4 Panama Tax Haven Myths and Misconceptions

Dateline: Bogota, Colombia

Panama as an offshore jurisdiction has been front and center in recent years as a result of the now-infamous Panama Papers leaks. With all the attention Panama is getting, there’s bound to be some rumors and fiction spread around. But let’s talk about reality. 

A lot of folks out there still have misconceptions about how taxes, business, and immigration in Panama work. These are actual people who run businesses, who want to go where they’re treated best and are being misguided to believe in the “tax haven”. 

Panama is being over-promoted by people who are in the business to sell you on Panama, even if what they are telling you isn’t exactly the truth. It’s their job to sell you on it, so they are going to tell you what you want to hear and what’s really too good to be true. 

I’ve heard so many misconceptions about Panama. Some of these misconceptions are rooted in the Panama Papers scandal because people were scared by it. Some come because people are still empowered by the idea of Panama as a bit of a “Wild West.”

But the “Panama tax haven” that they want to believe in is as real as Neverland.

In this article, I’m going to address several key misconceptions about Panama. These misconceptions include scandals of hidden money, taxes on corporations, getting Panama citizenship and residence, and avoiding taxation. 

Now, let’s go through the four main myths and misconceptions about this so-called “Panama tax haven” that you should be aware of. 

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1. YOU SHOULD HIDE YOUR MONEY IN PANAMA

The first misconception about the Panama tax haven we have to address is this belief that you can hide your money or that you should try to go to Panama to hide money. Both parts of this belief are false. 

Panama signed on to what is called the Common Reporting Standard (CRS) back in 2018. This means that they are one of over a hundred jurisdictions that are now exchanging their residents’ financial information back and forth with other governments around the world.

Certainly, Panama has had a more secretive reputation in the past, but in this era of transparency, they don’t want to be known as the “Panama tax haven” – they don’t want to get on any blacklists and are now more open to sharing information.

If you live in Belgium and have a bank account in Panama, for example, Belgium is going to know. If you leave Belgium, that may not be as important, but as long as you’re living there, they’re going to know what’s going on. 

So, should you hide money in Panama? No. 

People call me the goody-two-shoes of the offshore business because I like to play by the rules, even when the rules aren’t fair. There are so many ways you can turn the rules to work in your favor by going where you’re treated best. 

People assume Panama is this place to do all kinds of shady stuff, but that really isn’t the case anymore. 

There was a lot of sensationalism surrounding the Panama Papers case because of the press coverage and Netflix movie. Most of those organizations didn’t want to give the parties involved a fair shake. They just assumed that the “Panama tax haven” is bad. 

There was little regard for the fact that there are other politicians who have stashed their money there. It was only the seven and eight-figure entrepreneurs who they thought should be punished. 

That said, Panama is not a place to hide money. Hiding money isn’t a thing that we’re really doing now in the 2020s. It’s not something you should do and in the information-sharing age, it’s not really something you can do anymore in Panama or elsewhere. 

2. PANAMA COMPANIES PAY ZERO TAX

The second misconception comes with a caveat because, while it can be true that a Panama company can pay zero tax, it’s not as easy as people make it out to be.

You often hear that if you are operating a business in Panama, you can pay 0% tax. But Panama is not a zero-tax jurisdiction. There are different types of business structures in Panama and some most certainly pay tax. Local companies are paying taxes. If you go to the store and buy a television and they make a profit, they’re paying tax. 

If you really want to take advantage of the Panama tax haven for businesses, you must ensure you do things properly. 

What Panama does have is a system in which you can pay no tax if your customers are not in Panama. 

It will be interesting to see what happens with that in the years to come because the Organisation for Economic Co-operation and Development (OECD) and similar groups are cracking down on countries with this kind of two-tier tax system. We’ve already seen countries like Barbados have to harmonize their two-part tax system into one flat structure that applies to both onshore and offshore businesses. 

There’s another side to that as well. While you could follow some basic protocols, set your company up properly, and pay 0% in Panama, that doesn’t mean that you won’t have to pay tax where you live. Panama may be a tax haven for your business, but Panama is likely not the only place you need to worry about. 

