American Expats in Panama

Updated on September 11, 2025.

Panama & U.S. Tax Timeline: Critical Dates for Dual Filers

Managing tax obligations between Panama and the United States requires understanding two fundamentally different tax calendars and systems. Panama's territorial tax system creates minimal filing requirements for most expats, while U.S. obligations remain comprehensive regardless of Panama residence.

Panama's territorial tax system means most American expats have minimal Panama tax filing obligations. Unlike countries with worldwide taxation, Panama only taxes income derived from Panamanian sources. Foreign-source income, including U.S. Social Security, foreign pensions, and income from work performed outside Panama, remains tax-free in Panama. This creates a significant advantage but requires careful documentation to establish the foreign source of income.

Strategic Payment Planning for U.S. Tax Obligations

While Panama's territorial system may eliminate local tax obligations for many expats, U.S. tax requirements remain fully applicable. The critical challenge for American expats in Panama is managing U.S. tax payments when most income may not be subject to withholding.

Panama's use of the U.S. dollar eliminates currency conversion complications for tax calculations, but this simplicity can mask the need for proactive tax planning. Many expats mistakenly assume that because Panama doesn't tax their foreign-source income, they have no tax obligations. This oversight can lead to substantial U.S. tax liabilities, especially for self-employed individuals or those with investment income.

To effectively manage U.S. tax obligations from Panama, establish a systematic approach to estimated tax payments. Calculate quarterly payments based on your expected annual income, considering that you may qualify for the Foreign Earned Income Exclusion (FEIE) up to $126,500 for 2024. However, investment income, self-employment income above the FEIE limit, and certain other income types remain fully taxable.

For self-employed expats, the situation requires particular attention. While the FEIE can exclude earned income from U.S. income tax, it doesn't apply to self-employment tax (Social Security and Medicare). This 15.3% tax applies to net self-employment income regardless of the FEIE, creating a substantial tax obligation even when no income tax is due. Quarterly estimated payments become essential to avoid underpayment penalties.

Consider establishing a separate U.S. bank account specifically for tax reserves. Since many Panama banks have terminated relationships with U.S. citizens due to FATCA reporting requirements, maintaining U.S. banking relationships proves crucial for managing tax payments. Set aside funds monthly based on projected tax liability, treating tax reserves as a fixed expense.

Panama vs. U.S. Tax Systems: Direct Comparison

Understanding the fundamental differences between Panama's territorial system and U.S. worldwide taxation is essential for effective tax planning. Panama's approach offers significant advantages for expats with foreign-source income, while the U.S. system continues to apply regardless of residence.

Panama's progressive tax system applies only to Panama-source income, with rates ranging from 0% on income up to $11,000 to 25% on income exceeding $50,000. The first $11,000 of Panama-source income remains tax-free, with a 15% rate applying to income between $11,000 and $50,000. This compares favorably to U.S. federal rates, especially when considering that foreign-source income escapes Panama taxation entirely.

The territorial nature of Panama's system creates planning opportunities unavailable in worldwide taxation countries. Income from U.S. investments, foreign consulting work, and international business activities remains untaxed in Panama, regardless of amount. This allows American expats to potentially reduce their overall tax burden significantly, though U.S. tax obligations continue to apply to worldwide income.

The Panama Tax System Explained in Detail

Panama's territorial tax system represents one of the most favorable tax regimes for American expats, fundamentally different from the worldwide taxation approach used by the United States. Understanding what constitutes Panama-source versus foreign-source income proves crucial for optimizing your tax position.

The Territorial Taxation Principle

Panama only taxes income derived from activities or investments within Panama's territory. This principle, enshrined in Article 694 of Panama's Fiscal Code, means that income earned from sources outside Panama remains completely tax-free, regardless of your residency status or the amount involved. This includes income from foreign employment, international consulting, overseas investments, foreign real estate, and non-Panama business activities.

