Capital Gains Tax on the Transfer of Shares in Panama

As a general rule, the transfer of Panamanian shares combines a final tax of 10% on the net gain with advance withholding of 5% on the total transaction value. The different bases explain why evidence of cost, grounds for non-taxability and the refund procedure are decisive.

General tax framework

The sale or transfer of shares, equity interests, bonds and other securities issued by Panamanian legal entities is generally subject to specific tax treatment separate from the ordinary income tax regime: the capital gains regime. Its basis is Article 701(e) of the Tax Code, with implementing provisions in Articles 117-A to 117-E of Executive Decree 170 of 27 October 1993, subsequently supplemented and amended by Executive Decrees 135 of 2012 and 62 of 2018.

The regime is triggered by the existence of securities economically invested in Panama. This broadly defined concept covers securities invested directly or indirectly in the liabilities or equity of legal entities receiving taxable income in Panama. It also covers indirect investment through securities issued by individuals or legal entities not domiciled in Panama that directly or indirectly own securities issued by Panamanian legal entities generating taxable income. This broad definition seeks to prevent the interposition of foreign companies in the ownership chain from avoiding the tax.

Taxable income rules: which gains are taxable and which are not

Article 117-A of Executive Decree No. 170 of 1993 establishes three basic rules on tax liability, applicable to Income Tax, Dividend Tax, and Complementary Tax:

• Gains derived from the sale or transfer of bonds, shares and other securities issued or guaranteed by the Panamanian State are not considered taxable, nor are losses deductible.
• Gains from the sale or transfer for consideration of bonds, shares, equity interests and other securities issued by private legal entities are taxable.
• Gains derived from the sale of securities as a result of accepting a public tender offer (PTO) are also considered taxable, in accordance with the provisions of Decree Law 1 of July 8, 1999.

Tax Mechanics: Fixed Rate and Advance Withholding

Once it has been determined that the transaction is taxable, Article 117-B of Executive Decree No. 170 of 1993 establishes that capital gains treatment will be applied, calculating the final tax payable on the gain obtained at a fixed rate of ten percent (10%).

The law, however, does not leave the collection of this tax solely to the seller’s subsequent declaration. It imposes on the buyer or acquirer the obligation to withhold, at the time of payment, a sum equivalent to five percent (5%) of the total value of the sale or transfer, as an advance payment of Income Tax, and to remit said sum to the Tax Authority within ten (10) business days following the date of payment. The seller then has the option of considering this withheld amount as the final tax payable on the capital gain, without the need for additional settlement.

It is important to note that the withholding tax base (5% on the total value of the transfer) and the final tax base (10% on the net gain obtained) are conceptually distinct. When the sale price is substantially higher than the acquisition cost, both figures tend to converge; however, when the profit margin is small relative to the total value of the transaction, the 5% withholding tax on the total price can significantly exceed the 10% payable on the actual profit, resulting in an overpayment to the seller. This situation is precisely what gives rise to the refund mechanism explained in section 6.

Cases in which withholding does not apply

Article 117-D of Executive Decree No. 170 of 1993, as amended by Executive Decree No. 62 of 2018, recognizes that there are sales or transfers of shares or securities that, by their very nature, do not generate capital gains. In these cases, the 5% withholding tax does not apply. The grounds recognized by the regulation are the following:

• Transfers or alienations in favor of the State, its autonomous institutions, municipalities, and associations of municipalities.
• Transfers or alienations between relatives within the first degree of consanguinity and between spouses.
• Transfers or alienations of shares through appropriation, sale, or judicial or extrajudicial liquidation of securities, as a result of the execution of a guarantee established through a guarantee trust or pledge to secure financing.
• Transfers or alienations of securities free of charge between persons not included in the above cases, when it can be determined, in the opinion of the Directorate General of Revenue (DGI), that no capital gain was generated.
• Sales or transfers of securities for valuable consideration in which, also in the opinion of the DGI, it can be determined that no capital gain was generated.

For gratuitous transfers and transfers for consideration without a gain, the law does not rely solely on the parties’ assertions: it requires that both the buyer or acquirer and the seller or transferor document the reasons why withholding is not applicable. This documentation must be attached to the Capital Gains Tax Return and consists, at a minimum, of a notarized sworn statement signed by the parties attesting to the gratuitous nature of the transfer (or the absence of profit, as the case may be), accompanied by a sworn certification before a notary public, issued by a Certified Public Accountant, also confirming this circumstance.

The rules also preserve the tax cost: when a person subsequently disposes of securities received through a transfer that generated no capital gain, the cost of those securities must be the weighted average of the price actually paid by the transferor, for purposes of calculating any income tax arising on that later disposal.

