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UK-Panama Double Taxation Agreement (DTA): Key Provisions & Benefits

Published by Susan Basnet
Posted Date: June 21, 2024 , Modified Date: July 10, 2024

The UK and Panama signed a comprehensive Double Taxation Agreement(DTA) on 29 July 2013, structured into six chapters and comprising 27 articles. Covering a wide array of tax-related matters, from defining taxable persons to outlining methods for the elimination of double taxation, this agreement aims to provide clarity and fairness in tax matters between the two nations.

The Agreement entered into force on 12 December 2013.

Chapter I – Scope of the Convention

The first chapter of the Convention is titled Scope of the Convention and covers two articles that deal with areas focusing on the Persons and Taxes covered within the Agreement.

Article 1: Persons Covered

Article 1 of the Convention states that the Agreement is applicable to persons who are residents of either or both of the parties of the Agreement.

Article 2: Taxes Covered

As mentioned earlier, Article 2 outlines the taxes regulated by the Convention. These include taxes on both income and capital gains imposed by a contracting state. The article further specifies the types of taxes covered under the Convention, which include:

  • The income tax listed in the Fiscal Code, Book IV, Title I in Panama, referred to as the 'Panamanian tax'.
  • Income tax, corporation tax, and capital gains tax in the United Kingdom, referred to as the 'United Kingdom tax'.

Chapter II – Definitions

Article 3: General Definitions

For the purposes of the Convention, various terms are defined in Article 3 of the Agreement.

  • The term ‘Panama’ broadly means the Republic of Panama.
  • The term ‘United Kingdom’ means Great Britain and Northern Ireland
  • The terms "a Contracting State" and "the other Contracting State" mean Panama or the United Kingdom as the context requires.
  • The term "person" includes an individual, a company, a partnership and any other body of persons.
  • The term ‘‘enterprise’’ applies to the carrying on of any business
  • The term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State
  • The term "competent authority" means the Ministry of Economy and Finance or its authorised representative in Panama and the Commissioners for Her Majesty’s Revenue and Customs or their authorised representatives in the United Kingdom.
  • The term ‘national’ means any individual possessing the nationality of Panama, and any British citizen, or any British subject not possessing citizenship of any Commonwealth Contracting State but with the right to abode in the UK.

Article 4: Resident

Article 4 defines the residency status of a person for the purposes of this Convention, whether an individual or a company. According to the article, a person is considered a resident in the UK for tax purposes if they are liable to tax in the UK due to their domicile, residence, place of management, place of incorporation, or any other similar criterion.

Resident- Double Taxation Agreement

However, the term 'resident' does not apply to those who are liable to tax in the UK only on income or capital gains from sources within the UK. The same definition is used to determine the residency status for individuals from Panama. If an individual qualifies as a resident of both Panama and the UK under this definition, their residency status will be determined based on additional factors, mainly:

Permanent Home: An individual is considered a resident of the Contracting State where they have a permanent home. If the person has a permanent home in both territories, their residency is determined by the proximity of their personal and economic relations to each Contracting State.

Habitual Abode: If the permanent home test fails, either because there is no permanent home or the proximity of relations cannot be established, a person is considered a resident of the Contracting State where they have a habitual abode, i.e., where they spend a significant amount of time.

Nationality: if the individual has a habitual abode in both States, or in neither of them, he shall be deemed to be a resident only of the State of which he is a national.

If all three of these tests fail, the question of residency will be settled by mutual agreement between the competent authorities of the two territories. In the absence of such an agreement, the person shall not be considered a resident of either Contracting State and therefore cannot claim any benefits under the Agreement, except for the elimination of double taxation, non-discrimination, and the mutual agreement procedure.

Article 5: Permanent Establishment

Article 5 of the Convention defines the term ‘Permanent Establishment’ as a fixed business location where activities are wholly or partially conducted, such as a management office, branch, office, or factory. Activities such as building sites, construction projects, or supervisory work connected to these projects are considered permanent establishments only if they last more than nine months.