The determination of source follows specific rules. Services are sourced where performed, meaning remote work for non-Panama clients while physically in Panama could create Panama-source income. However, Panama's tax authorities generally don't pursue foreign clients' remote workers if no Panama entity is involved. Investment income follows the location of the underlying asset or payor, keeping foreign investment income tax-free.

What Constitutes Panama-Source Income

Panama Tax Rates and Calculations

For Panama-source income that is taxable, the following progressive rates apply:

Panama allows various deductions including mortgage interest on Panama property (with limits), educational expenses for dependents in Panama, medical expenses exceeding 5% of gross income, and charitable donations to approved Panama organizations. Personal exemptions include $800 per dependent and specific allowances for disability or elderly status.

Special Tax Regimes and Incentives

Panama offers numerous tax incentives designed to attract foreign investment and retirees. The Pensionado visa program provides tax exemptions on foreign pension income and numerous discounts on services. The Panama Pacifico Special Economic Area offers reduced 5% income tax rates for qualifying businesses. The City of Knowledge (Ciudad del Saber) provides tax exemptions for technology and research companies.

The Multinational Company Headquarters (SEM) regime exempts foreign-source income and provides immigration benefits for executives. Companies providing services exclusively to foreign clients from Panama may qualify for 0% tax rates under certain conditions. These incentives can significantly reduce or eliminate Panama tax obligations for qualifying American expats.

Panama Business Structures and Taxation

Panama's business-friendly environment and territorial tax system make it attractive for American entrepreneurs. Understanding the various business structures and their tax implications helps optimize both Panama and U.S. tax positions.

Panama Corporations (Sociedad Anónima - S.A.)

Panama corporations are the most common business structure for foreign investors. They're taxed only on Panama-source income at a flat 25% rate, with foreign-source income remaining tax-free. Dividends paid to foreign shareholders from foreign-source income face no withholding tax. The annual franchise tax is only $300, regardless of income level.

For U.S. tax purposes, Panama corporations require careful planning. If you own more than 50%, it becomes a Controlled Foreign Corporation (CFC), potentially triggering GILTI (Global Intangible Low-Taxed Income) and Subpart F income inclusion. Filing Form 5471 becomes mandatory for 10% or greater ownership. Consider "checking the box" elections to treat the corporation as a disregarded entity or partnership for U.S. tax purposes.

Panama Limited Liability Companies (Sociedad de Responsabilidad Limitada - S.R.L.)

Panama LLCs offer flexibility similar to U.S. LLCs but are less common than corporations. They require at least two members and face the same territorial taxation as corporations. For U.S. tax purposes, they typically default to partnership treatment, requiring Form 8865 filing. The structure works well for joint ventures but offers less privacy than corporations.

Panama Private Interest Foundations

Panama foundations serve estate planning and asset protection purposes, operating similarly to trusts. While not typically used for active business, they can hold investments and business interests tax-efficiently. Foreign-source income remains untaxed, and distributions to foreign beneficiaries face no withholding tax.

U.S. tax treatment of Panama foundations is complex. They may be classified as foreign trusts, requiring Forms 3520 and 3520-A. Alternatively, they might be treated as foreign corporations, depending on structure and control. The IRS scrutinizes these structures, making proper reporting essential to avoid penalties.

Panama Real Estate Taxation and Investment

Panama's real estate market attracts many American expats with favorable tax treatment and investment opportunities. Understanding the tax implications helps optimize property investments while maintaining U.S. compliance.

Property Tax Structure

Panama's property tax system offers significant advantages compared to many U.S. jurisdictions. Primary residences enjoy a $30,000 exemption, with graduated rates applying to value exceeding this threshold: 0% on value up to $30,000, 0.5% on value from $30,001 to $50,000, 0.7% on value from $50,001 to $75,000, and 1.0% on value exceeding $75,000.

New construction receives a property tax exemption for 5-20 years depending on property value, with longer exemptions for lower-valued properties. This incentive significantly reduces carrying costs for new property investments. Many developments pass these exemptions to buyers, creating tax-free periods for property ownership.

