Countries › Panama › Guide › 16. What is normal abroad but not here › Territorial tax: foreign source income is not taxed

Territorial tax: foreign source income is not taxed

Argentina. For full detail on Argentina, go to The Argentine Thread.

Last verified: 2026-10-29 · Status: Stable

Abroad, most countries tax resident companies on worldwide income and give credits for foreign tax. Panama taxes only income produced inside Panama: foreign source income is subtracted from gross income, and dividends that holding companies without Panamanian operations pay out of foreign source income are not Panamanian income. The flip side is that costs linked to foreign source or exempt income are not deductible, with a proportional cap on deductions, and services that benefit someone in Panama are Panamanian source even if performed abroad.

Panama's currency, the balboa (B/.), is at par with the US dollar, which circulates freely; the Superintendencia de Bancos states that the balboa's value is on a par with the US dollar and that the dollar circulates without restrictions in commercial and financial transactions (checked 29 October 2026). USD figures therefore equal the balboa figures.

Key facts

Territorial income tax	Yes: only Panamanian source income is taxed; foreign source income is deducted from gross income textCódigo Fiscal arts. 694 and 695, as of 2026-10-29 · in force
Corporate income tax, general rate	25 %Código Fiscal art. 699 (Ley 8 de 2010), as of 2026-10-29 · in force

The rule

1. Taxable income is the difference left after deducting from gross income the foreign source income, the exempt or non taxable income and the deductible costs, expenses and outlays.
Cost to do it: No tax on foreign source income; compliance costs to document the source of each revenue line.
Example: A Panamanian company with B/.1,200,000 of revenue, of which B/.1,000,000 is foreign source, starts from B/.200,000 of taxable gross income. / Same in US dollars, since the balboa is at par.Código Fiscal art. 695 as worded by Ley 8 de 15 de marzo de 2010 art. 5, art. 695, 2010-03-15 official text · verified 2026-10-29

2. Distributing dividends or participations of legal persons that need no Aviso de Operación or earn no taxable income in Panama, when those dividends come from income not produced in Panama, is not income produced in Panama.
Cost to do it: No fee.
Example: A holding company that only receives dividends from foreign subsidiaries and pays them on, without Panamanian operations, is outside the Panamanian income tax on that flow. / A US$10,000,000 dividend from a Colombian subsidiary passing through a Panamanian holding without local operations is not Panamanian source income.Código Fiscal art. 694 parágrafo 2 literal c as worded by Ley 8 de 2010 art. 4, art. 694 parágrafo 2, 2010-03-15 official text · verified 2026-10-29

3. Costs and expenses incurred in businesses or investments whose income is foreign source or exempt are not deductible. Costs must be allocated to taxable, exempt or foreign source income, and deductible costs cannot exceed total costs multiplied by taxable income over total income (taxable, exempt and foreign source), save listed items such as bad debts, donations to the State and the Aviso de Operación tax.
Cost to do it: Loss of deductions on the foreign share of shared costs.
Example: Revenue B/.1,200,000, of which B/.200,000 taxable; total costs B/.600,000. Maximum deductible costs = 200,000 / 1,200,000 x 600,000 = B/.100,000. Taxable income B/.100,000; at 25 percent, income tax of B/.25,000. / Tax about US$25,000 on US$1,200,000 of revenue.Código Fiscal art. 697 first paragraph and parágrafo 4 as worded by Ley 8 de 2010 arts. 6 and 8, art. 697, 2010-03-15 official text · verified 2026-10-29

4. Income received by persons domiciled outside Panama for any service or act that benefits individuals or companies located in Panama, including fees, copyright, royalties, goodwill, trademarks, patents, know how and trade secrets, is Panamanian source to the extent those services affect the production of Panamanian source income.
Cost to do it: Withholding on payments to the foreign provider (see the taxes section).
Example: Management fees charged by a foreign parent to a Panamanian operating company that deducts them are Panamanian source for the parent. / A US$120,000 annual service fee paid abroad and deducted in Panama is within the Panamanian tax net.Código Fiscal art. 694 parágrafo 1 literal e as worded by Ley 8 de 2010 art. 2 (later reworded), art. 694 parágrafo 1 literal e, 2010-03-15 official text · verified 2026-10-29

5. Legal persons pay income tax on net taxable income at a general rate of 25 percent from 2011.
Cost to do it: 25 percent of Panamanian source net taxable income.
Example: Net taxable income of B/.100,000 pays B/.25,000. / About US$25,000.Código Fiscal art. 699 as worded by Ley 8 de 2010 art. 9, art. 699, 2010-03-15 official text · verified 2026-10-29

Topic	Typical worldwide system	Panama
Foreign source income	Taxed, with foreign tax credits	Deducted from gross income
Costs of foreign activities	Usually deductible	Not deductible; proportional cap
Holding company passing on foreign dividends	Often taxed or exempt under participation rules	Not Panamanian source if it has no Panamanian operations
Services from abroad that benefit a local payer	Often taxed by withholding	Panamanian source to the extent they affect local income

Worldwide taxation abroad versus territorial taxation in Panama (Código Fiscal arts. 694, 695, 697 and 699 as worded by Ley 8 de 2010).

Worked example

A regional trading company in Panama earns B/.1,000,000 on sales of goods shipped between Asia and South America and B/.200,000 on sales to Panamanian customers, with B/.600,000 of total costs. Only the B/.200,000 is taxable; deductible costs are capped at B/.100,000; tax is B/.25,000 (US$25,000), not 25 percent of the group's full margin.
For investors also active in Argentina, which taxes resident companies on worldwide income, the Panama result does not change Argentine rules; see The Argentine Thread guide for the Argentine side.

Step by step

Map each revenue stream by source: where the service is performed or used, where goods move, and who benefits.
Keep contracts, shipping documents and service evidence showing the foreign source of exempt flows.
Allocate shared costs and apply the art. 697 proportional cap in the annual return.
Check the economic substance rules for multinational group entities with foreign passive income and any special regime (headquarters, free zone) you rely on.

Common traps

Territorial does not mean tax free: Panamanian customers, local services and services that benefit Panamanian payers are taxed.
Large shared overheads lose most of their deductibility when most revenue is foreign source.
Dividend tax is a separate question from the source of the profits; check the dividend tax page before distributing.
Home country controlled foreign company rules can tax low taxed Panamanian profits in the parent's country.

Sources

Ley 8 de 15 de marzo de 2010, Código Fiscal reform (Gaceta Oficial 26489-A)

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