If an enterprise from one Contracting State provides services in another State either through individuals present for over 183 days in a year with more than 50% of revenue from those services, or for over 183 days for the same or related projects, it's deemed to have a permanent establishment in that other State.

Certain activities are particularly excluded from this definition, such as facilities solely for storage or merchandise delivery or maintaining a business location solely for purchasing goods or gathering information for the enterprise. However, these exemptions cease to apply if the enterprise or a closely affiliated entity engages in business activities at the same location or elsewhere within the same Contracting State.

An enterprise does not automatically establish a permanent establishment in a Contracting State solely because it conducts business there through an independent broker or agent, or due to control relationships between companies from different territories.

Chapter III – Taxation of Income

Article 6: Income from Immovable Property

Immovable property is a common source of income for residents in both territories, and the taxation of such income is covered in Article 6 of the Agreement.

Typically, such income earned in the other Contracting State may be taxed in the Contracting State of income’s origin. The definition of ‘immovable property’ is defined in the same way as it is under the law of the Contracting State in which the property is situated. However, the term clearly excludes ships, boats and aircraft.

For the purposes of Agreement, the income could origin via the direct use, letting or use in any form of immovable property, whether by individuals or enterprises.

Article 7: Business Profits

Generally, enterprise profits are taxed only in the Contracting state they are earned, but if the enterprise operates in another Contracting State via a permanent establishment, the profits attributable to the permanent establishment may face taxation there. The attributable profits are the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities.

Business Profits- Double Taxation Agreements

If one Contracting State adjusts the profits attributable to permanent establishment of an enterprise from another Contracting State and taxes the profits already taxed in the other Contracting State, the other Contracting State shall make an appropriate adjustment to the amount of tax charged on those profits to eliminate the double taxation. The competent authorities of both territories will consult each other as necessary to determine such adjustments.

Article 8: Shipping and Air Transport

Similar to business profits, the profits of an enterprise of a Contracting state from the operation of ships or aircraft in international traffic are taxable only in that State. For the purposes of the Article, the profits encompass:

For the purposes of this article, such profits must be from activities incidental to the operation of ships or aircraft in international traffic, including:

  • Profits from the rental on a bareboat basis of ships or aircraft,
  • Profits from the use, maintenance or rental of containers used for the transport of goods.
  • Profits from the participation in a pool, a joint business or an international operating agency.

Article 9: Associated Enterprises

As per Article 9 of the Agreement, an appropriate adjustment must be made by the two states in regard to the tax on profits from associated enterprises. The article applies in two scenarios:

  • When an enterprise from a Contracting State is directly or indirectly involved in the management, control, or capital of an enterprise in the other Contracting State, or
  • When the same persons are directly or indirectly involved in the management, control, or capital of enterprises in both Contracting States.

If either of these conditions is met and the terms between the two enterprises differ from those between independent enterprises, resulting in unreported profits, those profits may be added to the taxable profits of the enterprise.

Additionally, if a Contracting State taxes profits of its enterprise that have already been taxed by the other Contracting State —and those profits would have accrued to the first enterprise under independent conditions—the other Contracting State will adjust the tax amount appropriately. This adjustment will consider the other provisions of the Agreement, and the competent authorities of both Contracting States will consult each other if needed.

Article 10: Dividends

Dividends paid by a company in one Contracting State to a resident of the other Contracting State can be taxed in that other Contracting State. However, these dividends can also be taxed in the Contracting State where the company paying the dividends is based, but the tax rate cannot exceed 15% if the recipient is a resident of the other Contracting State.

