Sworn Statement Of Capital Gains In Panama



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The author discusses Law No. 5 of January 25, 2006 modifying Article 5 of Law 108 of 1974 which grants incentives for exports and indicates other provisions.

Law No. 5 of January 25, 2006 modifying Article 5 of Law 108 of 1974 which grants incentives for exports and indicates other provisions, sets forth, in its Article 2, that it modified Article 701 of the Fiscal Code, to wit:

"Article 701. With the purpose of calculating the Income Tax for the cases mentioned below, the following rules must be followed:

In the case of earnings resulting from the disposal of immovable property, the taxable income will be the difference between the real sale value and the sum of the assetís basic cost, the amount of the improvements made and the expenses necessary to carry out the transaction.

If the sale of immovable assets fall within the taxpayerís regular dispatch of business, the payable tax will be calculated based on the rates established in Articles 699 or 700 of the Fiscal Code.
In the event the sale of immovable property does not fall within the taxpayerís regular dispatch of business, the taxpayer will pay an income tax amount based on a fixed and final 10% (ten percent) rate, payable prior to the registration of the corresponding Public Deed at the Public Registry, together with the two percent (2%) Immovable Property Transfer Tax. In such cases, the relevant sale shall not be counted in determining the taxpayerís taxable income and the taxpayer will not be able to deduct the amount of the transfer tax incurred. The Income Directorate General of the Ministry of Economy and Finance is hereby empowered to regulate this matter.

It is understood that for the first disposal or sale of an immovable asset as of the passing of this law, the assetís basic cost will be its assessed value on the aforementioned date or its book value, whichever is lower.

Nevertheless, up until the 30th of June 2006, the taxpayer may opt to submit an affidavit of the new assessed value, according to the provisions of Article 766-A of this Fiscal Code and, consequently, the new assessed value will be taken as the basic cost as of its date of acceptance by the Land Register and Property Assets Directorate of the Ministry of Economy and Finance.

If two or more disposals have taken place in one taxable year, the total earnings in each operation will be taken as proceeds, it being understood that in no case may such total be negative for tax purposes. The result must be added to the taxable income from other sources of the year in which the disposal took place in order to obtain the applicable rate. The rate so obtained will be multiplied by the total earnings of the sale, and the result will be the applicable tax".

In practice, the Income Directorate General prepared a sworn declaration of capital gains form which describes the value of the disposal, the basic cost (which is the assessed value recorded), the improvements incorporated and the disposal expenses (specific documents, such as invoices, receipts, notary expenses, public registry and legal fees, must be added).

In addition, the same form is used for determining the capital gain regarding securities and movable assets, such as bonds, stock, interests, securities issued by bodies corporate and earnings obtained from other movable goods.

Experience shows that in order to deduct expenses, the Income Directorate General accepts statements of account furnished by notaries and the calculation made prior to the settlement of registration fees at the Public Registry.

In the sale of a beach house made for the amount of $35,000 (THIRTY-FIVE THOUSAND DOLLARS AND 00/100), the assessed value of which was US$6,600.00, the sum of US$2,800.00 was paid for capital gains and the sum of US$700.00 for the two percent (2%) Immovable Property Transfer Fee; since no receipts evidencing the expenses incurred in order to make the sale were available, the Income Directorate General did not deduct any expenses in calculating the capital gains.

In case the sale of immovable assets falls within the taxpayerís regular dispatch of business, as is the case of the developers of housing, condominium and tourist projects, the payable tax will be calculated on the basis of the rates indicated in the Fiscal Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ABOUT THE AUTHOR: Rodrigo Julio Molina Ortega
Rodrigo Julio Molna Ortega, investment advisor.

Copyright Molina & Co.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.



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