If you live in a country that taxes you based on your residence, then you may very well pay tax on that Panama-based company. The United States, Canada, Australia, the UK, and pretty much every country in Europe and the developed world has this kind of tax code where you pay based on where you live. 

If you want to save money on tax, you would need to properly set up a company in Panama in order to qualify for the 0% tax rate, and then you would need to live in and have a tax residence in a low tax or zero tax jurisdiction. 

Panama is not like the UAE where there’s simply no tax. To be clear, there’s no tax on foreign income for people who live there under certain conditions or for companies doing business there who are set up for doing business offshore. However, this requires proper planning. 

Part of that planning requires you to not be living full-time in a high-tax country. 

3. PANAMA RESIDENCY AND CITIZENSHIP

The third misconception is also a bit of a gray area because there is both some truth and some fiction when it comes to what you’ve heard about immigrating to Panama. 

Panama is a relatively open country for immigration. There are a lot of folks there from the US, Canada, Europe, and from all over the world in Panama. 

There are many different programs you can choose from to get into Panama. The standard program to become a permanent resident asks you to invest $300,000 in the country. This investment could be a combination of real estate. 

For example, you could buy one or multiple properties that add up to $300,000. Or this $300,000 investment could be made up of a combination of real estate and investments in Panama bank accounts, such as buying a piece of real estate for $200,000 and putting $100,000 in the bank. A third option is forestry investments. 

PANAMA FRIENDLY NATIONS VISA

There are many different opportunities to get into Panama because there are so many different programs. However, in 2012, they came out with a new program for around 50 countries which included mostly developed countries such as the US, Canada, Australia, and countries in Europe. 

This was called the Friendly Nations Visa. Through this program, you could become an instant resident with a long-term pass that requires you to travel back to Panama one day a year in order to keep the residence. 

To apply for the Friendly Nations Visa, the main applicant just needs to deposit $5,000 into a Panama bank account and have one economic tie.

This is a great option for a back pocket or Plan B residence. There have also been rumors that the Friendly Nations Visa Program is going away, so if you are really wanting to use this program to get a Panama residence, you may want to do it sooner rather than later. 

You can learn more about Panama’s Friendly Nations Visa in our ultimate guide.

The Friendly Nations Visa: FICTION vs. REALITY

Now, let’s clear up a few of the misconceptions regarding the Panama Friendly Nations Visa. 

Fiction: Some people assume this economic tie is like the economic tie for tax residence.

Truth: An economic tie can be a company that is part of your business structure, a forestry investment, or a piece of real estate. 

Fiction: There are also people who believe that they can use the Friendly Nations Visa to get citizenship. 

Truth: The Friendly Nations Visa is not a citizenship by investment program it is a residence by investment program. You can apply for citizenship after five years of residence, but there is more to it than that (see below).

Fiction: Some people say that when you get your second citizenship in Panama, you don’t have to pay tax anymore. 

Truth: Let’s be clear, if you’re a citizen of two countries, both countries can tax you. However, most countries won’t tax you if you are not residing there. If you’re from Belgium and you leave Belgium, Belgium won’t tax you because they don’t have citizenship-based taxation. Just make sure you don’t fall into the nomad tax trap or you may still be considered a tax resident even after you leave.

However, if you are a dual citizen of Panama and the US, the US doesn’t lose its rights over you. The United States – where a lot of the people interested in these Panama programs are coming from – is the only country that taxes you even if you don’t live there. It doesn’t matter that you’re also a citizen of Panama, you are still subject to US tax unless you renounce your US citizenship.

THE PANAMANIAN CITIZENSHIP PROBLEM

The issue with Panamanian citizenship is that nobody is actually getting citizenship. Technically, you can apply for citizenship after five years of legal residence. But just because you can apply for something doesn’t mean you’ll be accepted. 

I’ve known people who have lived in Panama for 15 to 20 years and they still haven’t been given their Panamanian citizenship. Their paperwork is filled out and just sitting there on a desk in some government office. 

