Panama: Regulates the economic substance rules applicable to certain passive income from foreign sources
In the previous newsletter, we suggested interpreting Law 526 of 2026 not as a departure from the principle of territoriality, but as a step towards genuine territoriality. Executive Decree No. 32 of 2 September 2026 confirms this interpretation and completes the missing piece: whilst the Act defined who may fall within the regime and which income is subject to scrutiny, the regulations specify how a sufficient economic presence in Panama is demonstrated in practice.
The main message remains the same: the requirement is still exceptional and does not automatically apply to every Panamanian company or foundation with assets, income or operations abroad. For those entities that do fall within the regime, however, the standard is no longer defined in general terms. From 2027 onwards, it will be necessary to maintain substance throughout the year and be able to demonstrate this through personnel, premises, decisions, expenditure and documentation that are consistent with one another.
In summary: the majority of Panamanian companies with assets or operations abroad are not automatically subject to these requirements. The assessment depends on four criteria: whether the entity is Panamanian, whether it belongs to a multinational group, the existence of covered foreign passive income, and the ability to demonstrate substance. For holding companies and mere holding vehicles, the Decree provides for a simplified treatment.
Law 526 added Articles 707-A to 707-Ñ to the Tax Code and established that certain entities incorporated or domiciled in Panama, which are members of a multinational group, must demonstrate economic substance in respect of certain passive income from foreign sources in order to retain their tax-exempt status (dividends, interest, royalties, capital gains, income from immovable property and other income from movable capital). Where an entity fails to demonstrate that the applicable conditions are met, the relevant income is, exceptionally, subject to income tax at a rate of 15 per cent, without prejudice to any credit for tax paid abroad where applicable.
The four questions remain the entry criteria:
- Is the entity incorporated or domiciled in Panama?
- Is it part of a multinational group within the meaning of Law 526?
- Does it derive any passive income from foreign sources covered by Article 707-C of the Tax Code?
- Can it demonstrate an adequate economic presence in Panama in accordance with the criteria now set out in the Decree?
If the first three answers were NO, the regime does not apply. If all four were YES, the regime applies and it must be determined whether it is the general or simplified regime. The mere existence of a Panamanian company, the holding of a bank account or an asset abroad, or even the carrying out of transactions outside the country, does not in itself trigger this regime.
What does ‘adequate economic presence’ mean: the regulations set out the concept of adequacy under the principle of proportionality. There is no universal figure for the number of employees, square metres of office space or minimum expenditure that applies to all cases; adequacy must be assessed in the light of the nature, scale and complexity of the activity, the type and amount of income, the assets generating it, the risks assumed and the group’s operational structure in Panama. The required components are:
- Human resources in Panama: adequate, qualified and remunerated staff; as a general rule, no fewer than one person employed or contracted.
- Premises in Panama: owned, leased or shared, commensurate with the business activity and duly documented.
- Management and strategic decision-making: at least two face-to-face meetings per year in Panama, with records of the decisions taken; these functions may not be outsourced or delegated.
- Operating costs and expenses: these must be proportionate and have a direct and verifiable link to the foreign passive income earned.
- Supporting documentation: minutes, contracts, accounting and non-accounting records, correspondence and reports that enable compliance to be verified in substance.
Special treatment for holding companies: the Decree establishes a separate regime for entities whose main activity consists of holding equity interests in other entities, or the non-routine acquisition, holding or disposal of immovable property. These entities must meet a simplified standard: at least one director, officer or remunerated administrator resident in Panama with appropriate experience (or an equivalent member of staff), and their own, leased or shared premises, duly documented.
Illustrative examples:
Pure holding company: holds shares in foreign subsidiaries and receives dividends without being involved in their day-to-day management; eligible for the simplified regime.
Financing holding company: if it also provides financing or actively manages investments, it must be assessed to determine whether it continues to qualify for simplified treatment.
Inactive company: if it does not generate covered passive income during the period, the regime may not apply to that income, although it is advisable to monitor any changes in its profile.
Advantage of the simplified regime: this is not an additional exemption, but a compliance standard proportionate to an essentially passive activity — requiring fewer staff, allowing for shared premises and entailing a lower operational burden than the general regime.
Outsourcing: the Decree permits certain activities of substance to be carried out by service providers in Panama, provided there is a contractual relationship, the work is actually performed in Panama, and the entity has mechanisms for monitoring and control in place. Strategic decisions of the board of directors may not be outsourced, delegated or subcontracted.
The tax return as an annual proof of substance: Entities subject to the requirement must include in their tax return sufficient information on their principal activity, human resources, premises, outsourcing, strategic decisions and the costs associated with each source of passive income. Supporting documentation must be retained in Panama, in Spanish, for five years.
Key timeline:
28 May 2026: enactment and publication of Law 526.
2 September 2026: publication of Executive Decree No. 32.
Rest of 2026: period to assess the scope of the regime and identify gaps.
1 January 2027: the regime comes into force for tax years beginning on or after this date.
What we recommend reviewing: scope (incorporation in Panama and membership of a multinational group), income earned, profile (mere holding or operational), current substance gaps, and whether the documentary evidence (accounts, minutes, contracts) supports the entity’s position.
Our team can assist with assessing applicability, classifying entities and income, analysing gaps, designing corporate governance and substance documentation, and coordinating the corporate, accounting and tax aspects of compliance prior to the start of the 2027 tax period.