Contents of this guide
What the exemption covers
The short answer is that the exemption is broad but not total. Article 31 of the law provides that every activity, operation, transaction, procedure and transfer of goods, the purchase of equipment and construction materials, of raw materials, machinery, tools, accessories and supplies, and every good or service required for the operations of companies established in free zones are exempt from all direct and indirect taxes, contributions, fees, duties and national levies. The same article exempts the operating license tax and requires the promoter and the companies to keep accounting records that distinguish exempt operations from those that are not.
Article 32 then opens the list of what is paid, and article 33 treats separately the income tax of service and technology companies. Executive Decree 62 of 2017, which regulates the law, repeats that split in its articles 16 and 17. Understanding the exemption requires reading the three articles together, because the benefit in 31 is limited by 32 and 33.
A project such as Innovation Smart District (ISD) states on its About page that companies and startups that locate within ISD enjoy tax and immigration benefits under Law 32 of April 5, 2011. What follows explains what that law says, without adding conditions specific to ISD.
Tax by tax
The table lists how the law treats each tax. Each row gives the article where it appears.
| Tax | What the law says | Article |
|---|---|---|
| Direct and indirect taxes, contributions, fees, duties and national levies | Exempt for the operations and purchases of the established company | 31 |
| Operating license tax | Exempt | 31 |
| Income tax, foreign operations and operations among zone companies | Exempt, for service, high technology and other categories | 33 |
| Income tax, domestic operations | Subject to income tax and other taxes under current legislation | 33 |
| Dividends | 5%, and 2% complementary tax if profits are not distributed | 32, item 2 |
| Annual tax | 1% of capital, with a minimum of 100 and a maximum of 50,000 balboas | 32, item 3 |
| Selective consumption tax and Special Interest Compensation Fund | Paid, except loans secured by deposits in the second case | 32, items 4 and 5 |
| Labor and social security contributions | Paid | 32, item 6 |
Radar’s compilation from articles 31 to 33 of Law 32 of 2011, read in the copy of Gaceta Oficial Digital 26757 B published by MICI. The annual tax amounts are those in the 2011 text. The law is in Spanish and the content is paraphrased.
Article 32 also includes, in item 1, income tax and the tax on transfer of movable goods and provision of services (ITBMS) on local lease and sublease operations. The law clarifies that promoters are excepted from that payment.
Income tax: foreign versus domestic
For a technology company, article 33 weighs the most. Service companies, logistics service companies, high technology companies, scientific research centers, higher education centers, general service companies, specialized health centers and environmental service companies are exempt from income tax on their foreign operations and on their operations among themselves. Domestic operations, those aimed at the territory of the Republic of Panama, are subject to income tax and other taxes under current tax legislation.
In practice, the border is the destination of the service or good. Under the decree, foreign operations are those provided to persons outside Panama’s territory, within free trade areas or in other free zones and special regimes, and domestic operations are those directed at the national fiscal territory. A company serving clients abroad and other companies in the zone falls in the first group, and one selling to clients in Panama, in the second. For goods, article 36 states that goods produced in the zone or brought into it that are imported into the national territory pay the applicable tariffs and generate the corresponding income tax.
That is why the law requires records separating exempt and non-exempt operations. Radar’s guide on the taxes a company pays in Panama shows the general regime that domestic operations fall into.
The exemption period
A frequent question is how many years the benefit lasts. Articles 31 to 33 of the law contain no exemption period. What the text does set is something else: the promoter’s license is permanent (article 21), the company’s license is approved within a maximum of ninety days (article 26) and the right to the benefits runs from the date of the resolution that registers the company in the official registry (article 29). The benefit is lost if the license is canceled, for example for failing to meet investment amounts and deadlines (article 38).
Some third-party summaries mention fixed exemption periods. Those periods do not appear in the text of the law published in the Gaceta Oficial, so they are not repeated here. The 2017 decree states that Law 32 was reformed by Law 125 of 2013, which changes aspects of airport and aerodrome administration, so it is advisable to confirm the current consolidated text with MICI or a lawyer before an investment decision.
One more date detail: article 79 provided that items 2 to 5 of article 32, that is dividends, annual tax, selective consumption tax and the Special Interest Compensation Fund, took effect on January 1, 2016. The 2017 decree already lists them as applicable payments.