Being able to apply for something is great, but I doubt that applying was your goal. When my team and I work with individuals to create a holistic plan, we ask for their bullet point objectives with the end goal in mind. No one’s end goal is to be able to apply for a second passport. They want their citizenship in their hand.

Getting citizenship through Panama’s immigration program hasn’t worked out the way people have expected. And this still hasn’t stopped people from promoting it. 

There are also people promoting Panama as a paper residence. They say that you can use the Friendly Nations Visa to get a residence in Panama and then keep that residence by returning to Panam for one day a year – which is true. But the problem here is that these same people will tell you that after you’ve done this for five years, you can apply for and receive Panamanian citizenship. This is false. Panama isn’t going to give you citizenship if you’ve only ever spent five days in the country. 

The truth is, you can get residence if you’re from one of those 50 countries that qualify you for the Friendly Nations Visa Program. It’s not always a swift and easy process, but it can be done. Obtaining citizenship, on the other hand, is the challenge. 

Ultimately, if you want to live in Panama, you can get a residence, but don’t confuse that with citizenship. 

4. AVOIDING TAX IN YOUR HOME COUNTRY

The fourth misconception piggybacks off of the third. People are promoting Panama based on this misconception that Panama is a zero-tax country. 

False. While you can obtain zero tax on a corporate level, it’s not necessarily the case for every business and it’s not the truth for you as an individual. 

At a conference, there was a guy who was trying to sell people on the idea of Panama citizenship or residence. He said that US citizens could get their Panama permanent residence through the Friendly Nations Visa Program and that spending one day a year in Panama would count as their economic tie. This would tie you to the country and make it so you can qualify for a tax exemption in the United States under the bona fide residence program. 

This is absolutely not true.

You cannot spend one day in Panama to keep your Panama residence active and then go back to wherever you’re from for the other 364 days. Nice try, but that’s not how it works. 

Yes, it’s true that some countries have more than just the “days test” now, meaning that your taxation is based on more than the amount of time you spent in that country. But even if you spend fewer than six months in one country, you may be taxed on the economic substance test or center of life test. 

Having an economic tie in Panama is a start, but it doesn’t allow you to avoid tax in your home country. You can’t go to your home country and tell them you’re a taxpayer in Panama because you spent one day there. One day in Panama doesn’t make you a tax resident. 

You really need to consider what we call the tax-friendly quadrant. The tax-friendly quadrant encompasses both the personal side of where you are leaving and where you are arriving as well as the business side of where you’re leaving and where you’re arriving. If both your business and you personally are moving to Panama, then it’s possible to set up a structure for a tax-effective life. 

But simply being a physical resident of Panama through a program like the Friendly Nations Visa Program is not going to solve your personal tax problems. (Although having a company in Panama may solve your business tax problems.) But you need to remember that everything works in tandem. 

The challenge with Panama is that many people target Americans and Canadians and try to sell them this idea that the “Panama tax haven” is a panacea and a cure for all your ills. 

It’s not.

There is no one-size-fits-all, simple solution cure for all your ills. There are, however, effective holistic solutions that work when you do. 

THE MYTH OF THE PANAMA TAX HAVEN

The key to living a low-tax lifestyle is to get out of your high-tax home country. If you’re a US citizen, you also need to plan accordingly for US citizenship-based taxation. The next step is to move your company somewhere open to your business with a low tax jurisdiction.  

Here’s the truth. There’s no hiding money in Panama. There’s no easy path to guaranteed citizenship. There’s no guaranteed zero percent tax for having a toe in the water. You need to be all the way in. 

The “Panama tax haven” is a myth.

Panama is not a bad jurisdiction – you can still work it into your holistic tax plan – but it’s unfortunate that these events in recent years have caused so many misconceptions. Make sure to cut through the fiction and find the fact in every situation. It could save you from making some serious mistakes. 

If you are looking for help in creating a holistic offshore plan for you and your business, you can contact me and my team of experts here. 

Source: https://nomadcapitalist.com/2021/02/22/panama-tax-haven-myths-misconceptions/