Nevertheless, dividends will not be taxed in the Contracting State where the paying company is based if the recipient, who is a resident of the other Contracting State, meets one of the following conditions:

  • The recipient is a company with share capital, holding at least 15% of the company paying the dividends, provided that:
  • The recipient company's shares are regularly traded on a recognised stock exchange, or
  • At least 50% of the recipient company's shares are directly or indirectly owned by residents or companies whose shares are traded on a recognised stock exchange, and these companies are either residents of one of the two countries or enjoy similar or better tax benefits under a double taxation agreement (DTA).
  • The recipient company is actively conducting business (other than managing investments for its own account, unless it's a bank or insurance company) in its resident Contracting State.
  • The recipient is a government entity or a local authority.
  • The recipient is a pension scheme.

When a company from one Contracting State earns profits or income from the other Contracting State, that other Contracting State cannot tax the dividends paid by the company, except if the dividends are paid to a resident of that other Contracting State or if the holding related to the dividends is connected to a permanent establishment in that Contracting State. Additionally, the other Contracting State cannot impose a tax on the company's undistributed profits, even if those profits originate from within that Contracting State.

Article 11: Interest

Interest earned in one Contracting State and beneficially owned by a resident of the other Contracting State may be taxed in that other Contracting State. However, the Contracting State where the interest arises can also tax it, but if the beneficial owner is a resident of the other Contracting State and meets specific conditions, the tax cannot exceed 5% of the gross interest amount. The application of this limitation will be mutually agreed upon by the authorities of the two countries.

Regardless, interest paid to a resident of the other Contracting State will only be taxed in that other Contracting State if the beneficial owner is:

  • A Contracting State, its Central Bank, or any of its political subdivisions or local authorities.
  • In connection with the sale on credit of merchandise or equipment to a company in one of the countries.
  • An entity or financial institution providing financing under an agreement between the governments of the two countries.
  • A pension scheme.

For the 5% tax cap to apply, the beneficial owner must be:

  • An individual.
  • A company with shares regularly traded on a recognised stock exchange.
  • An unrelated and independently operating financial institution.
  • Any other company, provided the competent authority determines that obtaining the tax benefit was not the main purpose of its establishment, acquisition, or maintenance.

Additionally, the interest must be paid by:

  • A Contracting State or its political subdivision or local authority.
  • A bank in the ordinary course of its business.
  • On a quoted Eurobond.

The provisions do not apply if the beneficial owner, a resident of one Contracting State, has a permanent establishment in the other Contracting State where the interest arises and the debt-claim is connected with this establishment; in such cases, the business profits article will apply. Interest is considered to arise in the Contracting State where the payer is a resident, but if the payer has a permanent establishment in a Contracting State where the debt-claim was incurred, the interest is deemed to arise in the Contracting State of the permanent establishment.

Article 12: Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, the laws of the State may lead to such royalties being taxed in the Contracting State as well. The catch here is that where the beneficial owner of the royalties is a resident of the other Contracting State, the tax must not exceed 5% of the gross royalties’ amount.

Typically, Royalties are deemed to arise in the Contracting State where the payer is a resident. However, if the payer has a permanent establishment in a Contracting State and the liability to pay the royalties is connected to that establishment, the royalties are deemed to arise in the Contracting State of the permanent establishment.

Article 13: Capital Gains

Article 13 of the Agreement covers the provisions for capital gains tax. The tax treatment of capital gains depends on various factors, such as the type of assets and the seller's residency. The provisions can be summarised as follows:

Capital gains- Double Taxation Agreement

Immovable Property: If a resident of one Contracting State sells immovable property located in the other Contracting State, the gains from the sale may be taxed in that other Contracting State.

Shares and Interests: Gains from selling shares or similar interests that derive more than 50% of their value from immovable property in the other Contracting State can be taxed in that other Contracting State.

Business Property: Gains from selling movable property that is part of the business property of a permanent establishment in the other Contracting State may be taxed in that other Contracting State.

Ships and Aircraft: Gains derived by a business from selling ships or aircraft operated in international traffic or from movable property related to the operation of such ships or aircraft will be taxed only in the Contracting State where the business resides.

