Global Tax Alert (News from Americas Tax Center) | 19 August 2013

Panama-UK Double Taxation Convention signed on 29 July 2013

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A Convention for the Avoidance of Double Taxation (the Treaty) was signed between Panama and the UK on 29 July 2013.

The Treaty will enter into force once both countries have completed their legislative approval processes.

The Treaty is a hybrid of the OECD Model Double Taxation Convention and the UN model and its most relevant provisions include the following:

Permanent Establishment (Article 5)

The Treaty follows the traditional definition of permanent establishment (PE), i.e., any fixed place of business through which the business of an enterprise is partially or wholly carried on. It also includes a non-comprehensive list of PE examples such as place of management, branch, office, factory, workshop, mine, oil or gas well, quarry or any other place of extraction of natural resources.

In addition, a building site, construction, assembly or installation project or supervisory activities in connection therewith constitute a PE if such site, project or activities last more than nine months.

The rendering of services is also included in the definition in the following circumstances:

  • If the services are rendered through an individual in a contracting State (other than the country of residence of the enterprise) for a period of more than 183 days (consecutive or not) within any 12-month period, and if 50% of the enterprise's gross income derives from such services performed by the individual; or
  • If the services are rendered for a period or periods exceeding in the aggregate 183 days in any 12-month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State.

Business Profits (Article 7)1

The Treaty follows the general principle whereby the profits of an enterprise of a contracting State are only taxed in that State unless the enterprise has a PE in the other contracting State, with the exception of profits that constitute items of income subject to a specific treatment under the Treaty, e.g., interest or capital gains.

Dividends (Article 10)

Dividends may be taxed in the country of residence of the paying entity, provided the beneficial owner requirement is met, with a withholding tax that should not exceed 15%.

Exceptions to the above include the distribution of dividends that will be exempt from withholding taxes when the beneficial owner of the dividends is a company which is a resident of the other contracting State holding directly at least 15% of the capital of the entity paying the dividends, and provided that the other requirements to prevent abuse of this exemption are satisfied.

An exemption also applies if the beneficial owner of the dividends is “a Contracting State, or a political subdivision or local authority thereof; or pension scheme.”

Interest (Article 11)

Interest is taxed in the contracting State where it is generated but at a reduced rate, which should not exceed 5% if certain conditions are met, e.g., the recipient of the interest payment is an individual or a financial institution not related to the debtor.

Royalties (Article 12)

Royalties may be taxed in the contracting State where they originate but at a reduced rate which should not exceed 5%.

Payments made for the use of industrial, commercial or scientific equipment are included in the definition of royalties and are consequently taxed at source even in the absence of a PE.

Capital Gains (Article 13)

Capital gains derived from the sale of shares are taxed in the country of residence of the issuing entity only in the following two situations:

  • If the person generating the gain owned an interest representing more than 10% of the vote, value or share capital in the issuing entity and owned the shares for a time period less than 12 months prior to the sale.
  • If more than 50% of the shares' value (other than shares of a publicly traded company) stems from real estate located in the country of residence of the issuing entity.

Capital gains derived from the sale of shares in other circumstances are only taxed in the country of residence of the seller.

Exchange of Information

The Treaty also includes an exchange of information clause that follows the standards developed in the OECD and UN models. It is important to note that exchange of information thereunder will only take place subject to individual requests meeting specific requirements. Automatic exchanges of information are not contemplated.


1. The Treaty follows the article of the OECD model's 2010 edition.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited Corp., Panama City
  • Luis Eduardo Ocando
    +507 208 0144
  • Isabel Chiri
    +507 208 0100
Ernst & Young, S.A., San José, Costa Rica
  • Rafael Sayagués
    +506 2208 9880
  • Alexandre Barbellion
    +506 2208 9800
Ernst & Young LLP, Latin American Business Center, Houston
  • Priscila Maya
    +1 713 750 8698

EYG no. CM3741