Immigration and labor benefits
The law includes a special immigration regime. Article 44 allows foreigners hired as trusted staff, executives or technical experts by free zone companies to apply for a temporary resident permit valid for the term of their contract. Article 45 creates temporary permits for teachers, students and researchers of higher education and research centers in free zones, and article 46 provides a short stay visa for people coming to evaluate investments or do business, valid for nine months. Applications go to Immigration through the Commission’s Technical Secretariat (article 50). The requirements for each permit are set by decree, under article 53, and the general immigration regime has changed since 2011, so it is confirmed with Immigration.
On labor, article 58 obliges promoters, operators and companies to pay the legal minimum wage, payable at intervals of no more than a fortnight; the guide on the minimum wage in Panama explains how it is set. Article 63 sets a 50% surcharge for work on the weekly rest day, and article 64 limits overtime to three hours a day, with a 25% surcharge. Article 62 applies the Labor Code where it does not contradict the law.
Common mistakes when reading the law
- Believing “exempt” means “no payments at all”. Article 32 keeps dividends, annual tax, selective consumption tax and labor and social security charges.
- Forgetting the domestic and foreign border. The income tax exemption in article 33 covers foreign operations and those among zone companies; those aimed at Panama are taxed.
- Taking a period for granted. No exemption article read sets a number of years; the current text should be confirmed.
- Mixing free zones with other regimes. Article 76 states that this regime does not apply to any other free zone regime, except the cases the law mentions. The comparison with Colón or Panamá Pacífico is in the piece on special regimes.
- Not keeping separate accounting. Article 31 requires records reflecting exempt and non-exempt operations.
- Assuming the benefit is automatic. It comes with the approved license and registration (article 29).
How to check the benefit in a specific case
Reading the text is the base, but each company has different operations. An orderly review starts by classifying the activity into one of the categories in article 24, separating which part of revenue comes from abroad, from other zone companies and from the Panamanian market, and estimating the capital on which the annual tax is calculated. It is then checked against the license granted and the current text of the law on MICI’s site. An overview of the Panamanian economy, useful for placing this regime, is in the piece on how Panama’s economy works.
ISD’s website states that Innovation Smart District holds a free zone license and that companies and startups located there enjoy tax and immigration benefits under Law 32 of 2011. The About page gathers that information.
Frequently asked questions
What tax incentives does a free zone in Panama have?
Article 31 of Law 32 of 2011 exempts established companies from all direct and indirect taxes, contributions, fees, duties and national levies on their operations, and from the operating license tax. Article 33 exempts foreign operations of service and technology companies from income tax. Payments such as dividends and the annual tax remain.
Do companies in a free zone pay income tax?
It depends on the destination of the operation. Service, high technology and other categories are exempt on foreign operations and operations among zone companies, and pay income tax on domestic operations, those aimed at Panamanian territory.
How long does the tax exemption last in a Panama free zone?
Articles 31 to 33 of the law set no exemption period. The promoter’s license is permanent under article 21, and the benefit depends on keeping the license valid and meeting the obligations. The current text should be confirmed with MICI.
What taxes are paid in a Panama free zone?
Article 32 lists dividends at 5%, an annual tax of 1% of capital with a minimum of 100 and a maximum of 50,000 balboas, the selective consumption tax, the Special Interest Compensation Fund, labor and social security contributions, and income tax and ITBMS on local leases.
What immigration benefits does Law 32 of 2011 give?
The law provides temporary resident permits for trusted staff and experts hired by free zone companies, permits for teachers, students and researchers, and a nine month short stay visa to evaluate investments. Current requirements are confirmed with Immigration.
This content is informational and does not replace the advice of a tax lawyer or a certified public accountant.
Related articles
- Taxes a company pays in Panama: income tax, ITBMS, dividends, Notice of Operation and payroll
- Panama’s special regimes: Colón Free Zone, Panamá Pacífico, SEM and EMMA
- How Panama’s economy works: dollar, Canal, banking, logistics and territorial taxation
- Minimum wage in Panama: how it is set, regions, sectors and how it is calculated
Sources
- Law 32 of April 5, 2011, Gaceta Oficial Digital 26757 B: articles 21, 26, 29, 31 to 33, 36, 38, 44 to 46, 50, 53, 58, 62 to 64, 76 and 79. Copy published by MICI.
- Executive Decree 62 of April 11, 2017, Gaceta Oficial Digital 28257 A: articles 1, 2, 16 and 17.
- MICI, General Directorate of Free Zones: regulations.
- Innovation Smart District, About: tax and immigration benefits under Law 32.
- Radar Panamá, taxes a company pays, special regimes, Panama’s economy and minimum wage.
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