Panama Friendly Nations Visa

Local tax regime and what it means for you

Panama uses a territorial tax regime. That means only Panamanian-source income is subject to local tax; income earned outside Panama is generally outside the Panamanian tax net. For a Friendly Nations Visa holder, this distinction is crucial. Salary from a foreign employer paid into a US or Canadian account, dividends from ETFs in a foreign brokerage, rental income from property in the US, Canada, the UK, or Australia, and pension distributions from foreign plans are treated as foreign-source and are not taxed in Panama under the territorial rules. By contrast, income from a local Panamanian job (w2), contractor work performed for Panamanian clients, or profits from a Panamanian company (owner or self_employed) will fall into the taxable bucket.

Capital gains on foreign investments

Capital gains from selling foreign securities, such as index funds or ETFs held in a US, Canadian, or European brokerage, are generally exempt under territorial rules because the income is foreign-source. Selling a US-listed S&P 500 ETF in a US brokerage, for example, would not create Panamanian taxable income, regardless of whether the proceeds are later transferred to Panama. Gains on Panamanian real_estate or shares of Panamanian companies, however, are subject to local capital gains tax at the rates in force at the time; these rates are set by domestic law and not specified in this visa’s facts, so they should be confirmed with a local advisor before transacting.

Tax residency triggers and filing

Panama’s tax residency framework is not defined by this visa alone; it is driven mainly by presence and local ties. In practice, spending 183 days or more in Panama in a tax year, or establishing a habitual abode and center of vital interests there, is what turns you into a Panamanian tax resident, not merely holding a 24-month Friendly Nations permit. If you remain under 183 days and keep your main economic and family base elsewhere, you are often treated as non-resident for local tax purposes, with filing obligations limited to Panamanian-source income, if any. Local filing mechanics, including whether you must obtain a Panamanian tax ID and submit an annual return in a low-or-zero-income scenario, are not publicly specified for this visa category and should be confirmed case by case.

Tax treaty status with the US

Panama’s tax treaty status with the United States is partial. There is some bilateral framework, including elements affecting shipping, air transport, and the Panama Canal, but there is no comprehensive income tax treaty that would, for example, fully eliminate double taxation on dividends, capital gains, or ordinary salary. There is also no full Social Security totalization agreement covering US Social Security contributions for US workers in Panama. For most Friendly Nations Visa holders with foreign passive income, the practical effect is that US-source investment income keeps its usual US tax treatment, Panamanian-source income is taxed in Panama, and cross-border relief relies more on US unilateral mechanisms (like the Foreign Tax Credit on Form 1116) than on treaty provisions.

For US Citizens and Green Card Holders

US citizens and green card holders on the Panama Friendly Nations Visa remain fully subject to US worldwide taxation. The territorial system in Panama does not change your obligations to the IRS.

For earned income from remote_work, self-employment, or consulting, the Foreign Earned Income Exclusion on Form 2555 can shelter up to 126500 USD of 2024 earned income (indexed in later years). This includes W2-style income from a foreign employer and self_employed income from foreign clients, but not dividends, capital gains, rental income, pension or IRA distributions, or Social Security. With this visa’s 1 days/year physical presence requirement and the ability to be absent up to 730 days, many FIRE users will not meet the 330-day Physical Presence Test unless they consciously base themselves abroad most of the year; the Bona Fide Residence Test is easier to meet if you genuinely make Panama your primary home for multiple years.

When Panama does not tax your foreign-source income, the Foreign Tax Credit on Form 1116 has limited use for that income stream. A remote worker taxed only in the US on US-source salary, or an investor with only US-taxed dividends and capital gains, will have little or no Panamanian tax to credit. FTC becomes relevant if you have Panamanian-source earnings: local salary, local business profits, or gains on Panamanian real_estate. In those cases, the Panamanian tax paid can offset US tax on that same income up to the US rate.

FBAR (FinCEN Form 114) and FATCA Form 8938 remain pivotal. Any time your aggregate foreign financial accounts (Panamanian banks, brokers, or even prepaid cards) exceed 10000 USD at any point in the year, you must file FBAR electronically with FinCEN; non-willful penalties start at 10000 USD per violation. FATCA Form 8938 has higher thresholds but overlaps in scope. The Friendly Nations Visa does not legally require a local bank account, but many residents open one to manage 5000 USD savings or investment-related cash flows, so these reporting thresholds are easy to trip.

The optimal approach is coordinated planning: a US CPA who specializes in expat taxation to handle Forms 2555, 1116, 8938, and FBAR, and a Panamanian tax advisor for local residency, source-of-income analysis, and any required returns. The 1500–3000 USD you spend in year one on this paired advice usually pays for itself through avoided FBAR/FATCA penalties and better choices about where to recognize and source income and capital gains.