Israel – Panama Tax Treaty

Business Activity in Panama

Panama ranks among the top five countries in Latin America with the highest potential to attract foreign investment. This is partly due to its strong regulatory framework, which promotes transparency.

The business environment in Panama is diverse and dynamic, due to the country’s strategic location and the Panama Canal. Its trade relations with major partners are strong, with the United States being a principal partner. Meanwhile, China’s involvement in the region has significantly increased due to the global economic boom and new interest in the canal. The European Union and Canada also maintain strong trade relationships with Panama, and these alliances play a crucial role in the country’s economy. The economy also benefits from advanced logistics, major free trade zones, and a growing tourism sector, all supported by government efforts to enhance infrastructure and business regulations.

Bilateral Agreements Between Panama and Israel

1. Double Taxation Treaty

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Panama regarding the avoidance of double taxation was signed on November 7, 2012, and entered into force on December 31, 2014.

To read the agreement in English click here.

Applicability of the MLI

Both Panama and Israel have signed the “Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting” (MLI). Israel signed the agreement on June 7, 2017, and ratified it on January 1, 2019. Panama signed the MLI on January 24, 2018, and ratified it on March 1, 2021.

Residency for Tax Purposes in Panama

Residence of an Individual

A resident for tax purposes in Panama is someone who has been physically present in Panama and earning income there for more than 183 days within a year.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

In Panama, a company is considered a tax resident if it is either incorporated in Panama or effectively managed from Panama.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Panama

Panama Tax Authority is called The General Revenue Department (DGI).

Income taxation:0%, 15%, 20%

Taxation of companies and branches:25%

VAT: 7%.

Capital gains tax: 10%

Withholding Tax

Relocation to Panama

Since 2016, Panama has been a part of the alliance in the Multilateral Competent Authority Agreement, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, and the Mutual Administrative Assistance in Tax Matters.

Another important reason Panama has become one of the most popular investment destinations in Latin America is its well-established financial sector. The financial sector has been a crucial part of the Panamanian economy for many years, contributing significantly to growth and well-being. Well-organized regulations, the overall ease of doing business, and skilled human resources are key factors in this success.

Panama offers great incentives for investment, especially in the energy sector, with tax breaks and exemptions for various projects. The country has a stable, democratic government and a strong track record of economic growth. English is widely spoken, particularly in business and tourism, making international business operations easier.

Panama City has differently located housing units and offers many choices of private schools including bilingual ones. The country also boasts high-quality, affordable healthcare as well as efficient import services for personal goods and vehicles.

Panama has a Jewish community of between 10,000 and 12,000 as of 2012. Mostly located in the capital – Panama City, the community is also present in other cities such as Colon, David, and the former American Canal Zone. Currently, five Jewish schools operate in Panama City, covering education from primary to high school.

Real Estate Taxation in Panama

In Panama, all real estate owners must pay an annual Immovable Property Tax, which is levied between 0% to 2.10% based on the property’s value.

Transfer of Funds from Israel to Panama

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to a 25% withholding tax. The tax authority can allow, under certain circumstances, to reduce or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries. The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of Business Entities Panama

The most common types of business entities in Panama are:

Corporation (Sociedad Anonima – S.A.)

This is formed by at least two founders and must have a minimum of one shareholder post-registration. It is managed by a Board of Directors with at least three members. The corporation’s capital is divided into shares, which denote ownership rights and obligations.

Limited Liability Company (LLC or Sociedad de Responsabilidad Limitada – S.R.L.)

The LLC is preferred for offshore company formation alongside the corporation. It requires a minimum of two shareholders and at least one administrator, as well as a registered agent.

General Partnership (Sociedad en Nombre Colectivo)

Partners have unlimited liability for the company’s debts and obligations. All partners have the right to be involved in the management of the company.

Limited Partnership (Sociedad de Responsibilidad Limitada)

This entity requires a minimum of two and a maximum of twenty members and is governed by the Commercial Code and Law No. 24 of 1966. Major decisions are made in a general meeting if there are more than five members, and while annual financial statements are not mandatory, member names and share details must be registered in the Panama Public Registry. Partner liability is limited to unpaid, subscribed capital, and partners may appoint an administrator, whose name is recorded during incorporation.

Individual limited proprietorship (Empressa Individual de Responsibilidad Limitada)

This is a business structure owned by a single person, offering limited liability to protect the owner’s personal assets. The owner’s responsibility is restricted to the capital they contribute, making it an attractive option for small business owners or entrepreneurs. The business is a separate legal entity, capable of owning assets, entering contracts, and facing legal actions independently. This structure is ideal for those seeking liability protection without the complexity of forming a corporation.

You can find here a detailed explanation of how to open a business entity in Panama.

Incentive Laws in Panama

Panama has a number of incentive laws in place intended to draw the attention of foreign investors, boost economic growth, and target specific domains. The most important of those laws comprises the following:

Tourism Incentives Laws: Provides incentives for investments in the tourism sector, including tax exemptions on import duties, real estate taxes, and income taxes for certain periods, depending on the project’s location and size.

Free Zones Law: Offers incentives for companies setting up in any of the free zones in Panama, including tax, customs, and immigration benefits.

Panama Pacifico Special Economic Area: Offers a special regime for businesses operating in this area, including tax, labor, customs, and immigration incentives. It targets logistics, aviation, technology, and manufacturing sectors.

Tax Benefits: Panama has a simple tax structure with low VAT and corporate income tax rates, and operates a territorial tax system where income generated outside Panama is not taxed.

Tax Exemptions for New Construction: New constructions with permits issued after July 2009 are eligible for exemptions based on value: 15 years for values up to $100,000, 10 years for $100,000 – $250,000, and 5 years for values above $250,000. In instances of transferring ownership of newly constructed properties, the standard 2% real estate transfer tax is not imposed.

Double Tax Treaties: Panama