The Biggest Mistake that Condo Owners in Panama Make
Owners of apartments or real estate that are subject to the Horizontal Property Regime in Panama, have the obligation to pay taxes, related to their individual real estate unit, as well as regarding the land on which the building is built.
Here we are going to explain why you must pay taxes for your condominium under the Horizontal Property Regime, even if you have a tax exemption for the apartment.
In Panama many years ago, most of the owners of an apartment (which we will now call PH) took into account that if the value of their apartment was less than USD$30,000, they did not have to pay real estate taxes for the land on which the building is built. But as a result of a law created in 2010 that modified the tax code in relation to real estate taxes, it is established that "the first $30,000 of this fee will not apply to the land of the properties subject to the horizontal property regime".
In other words, the land where the building was constructed is taxable since it becomes common land, that is to say, the co-owner's land. The law does not say how to pay the taxes, and generally people forget to pay them and accumulate a debt with the tax office over the years. The Panamanian tax office distributes this tax among all the co-owners of the building and assigns the payment to each one of them in their individual account (according to the respective property number).
In my professional opinion and I agree with other professionals on this, as the land is a common good, that is to say it belongs to all the owners where the building is built, the tax should be paid in full and each owner should deliver his share with the monthly administration fee. But in practice this is not the case. The tax is not included in the common maintenance fees, which is why it is often forgotten. Nevertheless, each individual owner is responsible for paying his taxes and keeping up with his fiscal obligations.
Now why is this happening?
When a property is incorporated into the PH regime, two properties (fincas) are automatically created.
The first property is the PH (the common property) with a different number and which is registered in the PH section of the Public Registry. This property has an initial value that is set by the developer that built the project.
The other properties that are created, are all the apartments, one of them or several can be yours. This is called private property.
The exempted improvements only correspond to each of the properties of the PH, i.e. the apartments, but this does not include the common property, i.e. the building constructed on that land. By law you will not be able to exonerate the real estate tax of that land. Therefore, if the value of the land is 1 million dollars, the tax to be paid is calculate based on this value at the rate of 1%. And this 1% is distributed among all the real estate units, i.e. all the apartments in the building. The 1% is paid in three installments per year: at the end of April, August and December. However, it is possible to pay in advance.
When the exemption period of your apartment expires, you will pay for the value of the apartment plus the amount of the participation coefficient, that is to say, the 1% we have already mentioned.
What if I have a "normal" property? How much do I pay?
As of 2019, properties declared as family patrimony - principal residence (through a special procedure at the tax office, because nothing is automatic in Panama) must pay a real estate tax according to the value declared in the Public Registry, i.e.: Between USD$0 and USD$120,000 = exonerated. Between USD$120,001 and USD$700,000 = 0.5% of the value. Over USD$700,000 = 0.7% of the value.
My property has not been declared a family patrimony, how much should I pay?
From USD$0 to USD$30,000 = exonerated.
From USD $30,001 to USD $250,000 = 0.6% of the value.
From USD $250,001 and USD $500,000 = 0.8% of the value.
Over USD $500,000 = 1.0% of the value.
Banks became property tax withholding agents.
The amendments to the Tax Code now obligates banks in Panama to help the tax office by withholding the respective tax for each apartment or property in general that has been acquired through a mortgage financing. With the exception of new homes which have an exception for up to three years, with the condition that you have never purchased a property before and that it is your first home.
Property Exemptions in Panama: Why?
The developers, or construction companies according to the tax office are recognized a type of exoneration to the constructions of those projects which construction permit was in force prior to 2018. After this date the developers must pay the respective tax from the legal birth of the PH property.
The exonerations in Panama are created with the purpose of promoting the economic development of the country encouraging people, nationals or foreigners who want to do business in Panama and develop the country, and in return the Panamanian government grants them tax incentives. Therefore, farms dedicated to agricultural activities which cadastral value does not USD$350,000.00 are exonerated from taxes every 5 years while maintaining their activity.