The special regime for securities registered with the Superintendency of the Securities Market

Article 117-E of Executive Decree No. 170 of 1993, as amended by Executive Decree No. 62 of 2018, excludes from tax, for purposes of Income Tax, Dividend Tax, and Complementary Tax, the gains derived from the sale or transfer of three categories of securities:

• Securities issued or guaranteed by the State.
• Securities of issuers registered with Panama’s Superintendency of the Securities Market, provided the transfer takes place through a stock exchange or other organised market.
• Securities of registered issuers, as well as their subsidiaries or affiliates, when the transfer results from a merger, consolidation, or corporate reorganization pursuant to paragraph 2 of Article 334 of the Consolidated Text of Decree Law 1 of 1999, provided that in exchange for the transferred shares, only other shares of the surviving or reorganized entity, or of a subsidiary or affiliate thereof, are received.

This last exclusion allows for a degree of operational flexibility: the surviving or reorganized entity may pay its shareholders or participants up to one percent (1%) of the value of the shares received in cash or other assets, for the sole purpose of avoiding fractional shares, without such payment altering the non-taxable nature of the transaction.

The Mechanism for Refunding the Withheld Advance

When the amount withheld by the buyer (5% of the total sale value) exceeds the final tax payable (10% of the net profit), Article 117-C of Executive Decree No. 170 of 1993 grants the seller the right to request a refund of this difference from the General Directorate of Revenue.

The request must be accompanied by a sworn statement detailing, at a minimum: the sale price of the securities; the acquisition cost of said securities; the amount of expenses necessary to carry out the transaction (commissions, legal fees, notary fees, among others); the resulting profit or loss; the amount of tax calculated at the rate of 10% on that profit; and the amount actually withheld by the buyer; and the total amount requested as a refund.

The DGI (General Directorate of Revenue) resolves this request by means of a reasoned resolution, and the refund may be granted, at the seller’s option, in cash, as a tax credit applicable to the payment of other taxes administered by the DGI itself, or as a credit transferable to other taxpayers.

An illustrative case

The following example, with figures and structure taken from a real case (identities omitted for confidentiality reasons), illustrates the mechanics of the refund. A foreign company, holding one hundred percent (100%) of the shares of a Panamanian company, sold that shareholding in its entirety through a share purchase agreement, for a sale price of US$353,279.03. Pursuant to Article 701, paragraph e), of the Tax Code, the buyer withheld 5% of the total sale price from the seller, equivalent to US$17,663.95, and remitted it to the Tax Authority within the legal deadline of ten business days, by submitting Form No. 108.

The seller’s acquisition cost of the shares was US$300,000.00, resulting in a net profit of US$53,279.03. Applying the 10% tax rate to this profit, the final tax due amounted to only US$5,327.90, a figure substantially lower than the US$17,663.95 already withheld and paid to the Tax Authority, thus generating a difference in favor of the seller of US$12,336.05.

Based on this difference, and having demonstrated compliance with each of the requirements of Article 117-C, the seller is in a position to formally request a refund of the overpaid amount from the DGI (General Directorate of Revenue). This case illustrates a pattern that frequently recurs in transactions involving the purchase and sale of company shares: when the profit margin on the sale price is proportionally small, the 5% withholding tax on the total value almost always exceeds the final 10% tax on net profit, resulting in a recoverable credit that, in practice, many sellers fail to claim due to a lack of understanding of the mechanism.

Corporate Reorganization as a Cause of Non-Taxability

A scenario of particular practical relevance, distinct from the special regime for securities described in section 5, is that of corporate reorganizations within the same economic group. These are governed by subparagraph d) of Article 117-D of Executive Decree No. 170 of 1993, which exempts gratuitous transfers of securities from withholding tax when it can be demonstrated that no capital gain was generated.

The Directorate General of Revenue has confirmed this criterion through legal opinions issued regarding corporate reorganizations: as long as there is no actual gain for the new acquirers as a result of the transfer of shares, the event that triggers the capital gain tax obligation simply does not occur. The legal basis for this position is precisely the aforementioned Article 117-D, which does not exempt parties from the obligation of providing supporting documentation, but rather reformulates it: instead of calculating and withholding the tax, the parties must adequately substantiate why the transaction did not generate any profit.

The gratuitous transfer of shares within an economic group: typical clauses

In practice, agreements for the gratuitous transfer of shares used to implement corporate reorganizations within the same economic group usually incorporate, at a minimum, two specific stipulations aimed at supporting the tax treatment of the transaction:

A clause that expressly states the gratuitous nature of the transfer, without consideration between the parties, and bases it on Article 701, paragraph e), of the Tax Code, and on Article 117-D, paragraph d), of Executive Decree No. 170 of 1993, added by Executive Decree No. 135 of 2012 and modified by Executive Decree No. 62 of 2018, specifying that, since no capital gain is generated for the acquirers, the transaction is not subject to withholding tax.