Rental Income Taxation

Rental income from Panama property constitutes Panama-source income, subject to taxation regardless of owner residency. Landlords can choose between two taxation methods: withholding tax at 10% of gross rental income with no deductions allowed, or regular income tax rates on net income after deducting expenses. Most expats choose the regular income tax method when expenses exceed 60% of rental income.

Deductible expenses include property management fees, maintenance and repairs, property tax and insurance, mortgage interest, depreciation (typically 3% annually), and utilities if paid by landlord. Proper documentation of expenses proves essential for maximizing deductions. The U.S. requires reporting of Panama rental income on Schedule E, with foreign tax credits available for Panama taxes paid.

Capital Gains on Real Estate

Panama taxes real estate capital gains at 10% of the gross sale price or 25% of the net gain, whichever results in lower tax. Sellers can elect either method, providing planning flexibility. The buyer must withhold 3% of the purchase price as advance tax payment unless the seller provides a no-tax-due certificate. Primary residences may qualify for exemptions if owned and occupied for specified periods.

For U.S. tax purposes, Panama real estate gains face taxation regardless of Panama treatment. The primary residence exclusion ($250,000/$500,000) may apply if ownership and use tests are met. Foreign tax credits offset Panama taxes paid, though timing differences between Panama withholding and U.S. tax years require careful planning.

Banking and Financial Considerations

Panama's sophisticated banking sector historically served as a regional financial hub, though recent international compliance requirements have transformed the landscape for American expats. Understanding current banking realities helps manage financial affairs effectively.

Banking Challenges for U.S. Citizens

FATCA implementation dramatically reduced banking options for Americans in Panama. Many banks refuse U.S. citizen accounts or impose substantial minimum balances ($25,000-$250,000). Those accepting Americans often charge higher fees and restrict investment products. Account opening requires extensive documentation including proof of income, reference letters, and source of funds documentation.

Banks that do accept Americans typically include Banco General (with restrictions), BAC International Bank, Scotiabank, and some smaller institutions. Private banking services remain available for high-net-worth individuals. Digital banks and fintech solutions increasingly fill gaps in traditional banking access.

FATCA and FBAR Compliance

All Panama bank accounts require FBAR reporting if aggregate foreign accounts exceed $10,000 at any point during the year. Form 8938 filing becomes mandatory when foreign financial assets exceed $200,000 (single) or $400,000 (married filing jointly) for overseas residents. Panama banks automatically report U.S. citizen accounts to the IRS under FATCA agreements.

Reportable accounts include checking and savings accounts, investment accounts, certain insurance policies with cash value, and interests in Panama corporations or foundations. Penalties for non-compliance are severe, with FBAR penalties up to $12,921 per account per year for non-willful violations and potentially 50% of account value for willful violations.

U.S. Social Security and Panama Benefits

Understanding how U.S. Social Security works in Panama and Panama's social security system helps optimize retirement planning and benefit strategies for American expats.

U.S. Social Security in Panama

U.S. citizens can receive Social Security benefits while living in Panama without reduction or suspension. Direct deposit to Panama banks is available, though many expats maintain U.S. bank accounts for benefit receipt. Benefits remain tax-free in Panama as foreign-source income. The U.S. taxes benefits based on worldwide income levels, with up to 85% potentially taxable.

Medicare doesn't cover services in Panama, leading many expats to return to the U.S. for major medical procedures. Some maintain Medicare Part B for U.S. visits, while others rely solely on Panama healthcare options. The Pensionado visa doesn't require surrendering U.S. benefits, allowing dual benefit strategies.

Panama Social Security (CSS) System

Panama's Caja de Seguro Social (CSS) provides healthcare and pension benefits to contributors. Employees contribute 9.75% of wages, with employers adding 12.25%. Self-employed individuals pay both portions if opting into the system. After 180 monthly contributions, retirees qualify for Panama pensions based on average earnings.

American expats working for Panama employers must contribute to CSS. Self-employed expats can voluntarily participate, gaining access to public healthcare and eventual pension benefits. However, no totalization agreement exists between the U.S. and Panama, meaning potential double social security taxation for employed expats unless structured properly.