Other Assets: Gains from the disposal of assets not described above will only be taxed in the Contracting State where the seller is a resident.

Article 14: Income from employment

Subject to provisions not yet discussed, salaries, wages, and other similar remuneration earned by a resident of a Contracting State in respect of employment are taxable only in that State. However, the remuneration may be taxed in the other Contracting State as well, if the employment is exercised in the other State.

However, even if the work is done in the other Contracting State, the income will only be taxed in the resident's home Contracting State if all of the following conditions are met:

  • The employee is present in the other Contracting State for no more than 183 days in any twelve-month period starting or ending in the relevant fiscal year.
  • The payment is made by, or on behalf of, an employer who is not a resident of the other Contracting State. and
  • The payment is not charged to a permanent establishment that the employer has in the other Contracting State.

Additionally, income earned by a resident of one Contracting State for employment on a ship or aircraft operating in international traffic (except those operating solely within the other Contracting State) will be taxable only in the resident's home Contracting State.

Article 15: Directors’ Fees

Article 15 of the Agreement titled ‘Directors’ Fees’ states that payments received by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State, may be taxed in the other State.

Article 16: Artistes and Sports persons

Article 16 explains how the income by entertainers is taxed. Specifically, Income derived by a resident of one Contracting State as an entertainer (such as a theatre, motion picture, radio or television artist, or musician) or as a sportsperson from personal activities performed in the other Contracting State may be taxed in that other Contracting State.

Additionally, if the income from personal activities performed by an entertainer or sportsperson is paid to another person rather than to the entertainer or sportsperson directly, that income may still be taxed in the Contracting State where the activities are performed.

Article 17: Pensions

Pensions- Double Taxation Agreements

Pensions and similar remuneration paid to a resident of one Contracting State for past employment are taxable only in that Contracting State. However, they may also be taxed in the other Contracting State if they originate in that State.

Article 18: Government Service

Salaries, wages, and other similar remuneration paid by a Contracting State, or its political subdivision or local authority, to an individual for services rendered to that State, subdivision, or authority shall be taxable only in that State. However, these payments shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

  • Is a national of that State, or
  • Did not become a resident of that State solely for the purpose of rendering the services.

and is subject to tax in that State on such remuneration.

Article 19: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Contracting State where they are studying if they were a resident of the other Contracting State and the payments come from outside the Contracting State where they are studying.

Article 20: Other income

Article 20 of the Agreement document specifies that income not dealt with in the previous articles, regardless of its source, are taxable only in the Contracting State of residence. However, this rule doesn't apply to income from business activities conducted through a permanent establishment in the other Contracting State.

Chapter IV – Methods for Elimination of Double Taxation

Article 21: Elimination of Double Taxation

Article 21 of the Agreement is dedicated to detail how the double taxation would be avoided in the Contracting States. The elimination is done as follows:

In Panama:

  • If a resident of Panama earns income that may be taxed in the United Kingdom according to this Convention, Panama will exempt that income from taxes.
  • Even if income earned by the residents is tax-exempt in Panama, Panama may consider the exempted income in calculation of the residents’ taxes.

In UK:

  • Panamanian taxes paid under Panama's laws and as per this Convention on profits, income, or chargeable gains from Panama sources shall be credited against any UK tax computed on the same profits or income.
  • A dividend paid by a company which is a resident of Panama to a company which is a resident of UK shall be exempted from UK tax.
  • If a dividend paid by a Panamanian company to a UK company (which controls at least 10% voting power in the payer company) is not exempt from UK tax, the credit also considers Panamanian tax on the payer company's profits used for dividend payments.

Chapter V – Special Provisions

Article 22: Non-discrimination

Article 22 of the Agreement outlines several principals related to taxation between Contracting States. It addresses that the nationals of one Contracting State shall not face taxation or requirements in the other Contracting State that are more burdensome than those faced by nationals of the latter State in the same circumstances. The same applies to taxation on permanent establishment of an enterprise, interest, royalties, etc.

