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Expat Briefing Editorial Team, 07 January, 2016
According to International Living's latest annual Global Retirement Index, a certain country in Central America with a famous canal topped the league table of most favourable expat retirement destinations in 2016. Not sure where we mean? Then read on. And even if you are sure, then read on anyway!
The answer, of course, is Panama, which has long been a popular location for expat retirees from North America and Europe. Not only does its sub-tropical climate make it a pleasant place to live, but its tax rules and special visa schemes are also very appealing to expats and foreign investors. These are described in more detail below. First, we give an overview of Panama the country, its economy, its banking center and its tax rules.
Panama: An Overview
Around 400 miles long and between 30 and 115 miles wide, Panama appears on the map as a narrow isthmus running from east to west, forming an important land bridge between continental South America and North America, dividing the North Atlantic and Pacific Oceans. Weather-wise, Panama has a tropical maritime climate and is typically hot and humid. There is a prolonged rainy season from May to December, and a shorter dry season from January to May. Generally, the Caribbean coast receives about twice as much rainfall as the Pacific coast.
Panama's strategic advantages in terms of trade were recognised as far back as the first Spanish colonisers, prompting them to establish their first permanent settlement in the New World at Panama City in 1513.
Panama remained a Spanish colony for approximately three hundred years to 1821 before it was annexed by Colombia. This state of affairs endured until 1903 when the US helped win the modern day country its independence in return for a slice of land that would eventually see the Americans building and operating the famous canal, completed by the Army Corp in 1914.
However, the United States has gradually scaled back both its military presence and political influence in Panama, and a second treaty signed by the former President Torrijos (father of the more recent President) and US President Carter in 1977 set in train a 25-year transition period that saw the administration and running of the canal pass back to the Panamanians.
Panama's population was estimated to be just over 3.6 million in 2014. The largest ethnic group is mestizo (mixed Amerindian and European) which make up about 70 percent of the population. As befits this former Spanish colony, the official language of Panama is Spanish, but English is quite widely spoken in business circles.
Business and commercial life is centred on Panama City, the capital and a modern and thriving metropolis with a skyline of high-rise office blocks, apartments and up-market hotels. Panama City is home to most of the world's largest banks and some of the world's largest companies. Telecommunications, including the internet, are reliable and fast, and visitors will find the city's amnesties up to the standards of most cities in the West. However, the cost of living remains relatively low and expats originating from America and Western Europe are likely to see their incomes stretch much further than at home. There are also a variety of properties, both to rent and to buy, to suit most pockets and tastes, from luxury apartments in Panama City to beachside properties and more rustic dwellings in the country's interior. Boquete in the shadow of Volcan Baru, Panama's highest mountain (and an active volcano) at 3,475 metres, is a popular town with expats.
Tocumen International Airport, adjacent to Panama City, is the region's busiest, seeing almost 8 million passengers in 2013. It serves destinations throughout North and Latin America, and direct flights are available to some cities in Europe. Panama also houses major port facilities at either end of the canal and is a popular stop-off on the world cruise ship circuit.
Alongside the Canal, another legacy from the country's interdependence with the United States that has played an equally vital part in Panama's recent economic successes has been its peg to the dollar at par. Since there is no government-controlled central bank printing notes, Panama has had very little problem with inflation, unprecedented in the region, and with the dollar the effective currency in all but name (the balboa is the 'official' currency), investor confidence has not been the issue that perhaps it has in other parts of the region.
Panama's economy rebounded quickly following the 2008/09 global crisis. Supported by strong fundamentals, political stability, and prudent fiscal management, real GDP growth rates have been among the highest in the region, averaging about 9 percent per year over the last five years.
Panamanian society is starkly divided between the haves and have-nots and it has been estimated that about one-quarter of the population live below the poverty line. However, macroeconomic stability and policies to foster greater social inclusion have reduced unemployment to historic lows and rates of poverty have begun to fall significantly. The canal expansion project is also expected to boost economic growth.
Besides canal-related operations, Panama's main business sectors are logistics, shipping, banking (see below), insurance and tourism.
