Banking in Panama is a powerful asset protection technique, but it also has tax implications.  Except for the $300US/year corporation renewal there are no taxes to be paid.

Tax Evasion vs Tax Planning

This is a very important area to consider if you are going to build your asset base.  Tax evasion is illegal in some countries and we would never recommend it.  In fact, we are not going to speak about any particular Country's tax laws.  Everything you read on this page is NOT to be construed as tax advice.  We are simply going to explore some tax planning ideas.

Hiding income is tax evasion 

Tax evasion is when you hide / do not report income for the purpose of evading paying the taxes due.  Do NOT do this!  Even though it is possible to hide money in a Panama bank account because of the strong bank secrecy laws, it is tax evasion in some countries.  Although tax evasion is not a crime in Panama and the Panamanian authorities would not co-operate with foreign tax authorities investigating you, it is a bad idea to hide money in Panama.  If your tax plan requires you to hide money it is likely not a tax plan but rather tax evasion.  Instead you should consider planning your affairs to legally reduce the amount of taxes due.

Again, we cannot give you tax advice, but here are some tax planning ideas to explore with your local tax professionals:

1)  Have a Panama bearer share corporation, or a Panama corporation owned by a foundation , own any intellectual property rights.  Have your onshore company license or pay a royalty to the offshore corporation which owns the intellectual property rights.  In almost any business, there are strategies, software, or business critical ideas, otherwise known as intellectual property, that are valuable.  These ideas often make or break a company.  When you setup your business don't just lump it all into one onshore business.  Instead, use an offshore corporation while developing your ideas.  That way the offshore corporation will own these rights.  Consider a franchise.  The franchisee pays a portion of all earnings to the franchiser for the rights to use their marketing ideas and concepts.  Why can't you setup a similar structure?  After paying the franchise / royalty fees your onshore business will likely make a modest profit which you can pay the legally owed taxes on.  The offshore business will have to pay taxes in the jurisdiction where it is located.  If you choose a jurisdiction wisely, like Panama for instance, only $300/year is due.

Transfer Pricing - Offshore vs Onshore

Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization, or between related companies.  In our case, this refers to the price the onshore entity charges for its services.  The onshore order fulfillment company must charge what it's competitor's charge for the same service.

Warning:  The above ideas could become tax evasion if they are not implemented properly.  Some countries have "arm's length" laws, which must be satisfied to avoid your tax plan becoming tax evasion.  Arm's length laws are usually not a problem as long as you use fair transfer pricing (call for details).  Please see our article on avoiding offshore tax evasion.

2)  Tax deferring money coming from offshore to onshore -- Well this is the million dollar question.  Sure money can collect in an bearer share offshore corporation, but when money is paid to you by the corporation onshore or offshore (offshore - if your country taxes on worldwide income) taxes become due.  Is there any way to bring money onshore and pay taxes later or never?  How about a loan or mortgage?  What if an offshore corporation was to lend you money, or give you a mortgage?  To be a valid mortgage, you would have to pay interest payments of course just like a normal mortgage (or loan).  The following is an illegal loophole we do NOT recommend to anyone.  In fact, this is a good example of where tax planning can become tax evasion: After 6 or 7 years, depending on the jurisdiction, records can be destroyed legally (and should be!).  After that period one could theoretically stop making payments and default on the mortgage.  At that point the only person that would know would be the offshore corporation since it ceased to received payments.  If the offshore corporation doesn't come after you for the money, who would? Your records would all be destroyed after 6 or 7 years so nobody would know.  This is tax evasion because the unpaid balance would legally become income and be taxable as soon as the mortgage was defaulted upon.  Again this is tax evasion.  Do NOT do it.  Read this website carefully and make a tax plan.  Remember the difference between tax planning and tax evasion is that a tax plan is when you reduce taxes by doing something that is legal.  It is very easy to setup a tax plan to reduce your taxes by using an offshore corporation / offshore foundation and trusts.  Read this website to learn more or call us for assistance.

Using a bank loan to legally access offshore money

The previous example utilizes a direct loan.  In some countries, the loan may not be legal, if you own the offshore entity.  This problem can be handled in two ways.  The first option is to use a trust structure that forms a self-owned entity (call for details).  The second option is to use a third party such as a bank to facilitate the loan.  Most (if not all) countries allow you to borrow from any bank you want to.  As discussed previously, a loan is not a taxable event.  Banks in Panama will allow you to borrow up to 80% against a locked in investment like a CD.  The offshore corporation can buy a CD, which you can borrow up to 80% of.  The CD will be at a substantial interest rate.  Generally, for most banks, the spread between the deposit interest rate and the loan interest rate is 2%.  This solution is more costly because now you have to pay 2% interest on the money, but it allows you to access money offshore using a loan from a completely independent third party.

Be very careful when doing any kind of tax planning.  Consult your local tax professional to see what is legal in your country.  The above ideas should only be used as food for thought.  Your local tax professional will design a proper and legal tax plan for you.  Do not call us for tax advice.  We can only advise you of taxes payable in Panama.  Taxes owed in other countries are not within our competency and we cannot advise you in such matters.  We are, however, happy to assist you in your asset protection strategies.