Newsletter:

Dividend Distrubution - Steps to be Considered

03 January 2017

The Dividend is part of the yield of a business which is then divided by the shareholders of a corporation. The dividend constitutes the main remuneration of the shareholders as owners of a corporation. Their amounts must be approved by the General Board of Shareholders of the corporation.

In Panama, legal persons who require a Notice of Operation for commercial and industrial operation in the national territory or those who generate taxable incomes in the Republic of Panama, are required to pay taxation for dividends.

What are the percentages that must be paid in the Taxation of dividends?  

Taxation of dividends will be paid as follows:

  • 10% from profits from Panamanian sources.
  • 5% from profits from exempt, foreign and/or export sources.
  • 5% from profits from the Colon Free Zone, Panama-Pacific Area or any other zone or free zone, whichever is its source.
  • 20% in dividends corresponding to bearer shares.

How should the dividends be distributed as established by Law?

Dividend distribution or participation fees must be sold out in the following order:  

  1. Profits which result from revenues from Panamanian sources or from local internal operations;
  2. Profits which result from revenues from foreign or overseas or operations or from exports.
  3. Profits which result from revenues scheduled in paragraphs f), l), m) of article 708 of the C. F.

When must the taxation of Dividends be paid?

The sums withheld in the taxation of dividends will be referred to the tax collection offices on the following ten (10) days after the date of withholding.

What is the supplementary tax?

The payment of the supplementary tax applies if the businesses do not distribute the profits or distribute profits for less than 40% or 20% respectively and must cover 10% of the difference.

What are the steps that a business must consider when distributing profits?  

Some recommendations we must consider when distributing profits are the following:  

  1. Every business must keep a detailed record of the gains obtained on each fiscal year. This record must include the year, sum of the profits obtained, specify the source of income (local, foreign, exempt, exports, etc.), they must also list the distributions already made and the detailed summary of the supplementary Tax paid each year, since at the time when the tax must be paid, 2% or 4% will be deducted as is the case.
  2. All dividend distribution must include their Minutes from the Board of Shareholders where they authorize said distribution.
  3. Remember that taxation of dividends payment takes place 10 days after the date of distribution. File the form and pay the tax within this period of time to avoid surcharges and interests.
  4. When you prepare Form 07 “Affidavit of Withheld Taxes From Dividends or Participation Fees” verify all the information provided, such as:
  • Date of dividend distribution: remember that between the date of distribution and the tax payment there should be no more than 10 days.
  • Years of Distribution Period: include the year corresponding for the profits to be distributed. Many times when the detail of profits retained year after year is not available, we make mistakes in this item, for example when: profits are distributed on a year for more than what was really earned. Likewise, if you are distributing profits for the current fiscal year, you must include the detail of the preliminary earnings obtained at the time of distribution.
  • Detailed scrutiny of the persons to whom we are distributing and make sure to have all the information necessary that must be included in Form 7.
  • Correctly detail if the profits are from Panamanian sources of nominal shares, Panamanian sources of bearer shares, exempt, export, etc. Remember that this information is important to obtain the percentage of taxation of dividends that must be paid.  
  1. In the supplementary tax estimates to be paid in the Income Tax, you must add the dividend distribution for the tax period reported, you should not include profit distribution for previous years.

Others:

  • Shareholder loans must pay 10% of the Taxation of dividends.
  • Branches of foreign persons will pay 10% income upon 100% of its net taxable income obtained in Panama, less the taxes paid by that same income in the country.  
  • In the dividend distribution prevails the proposed tax regime in the treaties or agreements to avoid double taxation.