The Panamanian banking industry grew during the last quarter of the 20th century into a regional banking centre for Latin American and the Caribbean, due to a variety of factors including the absence of exchange controls, the rapidly increasing volume of trade being conducted through the country, liberal banking legislation and tight secrecy provisions. At the end of 1997 more than 100 banks were licensed in Panama, from more than 20 countries and with assets of about USD23bn; however the country responded to international pressure by tightening up on banking regulation, and a number of banks closed their offices in 2000 and 2001. By mid-2005, 80 licensed banks remained, of which 30 had international licences. Assets amounted to USD7bn.
Thanks to new financial regulation, Panama is once again developing itself into an important centre for banking. The legislation introduced a new licensing system for the industry and stricter compliance procedures, whilst subsequent laws and decrees have established modern anti-money laundering, fraud and terrorist financing rules. These initiatives helped to secure Panama's omission from the FATF (Financial Action Task Force on anti-money laundering) 'blacklist' of non-cooperative jurisdictions in 2001.
By the end of 2012 total consolidated assets in the banking sector reached over USD89bn. Foreign private banking represents the largest proportion of Panama's banking assets, followed by domestic private banking.
Opening a Bank Account
Account opening procedures vary from bank to bank in Panama, but it is common to be asked for a photocopy of your passport (which some banks will require to be notarised), a copy of some other form of ID, and two letters attesting to your financial standing from banks and financial institutions with which you have had a previous relationship. Two additional letters from professional or commercial people that you have dealt with in the past may also be required. Most banks in Panama also require a minimum opening deposit in the region of USD100 to USD300. Although English is now widely spoken in Panama, if Spanish is not your first language then it may be useful to engage the services of a Spanish-speaker when opening a bank account in Panama.
Panamanian banks offer the usual range of banking services commonly found elsewhere, including cheque, debit and credit card facilities, savings and investment accounts, online banking and a wide network of ATMs.
Panama is popular with foreign investors and residents because of its territorial basis of taxation; that is, only income derived from within Panama is taxable in Panama. There has been speculation for some years however, that fiscal reform will switch Panama to a worldwide system of taxation, partly in response to international pressure against so-called tax havens (see below).
An individual is considered resident if he is present in Panama for more than 183 days in any one tax year. Individuals are taxed on wages, income derived from the carrying on of a commercial or agricultural business, and investment income. The first PAB11,000 of income is exempt from income tax (2015). A 15 percent rate applies on income above PAB11,000 and below PAB50,000; and a 25 percent rate applies on income above PAB50,000. There is a 17.5 percent withholding tax on the gross income of non-residents providing services to Panamanian residents for periods of less than 183 days in a calendar year.
Some generous allowances and deductions are provided for under the Panama Fiscal Code, including a deduction for mortgage interest of up to USD15,000 per year; a deduction for donations to non-profit organizations of up to USD50,000 per year; and a deduction on up to USD10,000 per year for political donations; and individual contributions to retirement plans of up to USD15,000 per year, provided they do not exceed 10 percent of gross income.
Employers and employees make social security contributions in Panama: the employer from 2013 pays 12.5 percent of salaries and wages, plus 1.5 percent for an educational insurance tax; the employee pays 9.75 percent. The employer deducts the social security contribution along with income tax. The self-employed also make contributions at 13.5 percent of their income.
Capital gains tax is generally paid at a flat rate of 10 percent in Panama by individuals (and at the corporate tax rate where the gain is part of the taxpayer's ordinary business activity). However, some changes to the tax treatment of real estate were introduced in January 2011, including a 3 percent advance capital gains tax on certain real estate sales levied on the higher of the sales price or the value of the property.
Real estate in Panama is subject to an annual tax based on assessed value at rates between 1.75 percent and 2.1 percent (a bill was introduced in the legislature in August 2014 that would reduce these rates to between 0.4 percent and 1.4 percent, and increase the threshold to PAB40,000). There is also a 2 percent real estate transfer tax, but this does not apply to new property.
There is no inheritance or estate tax, capital acquisitions tax, or wealth tax on individuals in Panama.
For companies, the rate of income tax in Panama has been reduced in stages from 30 percent as a result of a fiscal bill passed in the first months of 2010. The rate is now 25 percent, although companies with turnover of less than PAB200,000 per year pay income tax at individual rates.
In 2007 Panama inaugurated a headquarters company regime (sedes de empresas multinacionales, or SEM) which offers tax breaks to encourage multinational companies to set up various types of service companies.
Significant tax breaks are also on offer for firms setting up in a growing number of free trade zones occupying sites formerly used as bases by the US military. The largest of these is the Colon Free Trade Zone, situated at the northern end of the canal in close proximity to the major ports on the Caribbean coast, which offers firms exemption from tax on all import and export movements.
