Deductible expenses in Panama: transportation, meals and lodging for a multi-country team

Territoriality: the expense follows the source of the income

In Panama, "is this expense deductible?" can't be answered on its own: first you have to answer which income it is linked to. Article 697 of the Tax Code, as worded by Law 8 of 2010, defines deductible expenses as those "incurred in producing income and in preserving its source," and excludes those "generated or caused in businesses, industries, professions, activities or investments whose income is foreign-source or exempt."

A regional headquarters that bills both abroad and in the local market has taxable, exempt and foreign-source income on the same income statement. Article 695 looks at it from the tax base: taxable income results from subtracting from gross income "foreign-source income, exempt and/or non-taxable income, as well as deductible costs, expenses and outlays."

The formula that decides how much you deduct: MCGD

Here is the fact that almost no article on deductible expenses in Panama puts in plain sight. Paragraph 4 of Article 697 requires each expense to be attributed to the income it corresponds to, "reliably, to the satisfaction of the General Directorate of Revenue (Dirección General de Ingresos)," and sets a ceiling: "deductible costs and expenses may not exceed the proportion that results from dividing taxable income by total income, including exempt and foreign-source income."

Apportionment formula in Paragraph 4 of Article 697 of the Tax Code: MCGD = (IG / IT) x CGT

1. Attribute each expense to its income It is the first obligation, and it is a documentation one. An itinerary, the visit agenda and the name of the client you went to see carry more weight than the expense's accounting category.
2. Compute the ratio, apply the ceiling and keep the calculation IG over IT, multiplied by total costs and expenses, gives you the MCGD; when the attributed deduction exceeds it, the ceiling wins. A number without the detail that produced it is impossible to defend two years later.

Transportation, meal and lodging expenses: what the rules do cover

If you searched for "deductible per diems Panama" ("viáticos deducibles Panamá") and couldn't find the rule, it's not your fault: it doesn't exist under that name. The income tax regulation —Executive Decree 170 of 1993, which the DGI itself lists as in force— titles its Article 38 "Transportation, meal and lodging expenses" ("Gastos de transporte, alimentación y hospedaje"). "Viáticos" (per diems) is public-sector vocabulary.

Article 38 opens like this: "The amount of transportation, meal and lodging expenses incurred inside and outside the country is deductible for the employer, provided they are necessary for producing taxable income or preserving its source and are proportionate to the nature of the taxpayer's activity." Three rules follow from it.

• Inside and outside the country. Your regional manager's hotel in Bogotá is no less deductible than a taxi in Panama City: what decides is the link to Panamanian taxable income, not where it was paid.
• Necessary and proportionate. Besides being necessary, the expense must be proportionate to the nature of the activity: a reasonableness standard, with no figures.
• The home–office commute is not deductible. The last paragraph excludes "the taxpayer's transportation expense from their home to their office or workplace and back."

The same article closes with a sentence worth reading in full, because it changes who deducts: "Likewise, the worker may deduct such expenses when no accounting (rendición de cuentas) of any kind is required." In other words: the deduction still exists, but it shifts to the worker when the company hands over the allowance without asking for an expense report. Which option suits your case is a decision for your advisor, not for this guide.

Don't confuse it with representation expenses (gastos de representación), which Article 40 regulates separately: they are those of "a managerial-level or trusted employee," they may not exceed one hundred percent of salary, and they are deductible when paid "as additional compensation on top of salary." A payroll item, not a reimbursement against an invoice.

The invoice: without it, the expense isn't deductible

The documentation requirement has two layers. Article 19 of the regulation requires the document: "to be deductible, the expense must have been actually incurred or accrued and be duly documented by a legally issued invoice or equivalent document."

The second layer is what that document has to say. Law 256 of November 26, 2021 rewrote Article 11 of Law 76 of 1976: an invoice is mandatory "to support every transaction involving the transfer or sale of goods and the provision of services by persons resident in Panamanian territory," and its Paragraph 1 sets the minimum content.

Minimum content of the invoice: Paragraph 1 of Article 11 of Law 76 of 1976, as amended by Law 256 of 2021

If the employee lost the invoice, Article 22 answers, and not the way you'd hope: the expense "may not be deducted." It leaves a crack open —it counts if the taxpayer "proves it to the satisfaction of the General Directorate of Revenue"— but the burden of proof shifts to your company.

If you hold an SEM License: the 5% rate and the payroll deduction

The Multinational Company Headquarters (Sede de Empresa Multinacional, SEM) regime attracts misinformation for a specific reason: the most easily found file of Law 41 of 2007 is the original, unconsolidated text, and it says the SEM is "exempt from paying Income Tax of the Republic of Panama." That stopped being true. Article 5 of Law 57 of 2018 replaced that Article 21: today companies with an SEM License "shall pay income tax… on the net taxable income derived from the services provided at a rate of 5%."

The same article contains a sentence that changes the math for a headquarters with people hired under different regimes: the SEM "may include among its deductible expenses the expenses incurred for the labor compensation of all its employees," and that deduction "shall apply even when the worker receiving the salary is exempt from income tax."

How to run this every month

None of this gets settled at fiscal year-end; it gets settled when someone snaps the photo of the receipt. Two things are decided at that moment: that the employee carries the company's RUC with them, because otherwise the hotel invoices in their name and the invoice no longer supports the expense; and that the purpose of the trip is written down next to the amount.