Panama Visa Options for American Expats

Panama offers diverse visa programs catering to retirees, investors, and professionals. Each visa type carries different requirements, benefits, and potential tax implications for American expats.

Friendly Nations Visa

The Friendly Nations Visa provides permanent residency to citizens of 50+ countries, including the United States. Recent changes in 2021 increased requirements, now demanding either Panama employment with a two-year work permit first, or a $200,000 real estate investment. The visa includes immediate permanent residency (after work permit period), right to work in Panama, path to citizenship after five years, and family inclusion for dependents.

Tax implications remain minimal due to territorial taxation. Panama employment creates Panama-source taxable income. Investment income from required real estate may generate Panama tax if rented. The visa doesn't affect U.S. tax obligations, which continue on worldwide income.

Pensionado (Retiree) Visa

Panama's Pensionado visa ranks among the world's best retirement programs. Requirements include lifetime pension of $1,000+ monthly (or $750 with $100,000 Panama property). Benefits include numerous discounts (25% on flights, 50% on entertainment, 20% on medical), import duty exemption on household goods, and duty exemption on car imports every two years.

The visa requires maintaining pension income but doesn't restrict other activities. Pension income remains tax-free in Panama as foreign-source. Discounts effectively increase purchasing power by 20-30%. However, Pensionados cannot work for Panama employers without losing visa status.

Qualified Investor Visa

The Qualified Investor Visa offers residency through various investment options: $160,000 in real estate, $500,000 in bank fixed deposit, or $500,000 in Panama securities. The visa provides permanent residency after two years, with investments maintaining flexibility after residency is granted. Family members can be included with additional investment.

Investment income tax treatment varies by type. Real estate rental income faces Panama tax if locally sourced. Bank interest from Panama banks may be exempt under certain conditions. Securities income depends on source, with foreign securities remaining tax-free. U.S. tax obligations continue on all investment income regardless of Panama treatment.

Short-Term Residence Visa (Digital Nomad)

Panama introduced a Digital Nomad visa in 2021, allowing remote workers to live in Panama while working for foreign employers. Requirements include foreign income of $36,000+ annually, health insurance coverage, and proof of foreign employment or business ownership. The visa provides nine months initial stay, renewable for 18 months total.

Digital nomads pay no Panama tax on foreign employment income. However, extended stays may trigger Panama tax residency (183+ days), though territorial taxation still exempts foreign income. U.S. tax obligations continue, with potential FEIE qualification after establishing foreign residence. The visa doesn't lead to permanent residency, requiring transition to another visa type for long-term stay.

Tax Optimization Strategies for American Expats

Foreign Earned Income Exclusion vs. Foreign Tax Credit

Panama's territorial system creates unique considerations for choosing between FEIE and FTC. Since Panama doesn't tax foreign-source income, many expats have no foreign tax credits available. This makes FEIE particularly valuable for excluding up to $126,500 (2024) of earned income from U.S. taxation.

FEIE works optimally for expats with foreign-source earned income below the exclusion threshold and minimal Panama-source income. The physical presence test (330 days outside U.S.) or bona fide residence test qualifies expats for FEIE. However, FEIE doesn't apply to investment income or self-employment tax, requiring additional planning.

FTC might benefit expats with substantial Panama-source income generating Panama tax. Credits carry forward 10 years if unused, providing future benefit. Combined strategies work for mixed income, using FEIE for foreign-source earned income and FTC for Panama-source income generating local tax.

Optimal Business Structuring

Panama's territorial system allows sophisticated business structuring. Operating through Panama corporations conducting exclusively foreign business can eliminate Panama tax while potentially deferring U.S. tax. However, CFC rules and GILTI provisions limit deferral benefits, requiring careful planning.

Consider segregating Panama-source and foreign-source activities into separate entities. Use Panama entities for local business while maintaining foreign structures for international operations. This preserves territorial tax benefits while managing U.S. tax implications. Professional guidance proves essential given complex anti-deferral rules.