Panama has 14 double tax avoidance agreements (DTAAs) in force with the following countries: Barbados; France; Ireland; Israel; Korea (South); Luxembourg; Mexico; Netherlands; Portugal; Qatar; Singapore; Spain; United Arab Emirates; and United Kingdom. Treaties with the Czech Republic and Italy have been signed and are awaiting ratification.
Panama offers a range of visa options for those seeking to retire permanently to the country, or who wish to live there on a long-term basis. Expats with money to invest in the country are especially encouraged. A non-exhaustive list of these schemes is outlined below.
This is one of the most attractive packages of incentives for expat retirees to be found anywhere in the world. Benefits include, among others:
To qualify for the pensionado programme, expats must be able to demonstrate monthly pension income of at last USD1,000, and an additional USD250 for each dependent.
Expats can apply for the pensionado programme irrespective of their age and regardless of the type of visa used to enter Panama.
Private Income Retiree Visa
Another option for those seeking to reside in Panama on a retired person's visa but who are not in receipt of a pension is the private income retiree visa. In order to qualify for this visa, applicants need to deposit a lump sum with the National Bank of Panama sufficient to provide a monthly income of at least USD850 per month. This visa needs to be renewed every five years.
Person of Means Visa
Those who are not retired, but who have independent means to support themselves can apply for a person of means visa. To qualify for this visa, an applicant must either open a three-year fixed-term deposit account with at least USD300,000 at a local bank or buy a property in Panama worth at least USD300,000 mortgage free. It is also possible for applicants to achieve the USD300,000 threshold by combining the two; for example, a property can be purchased for USD200,000 and the remaining USD100,000 deposited in a three-year fixed-term account.
This visa is granted for a period of two years, after which the holder can reapply and receive a permanent visa and national identity card. A 'person of means' can apply for Panamanian citizenship after five years.
The investor visa is aimed at expats intending to start a business in Panama and employ locals. As with the person of means visa, successful applicants are initially granted a two-year residency permit, after which a permanent visa may be granted. Panamanian citizenship can be applied for after five years.
To obtain an investor visa, the applicant must invest at least USD160,000 into a business established in Panama; the business must employ at least five Panamanian workers and pay them the minimum wage; and the company must be registered with the national social security agency.
Forestry Investor Visa
Another route towards long-term permanent residency in Panama is the forestry investment visa. To obtain this visa, applicants must invest at least USD80,000 (plus USD2,000 for each dependant, deposited in a local bank) in an approved reforestation project that is at least five hectares. Alternatively, the applicant can apply for a visa as a small forestry investor in a project that is at least three hectares and must invest at least USD60,000.
For a large forestry investor, permanent residency must be applied for immediately after the two-year renewable immigrant visa card expires. Small forestry investors can apply for permanent residency in their sixth year. Both small and large investors are eligible to apply for citizenship five years after their approval of permanent residency.
"Specific Countries" Programme
Perhaps the simplest and quickest route to permanent residency is Panama is the recently-introduced "Specific Countries" visa scheme, which grants residency to individuals from certain countries deemed "friendly" by the Government and is designed to attract more skilled migrants to Panama.
A major advantage of the specific countries programme is that individuals need only make a single residency application, which typically takes six to eight months to process. Initially, applicants will be issued with an interim residency card which is converted to a full cedula, or national ID card, once the application has been processed and accepted. Applicants are also permitted to bring spouses and dependents with them under this programme.
To qualify for the specific countries residency scheme, applicants should deposit at least USD5,000, plus USD2,000 for each dependent, into a Panamanian bank account and must own a property in Panama or own a Panama corporation with a business licence or have an offer of employment and contract from an employer in Panama.
At the time of writing, Panama was accepting applications from passport holders from the following countries: Andorra, Argentina, Australia, Austria, Brazil, Belgium, Canada, Chile, Croatia, Cyprus, Czech Republic, Estonia, France, Finland, Germany, Greece, Hong Kong, Hungary, Ireland, Israel, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Montenegro, Netherlands, New Zealand, Poland, Portugal, San Marino, Serbia, Singapore, Slovakia, South Africa, South Korea, Spain, Sweden, Taiwan, United Kingdom, United States and Uruguay.