Say you wanted to become a resident of Panama (probably made easier by being from a country in the Friendly Nations list). You incorporate your businesses (let’s say they are location independent online businesses) and make the $5k deposit. You get the residency after a few months if all goes well.
If you wanted to become a tax resident of Panama (not just ‘resident’ which can be maintained by infrequent subsequent visits each year), is it the case you need to stay inside the country X number of days/year? I imagine that even if that is the case, it would not be so easy to depart the tax net of your home country (or wherever you are tax resident, let’s say UK in this case). This is because days in/days out is just one of many tests to determine whether your domicile status. So presumably having your corporation set up in Panama as well as perhaps renting a property there (if not outright buying a property there but let’s not go that far) would be needed as proof to your home country that you are no longer tax resident there?
Also, if you did have your corporations set up in Panama, what actual taxes would you pay? Presumably there is no corporation tax (let’s say tax paid on profits made, not withdrawn from the company). But if you are tax resident there, presumably you wouldn’t pay dividend withdrawal tax either? What if you are still tax resident in another country? Presumably the only tax that would be paid would be this dividend withdrawal tax? So in the UK it would probably be considered personal income.
If you are a resident of the UK, you are in luck since Panama and the UK have a double taxation agreement. It can be viewed here.
Article 4 of this treaty explains how residency status is determined when you are resident of both countries:
he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State he shall be deemed to be a resident only of the State in which he has an habitual abode;
if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
Therefore, by having a home in Panama and cutting ties with the UK, you could be deemed a tax resident of Panama.
Since Panama is a territorial-tax country with a unique reputation, I would recommend you get a certificate of tax residency from Panama. This certificate will protect you from the UK tax authority and will be written proof of your residential ties to Panama.
To obtain this certificate from the Panamanian government, you will need to have resided in Panama for more than 183 days during a 365 day period or show proof that Panama is your center of economic or familial interest. See this article on how to obtain this certificate.
In regards to taxes, Panama is a country with a territorial tax system. Therefore, only income earned within Panama is taxable. See this article for more details.
If you earn income through a corporation incorporated in Panama (like the one for the friendly nations visa), you will have to pay taxes to the Panamanian government. Paying some taxes to the Panamanian government can be useful If you are trying to establish economic ties with Panama and show the UK you are established elsewhere. It’s also useful if you plan on becoming a Panamanian citizen in the future.
To avoid paying taxes in Panama, you would need to setup a corporation outside of Panama and funnel majority of your earnings through there. This income will not be taxable by Panama as it was earned offshore. This corporation would be preferably in a jurisdiction with zero or low corporate taxes.
I obtained my friendly nations visa 5 years ago but decided not to reside in Panama since my country didn’t have a double tax treaty (meaning I would have to cut almost all ties with my home country) and because I preferred the life in other Latin American countries.
So if you incorporated your company in Panama but were not tax resident (i.e. still lived in the UK) would you end up paying less taxes (in UK) with a Panama corporation or not really?
Presumably if you incorporated somewhere like Georgia (also a terrotirrial tax country) but were tax resident in Panama (or vice versa) then you would basically pay no taxes?
If you are living in the UK (and most high tax jurisdictions) an offshore company wouldn’t offer much benefit in terms of taxes anymore. By living in the UK, the management and control of the corporation is also based in the UK. Basically, the CFC (Controlled foreign corporation) rules would tax a foreign corporation (specifically those from zero or low tax jurisdictions) as if it were a resident of the UK. Take a look at this article for more details.
In the latter case, you would not pay any personal or corporate taxes in Panama for your Georgian based corporation. However, since Georgia has a corporate tax, you would need to pay the Georgian government taxes on behalf of your corporation as the corporation would be a resident of Georgia.
