and all fees are paid. This can be disastrous if the entity holds assets, such as property, or bank accounts. Restoring an IBC or LLC to good standing is an expensive and slow process.

Entities that do not have any Panamanian income are generally not required to file a tax return.

13. Do you need to pay social security in Panama & the US?

In Panama, both employers and employees pay social security tax. The employer must contribute 12.25% and the employee contributes 9.75%.

The US and Panama do not have a tax treaty, nor do they have a totalization agreement. Because of this, Americans who are employed in Panama may be required to pay into social security in both countries.

14. Moving to Panama from the US and filing taxes

The Republic of Panama is a beautiful country for US expats to move to and live in. It offers city life with a glitzy skyscraper skyline in Panama City, beautiful beach towns such as Coronado, Pedasi, or Bocas Del Toro, or the cooler tranquil green mountain towns with coffee farms, such as David or Boquete.

But the tax situation can be complex, especially for expats with extra US filing requirements because of their Panamanian bank accounts or corporations.

This Guide to US Tax for Americans living in Panama is intended to give an overview of the most relevant topics. It cannot replace consulting with a tax professional for your specific situation.

For help staying in compliance and minimizing your US tax burden, set up a consultation with our expert accountants.