Why Is Panama Considered a Tax Haven?

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Why Is Panama Considered a Tax Haven?

A tax haven is just a nation that allows people or corporations to pay little or no taxes; a pure tax haven is a country that levies no taxes at all. Due to strong law that closely oversees the country’s offshore jurisdiction and financial services, the Republic of Panama is regarded as one of the most well-established pure tax havens in the Caribbean.

key takeaways

  • Panama is a pure tax haven due to its legal and tax frameworks.
  • Panama does not levy income, corporation, capital gains, or inheritance taxes on offshore organizations that solely do business outside of the country. Offshore corporations may do business locally, which is a unique benefit, but they must pay local taxes as a consequence.
  • Panama has tight banking secrecy rules in place to safeguard account holders’ privacy.
  • Panama also does not have any tax treaties with foreign countries and no exchange control regulations.

Panama’s Offshore Financial Sector

Panama’s offshore jurisdiction provides a broad range of exceptional financial services, including offshore banking, offshore company establishment, ship registration, and the formation of Panama trusts and foundations. Offshore corporations that solely do business outside of the country are not taxed. Offshore corporations formed in Panama, as well as its owners, are immune from corporate taxes, withholding taxes, income tax, capital gains tax, municipal taxes, and estate or inheritance taxes.

Panama provides an extra advantage that many offshore tax havens do not: the ability to do business inside the offshore state. Any business undertaken inside the jurisdiction, however, is subject to local taxes.

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Financial Privacy

Panama has several regulations in place to safeguard company and individual financial privacy. The documentation of offshore firms, trusts, and foundations is subject to strict secrecy rules and regulations, with significant civil and criminal consequences for breaches of confidentiality. Corporate shareholders’ names are not needed to be publicly registered. Panama has fairly tight financial confidentiality regulations as well. Panamanian banks are not permitted to share any information on offshore bank accounts or account holders. A special Panamanian court order in connection with a criminal inquiry is the sole exception.

Panama allows people and enterprises of any nationality to incorporate.

Panama has few tax treaties with countries with substantial economic links to it, which helps to safeguard the financial anonymity of offshore banking customers who are residents of other countries. Panama also has no exchange control rules, which is a plus. This implies that there are no limitations or reporting requirements on money transfers into or out of the country for individual customers of Panama’s offshore banking, as well as for offshore business companies formed in Panama.

The Panama Papers

With the disclosure of the “Panama Papers” in 2016, the attractiveness of Panama as a tax haven became worldwide news—and not in a good manner. The documents were released in the German newspaper Süddeutsche Zeitung, which received them from an unidentified source, and included a cache of financial information from Mossack Fonseca, one of the world’s largest offshore legal companies. The records, which dated back to the 1970s, contained over 214,000 offshore corporate entities and shell firms involving high-net-worth people, government officials, and organizations from 200 nations, which the law firm had constructed. While the majority of them were genuine, others had been set up or utilized for criminal objectives such as fraud, tax evasion, money laundering, and violation of international sanctions, according to a group of investigative journalists.

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The papers were dubbed the Panama Papers because Mossack Fonseca (and, presumably, the person who leaked them) was headquartered in Panama, much to the chagrin of the Panamanian authorities, who complained that the term harmed the country’s image. It undoubtedly hurt Mossack Fonseca’s reputation: the legal company filed for bankruptcy in 2018 as a direct consequence of the disclosures.

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