It is as I thought. I knew about the whole CFC thing; I just wasn’t sure how it would work. Normally if you have an LLC in the UK you pay 19% corp tax then; 7.5% dividend tax for personal tax (though you can withdraw as a salary and be taxed the normal personal tax way) with first 2k tax-free; then anything above I think £32k it becomes 32.5%. So, if you kept the money in the Panama account, presumably it would not be taxed by the UK as it is in Panama’s jurisdiction? And any money that is withdrawn would be taxed as ‘personal tax’ in the UK (that is what it means when it tax the corp as if it was a UK resident? Or did I get that completely wrong? It might be that from what you are saying, the UK would impose a corporation tax also? That article you linked didn’t quite make that clear.
So it seems to me the best way would be to incorporate in Panama. And then have your tax residency in Georgia? As Georgia is a territorial tax country they don’t tax foreign income. So 0% corp tax in Panama and 0% withdrawal by virtue of being a resident of Georgia for tax purposes - does that make sense?
Each country has its own CFC rules and they are usually quite complicated. I’d recommend contacting a tax professional in the UK to help you out in figuring out the specifics. Here is a forum post with a similar question which may shed some light.
Yes, that setup should work to avoid taxation. In regards to the corporation, it might be worth doing some research into a better jurisdiction. Panama doesn’t have the best reputation and is often blacklisted. For example, sending a wire transfer from Panama to a supplier in the EU will be more likely to be flagged as suspicious than a wire from Hong Kong or the UAE.
To my experiences it is easy to get residency in Panama (Cedula) if you come from Friendly nations. Theoretically and practically you can get registration in tax authorities DGI ( Dirección General de Ingresos https://dgi.mef.gob.pa/), you can file tax declaration you can declare income received outside of of Panama and pay zero tax. You can set up corporation in Panama and pay zero tax on money received from abroad. However you face problems opening an accounts yourself and especially for corporation in Panama. They say in the banks “we do not open accounts for offshore companies even if they are registered in Panama”. I do not say it is impossible but for sure it is not easy. But at the end you will need to have in your hands Certificate of tax residency and it has nothing to do with tax declaration. In reality it costs ( legal services and other manipulations) around 5000 USD and 6 months to get it. But you can not get it just paying bribes - it will not work. You need to collect a bunch of documents in order to submit your case for the certificate. as far as I know you will need to submit following documents (I give you some as an example - copy of rental agreement, bills for water or electricity, copy of cedula, letter from the bank stating that you have " 5 cifras bajas en la cuenta" - 5 digits on you account. documents for your company…) So you will get your certificate even you you stay just 2-3 months a year but you will be able to prove strong links with Panama.
I tend to think being able to show tax residency in Panama might work against a company doing serious international business. Now Panama is black listed, how does it go working with international customers? Most countries have or are in the process of removing tax treaty benefits for black listed countries, and increased withholding taxes at heavy rates on all payments to black listed countries. So Panama might not tax foreign sourced income but it may well be taxed at the source. I visited Panama to see if I could work from there but in the end I kept looking at other options that are easier overall. For myself… I decided its better overall to stay in an onshore or near shore jurisdiction like Georgia that has low and even zero tax with territorial taxation plus good free trade agreements and good tax treaties with no withholding tax and no suggestion of blacklisting and ultimately pay lower total taxes - especially when you are running a commercial enterprise with customers onshore… while still being a cheap airfare from all of Europe
I was wondering if you found a solution to your problem. Also, you mentioned tax residency in Georgia, something I am considering. I don’t know if it’s the case, but if your income does not exceed a certain threshold and the sector is allowed, they tax small businesses 1%. I figure that as long as the income is from a foreign source, you would still not be taxed in your personal capacity as a tax resident (or just a resident, because it would require being 6 months in the country) and 1% corporate tax is a pretty reasonable anyway.
I find that “nearby geographically” is for the most part psychological. You can both setup and run a company online, .e.g. Panama, without ever setting foot there, so it doesn’t matter so much if it’s the next door country or if it’s half a world away. You do have a point regarding blacklisting and there might be pressure on both perceived and actual tax havens, from both the US and EU, towards making it harder and harder to legally not pay tax.