A second clause that translates the documentary standard required by the regulations into concrete obligations for the parties, committing them to:

• Document the reasons why withholding tax does not apply to the transfer of shares.
• Attach to the Capital Gains Tax Return a duly notarized sworn statement, signed by all parties, attesting to the gratuitous nature of the transfer.
• Submit a sworn certification before a notary public, issued by a Certified Public Accountant, confirming that the transfer is made gratuitously and does not generate a capital gain.
• Sign the necessary supplementary documents, including submitting Form 108 (Sworn Statement of 5% Withholding as an Advance Payment of Income Tax on Capital Gains), within the legal deadline of ten business days from the closing date of the transaction.

The withholding exemption in these cases is neither automatic nor presumed. It depends on properly preparing the supporting notarised sworn statement and certified public accountant’s certification and attaching them to the relevant return. Missing or insufficient evidence exposes the parties to the risk that the DGI will reject the exemption and assess withholding, together with the applicable penalties and surcharges.

The sale of a company with underlying real estate: how to determine the true sale value

A common conceptual error in share transactions of companies whose main or only asset is real estate, as with real estate holding companies, is assuming that the sale value of the shares is equivalent to the nominal value of the company’s paid-in share capital. This is not the correct approach from either a commercial or a tax perspective.

The true economic value of the shares of a company holding real estate is determined by its net worth, according to the basic accounting identity: assets minus liabilities equals net worth. Consequently, it is this net worth, and not the nominal share capital registered in the articles of incorporation, that must be used as the reference for setting the sale price of the shares. The taxable capital gain, in accordance with Articles 117-A to 117-C already explained, will be calculated on the difference between this sale price and the acquisition cost of the shares.

Ignoring this distinction has significant practical consequences: setting the sale price based on the nominal share capital, when the actual value of the underlying property net of any associated liabilities is substantially higher, can subject the transaction to scrutiny by the tax authorities for undervaluation, in addition to generating an artificially reduced capital gain tax base that does not reflect the economic reality of the transaction.

The seller’s representations and warranties as a mechanism for protecting the buyer

Precisely because of the importance of the underlying asset in determining the price, preliminary purchase agreements for shares of real estate holding companies almost always include a set of representations and warranties that the prospective seller grants to the prospective buyer, among which the following stand out:

• That the company is valid and duly constituted, and is in force in accordance with the laws of the Republic of Panama.
• That the prospective seller is the sole and legitimate owner of the shares being sold, which are free of any encumbrance, lien, attachment, purchase option, or any other restriction that affects their free disposal and transfer, unless the parties expressly declare otherwise in writing before signing the final agreement.
• That there are no undisclosed shareholders or third parties with rights over the shares other than the prospective seller, and that the shares being sold constitute the company’s entire issued share capital.
• That, except as expressly stated in writing, there are no pending lawsuits, claims, debts, or obligations, nor any encumbrances other than those registered in the Public Registry, affecting the company or the real estate.
• The commitment to keep the shares and the real estate free of any new liens, encumbrances, or attachments from the signing of the preliminary agreement until the execution of the final agreement.
• That all the information provided to the prospective buyer regarding the company and the real estate is true, accurate, and correct.

These representations and warranties serve a dual purpose. From a strictly contractual perspective, they protect the buyer against hidden contingencies that could affect the true value of the assets they are indirectly acquiring through the shares. From a tax perspective, they reinforce the traceability and reliability of the valuation used to set the sale price, which is especially relevant if, in the future, the transaction is reviewed by the tax authorities regarding the reasonableness of the agreed price and, by extension, the declared capital gain.

Conclusion

Panama’s capital gains regime for share transfers combines a final rate of 10% on the net gain with advance withholding of 5% on the total transaction value. Because the bases differ, the advance may not equal the actual liability, making the Article 117-C refund mechanism an important tool that is often underused. The regime also recognises legitimate cases of non-taxability, including transfers to the State, between close relatives, on enforcement of security and within reorganisations of the same economic group, subject to specific, verifiable documentation. For real estate holding companies, setting the sale price by reference to actual net worth rather than nominal share capital is essential both to the contract and to supporting the parties’ tax position in a subsequent review.

Frequently asked questions

Can a sale of shares trigger tax in Panama?

Yes, when the transaction falls within Panama’s capital gains rules. The company, assets, parties and source of the income must be analysed.

Is withholding required when shares are transferred?

The regime provides for withholding or advance payment in certain circumstances. Its application and any final tax settlement depend on the circumstances of the transaction.

What documents should be retained?

Contracts, evidence of tax cost, payments, returns and corporate documents should be retained so that the calculation and execution of the transaction can be reconstructed.

Official sources and related reading

• General Directorate of Revenue: Form 108 and withholding on securities transfers.
• Infojurídica: Executive Decree 170 of 1993.
• Infojurídica: Executive Decree 62 of 2018.
• Tax planning for transactions and asset transfers.

This article provides general legal information and analysis; it does not constitute legal advice for a particular matter. Administrative requirements may change and must be verified when each procedure is undertaken.