However, the article does not require either Contracting State to grant the same tax benefits to non-residents as those granted to residents or nationals.

Article 23: Mutual Agreement Procedure

If a person finds that actions of either or both Contracting States result in taxation not aligned with the Convention, they have the right to present their case to the competent authority of the Contracting State of their residency or, if applicable, their nationality. This presentation must occur within three years of being notified of the action leading to non-compliant taxation. The competent authority will strive to resolve the issue through mutual agreement with the competent authority of the other Contracting State, seeking to prevent taxation that contravenes the Convention. Any agreement reached will be enforced irrespective of domestic law limitations.

The competent authorities of the Contracting States will collaborate to address any interpretation or application challenges arising from the Convention and work towards eliminating double taxation not explicitly covered. They have the authority to communicate directly to negotiate an agreement, and if a mutual resolution cannot be achieved, alternative forms of resolution may be explored.

Article 24: Exchange of Information

Article 24 of this Agreement is focused on exchanging of information between the competent authorities of the Contracting State. As per the Agreement, the relevant information will be exchanged for enforcing the provisions of the agreement. The article also stresses that the information received by a Contracting State must be treated as secret, similar to domestic tax information.

Exchange of Information UK-Panama Double Taxation Agreement

If a Contracting State requests information, the other Contracting State cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the territories are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Contracting State.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Contracting State.
  • Provide information that would reveal trade secrets or contravene public policy.

However, the limitations to supply of information should not be solely due to the fact that the information is held by a bank, other financial institutions, nominee acting in an agency, etc.

Article 25: Members of Diplomatic Missions and Consular Posts

Article 25 of the Agreement clarifies that this convention does not impact the tax exemptions enjoyed by members of diplomatic missions or consular posts as per international law's general rules or special agreements' provisions.

Chapter VI – Final Provisions

Article 26: Entry into Force

It was agreed on the Agreement that convention would be brought into force by the notification from each Contracting States through diplomatic channels. The Agreement was signed on 29 July 2013 and entered into force on 12 December 2013.

The Agreement specified that the Convention's provisions would take effect as follows:

  • Withholding taxes apply to income from January 1, 2014, onwards.
  • Income tax and capital gains tax apply for any year of assessment starting on or after April 6, 2014.
  • Corporation tax applies for any financial year starting on or after April 1, 2014.

In United Kingdom, and

In Panama, the Convention's provisions would take effect as follows:

  • Withholding taxes apply to income from January 1, 2014, onwards.
  • Income taxes and other taxes (excluding withholding taxes) apply for any tax year starting on or after January 1, 2014.

Article 27: Termination

This Convention remains in force until terminated by either Contracting State. Termination requires six months' prior written notice through diplomatic channels after five years from the Convention's entry into force. Upon termination:

In Panama:

  • Withholding taxes cease for income derived from January 1st of the following year.
  • For income taxes and other taxes, the Convention ends for any tax year starting from January 1st of the following year.

In the United Kingdom:

  • Withholding taxes cease for income derived from January 1st of the following year.
  • For income tax and capital gains tax, it ends for any year starting from April 6th following the termination notice.
  • For corporation tax, it ends for any financial year starting from April 1st following the termination notice.

Conclusion

The Double Taxation Agreement (DTA) between the United Kingdom and Panama represents a significant milestone in fostering economic cooperation and ensuring fair taxation practices between the two nations. By providing clarity on tax matters, defining taxable persons and income sources, and outlining methods for the elimination of double taxation, this agreement promotes transparency, efficiency, and mutual benefit.

With clear provisions for resolving taxation disputes, exchanging information, and safeguarding the rights of individuals and enterprises, the agreement serves as a robust framework for facilitating cross-border trade and investment. As both countries continue to deepen their economic ties, the agreement stands as a testament to their commitment to fostering a conducive environment for international business and ensuring tax fairness for their residents and businesses alike.

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