Retirement Income Planning

Panama's tax-free treatment of foreign pensions and social security creates powerful retirement planning opportunities. Structure retirement distributions to maximize Panama's territorial benefits while managing U.S. tax. Consider Roth conversions before establishing Panama residency to lock in current tax rates.

Timing retirement account distributions requires balancing U.S. tax brackets with life expectancy. Panama's lower cost of living means smaller distributions may suffice, potentially reducing U.S. tax. Coordinate Social Security claiming strategies with Panama residency timing for optimal benefit taxation.

Common Mistakes and How to Avoid Them

Confusing Visa Status with Tax Residency

Many expats mistakenly believe that obtaining a Panama visa automatically creates tax obligations or eliminates U.S. requirements. Panama visa status and tax residency are separate concepts. You can hold permanent residency without becoming a Panama tax resident if spending limited time in country. Conversely, extended physical presence may create tax residency regardless of visa status.

U.S. tax obligations continue regardless of Panama visa or residency status. Citizenship-based taxation means worldwide income reporting requirements persist. Plan visa and physical presence strategies considering both Panama and U.S. tax implications.

Failing to Document Income Source

Panama's territorial system requires clear documentation of income source to claim foreign-source treatment. Maintain contracts showing work performed outside Panama, bank statements proving foreign payment sources, and business records demonstrating foreign customer base. Poor documentation may result in Panama treating income as locally sourced.

Create contemporaneous records rather than attempting reconstruction later. Use separate bank accounts for Panama-source and foreign-source income. Maintain clear business records showing where services were performed and delivered.

Inadequate Banking and Reporting Compliance

FATCA and FBAR non-compliance remains a critical risk for American expats. Many assume small accounts or foreign pension plans don't require reporting. However, aggregate account values trigger reporting, and penalties for non-compliance are severe.

Report all foreign financial accounts annually, regardless of income generation. Include signature authority accounts even if not personally owned. Consider streamlined compliance procedures if behind on reporting, providing penalty relief for non-willful violations.

Frequently Asked Questions

Q: Do I need to file a Panama tax return if all my income is from U.S. sources?

Generally, no. If you have no Panama-source income, you typically have no Panama tax filing requirement. Panama's territorial system only taxes income derived from Panama sources. However, if you operate a Panama corporation or have Panama employees, filing requirements may exist even without taxable income. Maintain documentation proving foreign-source nature of income in case of inquiry.

Q: How does Panama's territorial tax system affect my U.S. tax return?

Panama's territorial system means you may have little or no foreign tax to claim as credits on your U.S. return. This makes the Foreign Earned Income Exclusion particularly valuable for excluding up to $126,500 of earned income. Without foreign tax credits, investment income and earnings above the FEIE limit face full U.S. taxation. Consider tax-efficient investment strategies and timing of income recognition.

Q: Can I maintain my U.S. state residency while living in Panama?

Some states aggressively pursue former residents for tax purposes. States like California, New York, and Virginia may claim continued tax jurisdiction unless you properly establish non-residency. Critical steps include changing driver's license and voter registration, establishing Panama domicile with permanent visa, closing state bank accounts, and filing final state tax returns. States with no income tax (Florida, Texas, Nevada) provide cleaner breaks.

Q: Is Panama really a tax haven for American expats?

Panama offers significant tax advantages through territorial taxation, but it's not a complete tax haven for U.S. citizens. You'll pay no Panama tax on foreign-source income, including U.S. investments and pensions. However, U.S. worldwide taxation continues regardless of Panama residency. The key benefit is avoiding double taxation on foreign-source income while potentially using FEIE to reduce U.S. tax on earned income.

Q: What happens to my U.S. retirement accounts when I move to Panama?

U.S. retirement accounts (401(k), IRA, etc.) maintain their U.S. tax treatment regardless of Panama residency. Distributions remain taxable in the U.S. but are foreign-source income exempt from Panama tax. Consider Roth conversions before establishing Panama residency if in a lower tax bracket. Required minimum distributions (RMDs) continue applying at age 73. Panama banks may not accept direct rollovers, so maintain U.S. financial institution relationships.

