Panama Property Tax

When buying property in Panama, a good tax advisor and general knowledge of the tax system are important in order to make a wise buy.

All real estate in Panama is subject to property taxes; however, the country boasts the lowest tax rates in Latin America and the Caribbean, and comes complete with a good number of tax exemptions, according to personal circumstance.

Panama’s popularity as a tax efficient real estate destination for foreign purchasers makes buying property a familiar and straightforward process.

Transfer tax

2% must be paid by the vendor at the time of property transfer.

VAT

VAT is not charged in Panama for transfers of property. However, currently the seller must pay 10% capital gains tax, regardless of how long he has owned the property.

A statutory rate of VAT (5%) is applied in Panama but is levied for basic foodstuffs, trade and medical services.

Capital gains tax

Capital gains tax in Panama offers the taxpayer the option to pay in one of two methods:

1. 5% of the sum of: the cadastral value; any improvement costs; and 10% of the property’s cadastral value for each year of owning the property.
   This system of taxation consolidates the transfer tax and capital gains tax, meaning the taxpayer is not liable for 2% transfer tax or any more tax on capital gains made from the sale.
2. 2% of the higher value from either:

The sale price, or

The sum of the property’s cadastral value at the time of purchase, including improvement costs during ownership and 5% of the cadastral value of the property (including the improvement costs) for each year the property was held.

This second option means taxpayers are subject to a further tax on the capital cost for each year of ownership. The gain is then divided by the number of years the property was owned and the resulting amount is then taxed at the standard income tax rates (see below).

The 2% initial tax on the selling price can be credited as real estate transfer tax. When calculating capital gains tax liability for the property, this tax can therefore be deducted from the selling price as a 2% transfer of ownership cost.

Property tax

Property tax depends upon the total value of the land, plus improvements, as appraised by the Land Commission (Oficina de Catastro). Maximum annual charges will not exceed 2.1% of the property value.

Inheritance tax

Inheritance tax does not exist in Panama following abolition in December 2002. However, an Intervivo tax is charged, the amount of which is dependent upon the blood relationship between the donor and the beneficiary. This tax relates to the transfer of a
gift made during one’s lifetime rather than an inheritance from a will.

Tax exemptions:

• Any new residential property bought to use as a personal residence is exempt from paying VAT (Impuesto de Transferencia de Bienes Inmuebles).
• Profits on real estate sales that are reinvested in new constructions can be exempt from income tax. In order to qualify, re-investment must be made in residential property valued at USD 62,500 or less.
• Tourist zones are granted a 20-year exemption on real estate taxes. Import duties and VAT for the import of furniture, materials, equipment used for construction, as well as vehicles for at least eight passengers are also exempt.
• In September 2006, new rules came into effect offering tax exemptions of up to 15 years on the construction of residential homes:
  
  Commercial buildings: 10 year tax exemption
  
  Other construction use: 10 year tax exemption
  
  Houses:
  Up to US$100,000 - 15 year tax exemption
  US$100,000 - US$250,000 - 10 year tax exemption
  More than US$250,000 - 5 year exemption

The above exemptions are transferable when the property is sold.

Reduced mortgage interest rates: until May 2009, reduced mortgage interest rates up to 6.5% below regular rates are offered if the home is to become the purchaser's principal dwelling, and is valued below USD 62,500. This represents a good incentive for those wishing to move or retire to Panama.