Panama’s Tax system
Taking up Residency in a Tax Haven
High Tax Jurisdiction Residency Dilemma
The complication starts for most people because they are either a resident in a high tax country and not able to move to a low/no tax country or are resident of the US and do not want to renounce their citizenship. At the same time, they wish to set up a business, invest, or engage in another type of financial activity in a tax free jurisdiction using one or more tax-free structures with the use of an offshore bank or brokerage account to assist in that endeavour. The problem is that most high-tax jurisdictions want to tax you on your worldwide income regardless of where and how it is earned; there are all forms of policies and pieces of legislation in affect that force you to report your ownership interest in foreign companies and structures, for the purpose of not only taxing that income stream, but to tax it on an accrual basis, even before any of it has been repatriated home.
Every country has its own nuances as to how they approach this. Countries with less sophisticated tax codes will allow you to set up a business or investment activity in another country under a foreign entity and not require you to report its activities - taxing you only once the income is repatriated. Until about thirty or forty years ago this was the general modus operandi in every high tax country. However, little by little tax bureaucrats started to close loopholes, requiring you to report income earned even if it was earned by a foreign entity using foreign accounts, no matter if any income was repatriated. The only exceptions are for certain types of business activities and through double-taxation agreements. Double-tax agreements can be useful for many types of business activities as it prevents one from being taxed twice on the same income, though income cannot be moved to a no-tax jurisdiction and treaties are limited to a limited number of participating countries.
In general, businesses with a physical presence in a foreign country that does not do any business with one’s home country will not be taxed even if the business is considered to be personally owned. However, if there is no real physical operation going on in the country where it is located (i.e. it mostly exists in cyberspace) and/or the business is doing some or all of its business with one’s home country then the rules become a little more complicated.
Contact us for assistance in deciding the best strategy for you with regards to starting a new business offshore, relocating an existing business or starting an international subsidiary. If you would like more information in regards to starting an e-commerce business offshore please go to our Offshore Merchant Account and E-Commerce section.
If your business or investment is located in no-tax jurisdiction then it is important to make sure that your corporate structure complies with company tax laws in your country of residence. Businesses have more options and loopholes available to them than individuals looking to invest in foreign markets through international structures. In general the question is one of ownership. If legal ownership and control of the structure that holds the funds are held by a different corporate vehicle, even the most draconian reporting laws can be bypassed.
Tax Deferral and Elimination Options
A good strategy to consider is setting up a foundation to own the company to operate the business or investment rather than for it to be owned personally. There are a number of asset protection advantages that come when one is not considered the legal owner of their business, even if the company is operating in a low/no tax jurisdiction that does not recognize foreign judgments. This is because a determined opponent can always bring a suit into the country where you have located your business. If a foundation is established and registered as the sole shareholder of the company, it takes the individual out of the ownership position - as by definition no one can own a foundation. A trust can also be used in the same way. Therefore, so long as you do not repatriate income from the structure to yourself you can indefinitely postpone the paying of any taxes and let your earnings compound as you invest into other opportunities abroad.
At some point you are going to want to repatriate income back to your home country. You can then receive the funds and declare them in your regular tax returns as earned income. However, it is possible to use a correctly established foundation to grant tax-free gifts to relatives and family members (other than your spouse). This income shifting allows your family members to receive foreign gifts tax-free. In some countries, such as the US and Canada, this income would still need to be reported, but no income taxes would need to be paid since it is considered a foreign gift (please make sure to check the specifics in your own country of residence whether or not a gift tax is applicable).
There are many other ways to effectively repatriate income without paying taxes. Another solution is referred to as a 'back-to-back' loan that many offshore banks offer that involves collateralizing a foreign account and then drawing out a loan from the bank based upon the collateral of the foreign account. The income received is then classified as a loan or a credit line (such loans need to be done with very judiciously)
Another option, that generally involves more detail, is to set up a separate finance company that is attached to the main company that can issue mortgages on properties and loans for physical property or other capital equipment.
Tax Reduction Options
The current trend for companies to outsource many aspects of their business to various foreign based companies has created many new possibilities. For instance, onshore businesses can create their own outsourcing service companies (i.e. in web design, hosting, call centres, direct sales, advertising or a host of other activities) that then can be outsourced with the home company set-up to receive the invoices for all of services, which reduces the bottom line tax-payable. The additional accrued income then can stay outside ones country of residence for an indefinite tax-deferral.
Setting up insurance captives to provide your own in-house insurance coverage provides a host of interesting options and is another favoured tax-reduction strategy. Not only can you eliminate outrageous insurance premiums that are required by conventional insurers for certain lines of business, such as healthcare, but you can reap enormous tax benefits by claiming the insurance premium deductions on your business tax returns, and at the same time invest your own insurance premiums on a tax deferred basis through the offshore captive. See our section on captive insurance for more information on this strategy.
Another popular option for importers is to establish a trading company in a popular jurisdiction, like Panama or Hong Kong, where a lot of import/export trading type companies already exist. The concept is known in the business of triangulation where the trading company becomes an intermediary between the exporter and the importer that keeps the spread of the profit between the original purchase price and the final sale price. The trading company then bills the producer and then re-invoices the importer. This could involve setting up the company in a free zone, such as Colon, Panama, where products can be imported, re-packaged and then shipped to its final destination. The Colon-Free-Zone also offers you a cheaper virtual presence solution, whereby you use the services of a Free-Zone based service provider who can then follow your precise product receiving, packaging, shipping, and distribution requirements.
Private Annuity Contracts
No discussion about tax deferral and elimination strategies is complete without mentioning private annuity contracts that involve the exchange of appreciated assets, such as stock or cash realized from the sale of a business or property, to a foreign company in return for a future income stream. The periodic payments, more commonly referred to as annuity payments, are made to the 'Annuitant' (receiver of the annuity income) on a monthly, quarterly, semi-annual or annual basis. These payments may be deferred as long as the Annuitant wishes and together with appropriate estate-planning, the value of the appreciated foreign property can be transferred to heirs and beneficiaries without paying estate tax. Detailed information about this invaluable tax reduction strategy, which also has estate planning and asset protection features can be found in our Private Annuity Contract article.
These are just a few ideas on ways to eliminate or optimize the amount of taxes you have to pay. It is not intended as specific advice, but rather as an overview to stimulate further discussion and investigation. There are many other strategies that can be pursued and we will be happy to consult with you and discuss what would work best considering your situation.