Why Is Panama Considered a Tax Haven?

The Republic of Panama is considered to be one of the most well-established, pure tax havens in the Caribbean due to extensive legislation that strictly regulates the country’s offshore jurisdiction and financial services.

Key Takeaways

• Panama’s legal and tax structures make it a pure tax haven: that is, the country levies no taxes at all.
• Panama imposes no income, corporate, capital gains, or estate taxes on offshore entities that only engage in business outside of the jurisdiction. Offshore companies can engage in business locally—a rare perk—but will pay local taxes as a result.
• Panama has strict banking secrecy laws designed to protect the privacy of account holders.
• Panama also has no tax treaties with any other country and no exchange control laws.

Panama’s Offshore Financial Sector

Panama’s offshore jurisdiction offers a wide array of excellent financial services, including offshore banking, the incorporation of offshore companies, registration of ships, and the formation of Panama trusts and foundations. There are no taxes imposed on offshore companies that only engage in business outside of the jurisdiction. Offshore companies incorporated in Panama, and the owners of the companies, are exempt from any corporate taxes, withholding taxes, income tax, capital gains tax, local taxes, and estate or inheritance taxes.

Panama offers an additional benefit not available in many offshore tax havens: being able to conduct business within the offshore jurisdiction. However, any business conducted within the jurisdiction is subject to local taxes.

Financial Privacy

There are extensive laws in Panama to protect corporate and individual financial privacy. Strict confidentiality laws and regulations apply to the documentation of offshore corporations, trusts, and foundations, with severe civil and criminal penalties for violations of confidentiality. The names of corporate shareholders are not required to be publicly registered. Panama also has very strict banking secrecy laws. Panamanian banks are prohibited from sharing any information about offshore bank accounts or account holders. The only exception is a specific Panamanian court order in conjunction with a criminal investigation.

Important

People or businesses of any nationality may incorporate within Panama.

Panama has few tax treaties with countries that have strong economic ties to it, further protecting the financial privacy of offshore banking clients who are citizens of other nations. Panama also offers the benefit of having no exchange control laws. This means that for individual clients of Panama’s offshore banking, as well as for offshore business entities incorporated in Panama, there are no limits or reporting requirements on money transfers into or out of the country.

The Panama Papers

The popularity of Panama as a tax haven made global news—and not in a good way—with the publication of the “Panama Papers” in 2016. A cache of financial files from Mossack Fonseca, one of the world’s biggest offshore law firms, the papers were published in the German newspaper Süddeutsche Zeitung, which obtained them from an anonymous source. Dating back to the 1970s, the documents covered some 214,000 offshore business entities and shell corporations involving high-net-worth individuals, government officials, and organizations from 200 countries that the law firm had established. While most of them were legitimate, some had been set up or used for illegal purposes, including fraud, tax evasion, money-laundering, and the avoidance of international sanctions, a consortium of investigative journalists revealed.

The files were referred to as the Panama Papers because Mossack Fonseca (and, presumably, the individual who leaked them) was based there—greatly to the dismay of the Panamanian government, which protested that the name damaged the country’s image. It certainly damaged Mossack Fonseca’s: The law firm folded in 2018, a direct result of the revelations.

What Is a Tax Haven?

A tax haven is a country that offers individuals or businesses little or highly reduced tax liability.

What Is a Pure Tax Haven?

A pure tax haven is a country that imposes no taxes at all.

When Were the Panama Papers Published?

The Panama Papers were published in 2016 by the German newspaper Süddeutsche Zeitung.

The Bottom Line

Panama’s status as a tax haven was thrust into the spotlight with the publication of the Panama Papers in 2016 by Süddeutsche Zeitung, a German newspaper. But its law firms had quietly provided near total privacy for their offshore clients for years prior to publication, and may very well continue to do so to this day.