Pardini & Asociados authored the Global Overview for Panama of GTDT: Private Client

How does an individual become taxable in your jurisdiction?

Residents and non-residents of the Republic of Panama are subject to taxation. Panama taxation law is based on the territoriality principle whereby all foreign source income is exempted, but income and revenues produced within Panama are subject to Panamanian tax.

 

In other words, income tax is levied on all revenues produced within the boundaries of the Republic of Panama, irrespective of where the income is received and of the domicile or residence of the taxpayer. Activities that take place outside of Panama are considered foreign source income and not liable to tax.

Does your jurisdiction recognise trusts?

Panama law caters for all the main types of trust normally found in traditional common law jurisdictions such as:

 

One of the basic features of taxation of trusts in Panama is that, unlike in many other Latin American countries (where in the case of trusts with settlors as benefciaries the taxpayer is the settlor-benefciary themselves), the taxpayer is deemed (in all cases) to be the trustee in his capacity – an obligation that is limited to the tax liability generated by the trust fund and to the extent of the trust fund itself, in accordance with the principle that the trust is a separate patrimony from that of the trustee.

 

The territorial tax system immediately assures the settlor that no income other than that generated within Panama, and only from non-exempt sources, will be taxed. Panama law expressly provides that, once a benefciary has received trust property from a trust intended to have effect after the death of the settlor, all income deriving from such transfer is income tax exempt in Panama, making an excellent case for looking into suitable residence arrangements either in Panama itself, or in a country where foreign source income is only taxed on remittances.

 

It should be pointed out that there is no estate tax, succession tax, nor any kind of forced heirship legislation in Panama or recognition of foreign forced heirship rulings. Once an individual has transferred property into a Panama trust structure during his lifetime, no one can claim any rights over that property by way of right of inheritance unless they are named benefciaries of the trust.

 

Panama’s trust law also allows settlors to establish trusts governed by a foreign law, and foreign trusts are fully recognised. Panama is a signatory to the Treaty of Bustamante. Panama is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition; however, the Trust Law complies with the trust concepts expressed therein. Panama law ensures that rules such as the forced heirship do not apply. A properly executed foreign trust will be recognised and enforced in Panama, provided that the settlor and the trustee agree to abide by the formalities and requirements of Panama law. The trustee individually can make this statement if authorised by the trust deed.

 

Accordingly, foreign investors seeking to use the Panama trust to streamline their assets or organise their estate need not be concerned about the Panama public policy rules

What property constitutes an individual’s estate for succession purposes?

Any assets located in Panama, registered or non-registered, under the ownership or possession, included or not, on a person will, are subject to be inherited through a succession process.