Q: How does buying real estate in Panama affect my taxes?

Panama real estate purchases may qualify you for residency visas but don't automatically create tax obligations. Property tax applies only to value exceeding $30,000, with new construction often receiving multi-year exemptions. Rental income becomes Panama-source taxable income. Capital gains face 10% Panama tax on sale. For U.S. taxes, report rental income on Schedule E and capital gains on Schedule D, claiming foreign tax credits for Panama taxes paid.

Q: Should I establish a Panama corporation for my consulting business?

Panama corporations make sense if you have Panama-source income or need local liability protection. For purely foreign clients, the corporation may complicate U.S. tax without providing Panama benefits. U.S. CFC rules may eliminate deferral benefits, and Form 5471 filing requirements add complexity. Consider whether a simple sole proprietorship or U.S. LLC might better serve your needs. Professional tax advice is essential for optimal structuring.

Q: Can I use Panama's Pensionado discounts if I'm not retired?

The Pensionado visa requires proving lifetime pension income but doesn't restrict other activities except Panama employment. You can operate businesses, invest, or work remotely for foreign employers. The discounts apply regardless of age if you qualify for the visa. Many younger expats with military or disability pensions access the program. The combination of tax-free foreign income and substantial discounts creates significant financial advantages.

Q: What healthcare options exist for American expats in Panama?

Panama offers quality healthcare at fraction of U.S. costs. Private insurance costs $100-$200 monthly with comprehensive coverage. Hospital Punta Pacifica partners with Johns Hopkins, providing U.S.-standard care. Many doctors trained in the U.S. or Europe. Dental and cosmetic procedures cost 50-70% less than U.S. prices. Medicare doesn't cover Panama services, but savings often exceed Medicare coverage. Some expats maintain international insurance for worldwide coverage.

Q: How do I handle U.S. state tax if I maintain property there?

Owning property doesn't necessarily create state tax residency, but states may claim nexus based on various factors. Rent the property at fair market value to demonstrate investment intent. Limit state visits to avoid triggering residency day counts. Document Panama residency with visa, local address, and ties. Some states tax non-resident rental income regardless. Consider selling state property or transferring to LLC to minimize state tax exposure.

Professional Tax Support for Panama Expats

Living in Panama as an American expat offers unique opportunities through territorial taxation, but U.S. tax obligations continue requiring specialized expertise. At American Expat CPA, we understand the complexities of optimizing your tax position while maintaining full compliance with both Panama and U.S. requirements.

Specialized Panama Expertise

Our team combines deep knowledge of Panama's territorial tax system with comprehensive U.S. tax expertise. We understand how to structure income to maximize Panama's foreign-source exemptions while optimizing U.S. tax positions through FEIE and other strategies. Our experience includes navigating Panama corporation structures, managing real estate investments, and coordinating retirement income to minimize global tax burden.

We work with trusted Panama professionals when local tax issues arise, ensuring coordinated planning across jurisdictions. Our expertise covers the full spectrum of expat situations, from retirees leveraging the Pensionado program to entrepreneurs building international businesses from Panama. We stay current with both U.S. tax reform and Panama regulatory changes affecting American expats.

Comprehensive Service Offering

Getting Started

Whether you're planning your move to Panama, already established as a resident, or anywhere in between, American Expat CPA provides the expertise needed to optimize your tax position. We help you leverage Panama's territorial tax advantages while maintaining full U.S. compliance, allowing you to focus on enjoying the Panama lifestyle.

Disclaimer: The information in this page is provided for general reference only and should not be considered professional tax advice. Tax laws and regulations change frequently, and individual circumstances vary significantly. Before making any decisions or taking action based on this information, consult with qualified tax professionals familiar with both U.S. and Panama tax law. While efforts have been made to ensure accuracy, no guarantee is provided regarding the completeness or applicability of this information to your specific situation.