Understanding Payroll in Panama: What Global Companies Need to Know About Panama Payroll

According to the US Department of State, Panama boasts the fastest growing economy in the entire Western Hemisphere. Heavily based in services (over 90%), Panama has the second largest free trade zone in the world and has an infrastructure in place to support foreign business activity. Its democratically elected government is also a major positive for companies coming from the West.

However, Panama is far from a business utopia due to its minimal levels of education, fraud in the judicial system, and dearth of skilled workers. Foreign investors face a somewhat clandestine system of government that tends to take advantage of the less informed, less connected newcomer – which can make establishing business and payroll operations in Panama unfortunately complex.

Getting Started

Because of government corruption, launching business operations in Panama is challenging. The government of Panama tends to favor foreign investors with at least $2 million to spend in the country. This baseline is a result of the 1998 Investment Stability Law, which guaranteed foreign investors at and above this baseline equal treatment with respect to domestic companies. Those under the baseline face an understaffed and possibly contentious process of registering a business within the country.

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The general procedure includes hiring a registered agent in the country, a requirement to prepare the Articles of Incorporation. Registration with the Mercantile Division of the Public Registry is then required, a 2-day process. There is an annual franchise tax that must be rendered: the equivalent of USD $250 along with the entry fees of USD $50 for the first USD $10,000 of capital stock, with USD $0.75 required for every additional USD $1,000 of stock. Companies must then get a Notice of Operation through the Ministry of Trade and Industry, a one day process, and request an EIN (employer's inscription number) from the SSA, another one day process.

Employment Considerations

All foreign national employment issues are handled under Labour Code 1971. In general, Panama does not allow employment contracts to extend beyond a single year, and foreign national work permits must be renewed after a year in the country. In general, it is difficult to move a workforce into Panama; the government applies restrictions as the number of foreign nationals employed inches towards 15% of the company’s workforce.

Employers may require medical examinations along with other background checks. Collective bargaining agreements are common, but only within transportation, construction, and manufacturing. Panama also limits the workday to 8 hours and the maximum work week to 48 hours. Employees must be allowed to rest a minimum of half an hour every day. Most impressively, employees who have been employed for at least 2 years begin to enjoy a right known as "labor stability," which is the approximate equivalent of tenure in the United States.

Compensation, Bonuses, Severance Pay

Independent contractors have no statutory employment rights in Panama. Employees have the right to severance pay when let go. Employees who have been employed for less than 2 years also have the right to one month's salary as advance pay.

The minimum wage is restructured every 2 years by law by the Minimum Wage Commission. Currently there are 2 regional distinctions with respect to the minimum wage. There are many severance payment requirements that an employer must take into account upon terminating an employee in Panama, including a seniority premium, holiday payment and the "proportional 13th month" bonus.

Tax Requirements, Collection & Withholding

To properly process payroll, the employer must make social security contributions in an amount equal to 13.5 percent of the total remuneration of the employee and must withhold 9.75 percent on the employee’s behalf and remit it to the authorities. In addition to social security contributions, the employer must pay educational insurance tax at a rate of 1.5 percent of an employee’s remuneration. The employer also pays workers’ compensation insurance premiums at rates ranging from 0.56 percent to 5.67 percent of the remuneration (depending on the risk associated with the occupation).

The minimum income to be taxed in Panama is USD $11,000. All employees, both domestic and foreign national, are only taxed on the work that they perform in the country. This is regardless of whether payments are made or received domestically or abroad.

Tax rates are as follows:

• Income between USD $11,000 and USD $50,000 - 15% on the income over USD $11,000
• Income above USD $50,000 - Flat rate tax of USD $5,850 on all earnings up to USD $50,000 and 25% of income on all monies earned about USD $50,000

Leave – Sick, Maternity, Vacation, Absence, Holidays

Employees enjoy 18 paid days leave for injury or illness. Maternity leave is 14 weeks starting 6 weeks before childbirth, with paid leave rights that extend if the childbirth is delayed.

Navigating Payroll in Panama

Panama is a country that is on the verge of new levels of commerce, and now is a great time to get in ahead of expected growth. However, you need the right connections to ensure that your rights as an employer are followed. Deploying a holistic global payroll solution with experience in Panama can help ensure that your business in the country of Panama starts off on the right foot.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.