Access the original article in The LEGAL INDUSTRY REVIEWS: PERU.
PANAMA HAS INTRODUCED A SIGNIFICANT CHANGE TO THE TREATMENT OF CERTAIN FOREIGN-SOURCE INCOME. LAW NO.526 OF 28 MAY 2026 INTRODUCED AN ECONOMIC SUBSTANCE REGIME INTO THE TAX CODE. WHILST RETAINING THE PRINCIPLE OF TERRITORIALITY AS THE GENERAL RULE, THE NEW REGIME PROVIDES FOR THE TAXATION OF CERTAIN FOREIGN-SOURCE PASSIVE INCOME EARNED BY ENTITIES THAT ARE A PART OF MULTINATIONAL GROUPS AND DO NOT MEET THE CONDITIONS SET OUT IN THE LEGISLATION. THE REGIME WILL APPLY FROM THE 2027 FISCAL YEAR.
The first question for an entity is therefore not how much substance it has in Panama, but whether it falls within the scope of the new regime.
The law defines a multinational group as a group of two or more entities linked by ownership or control and resident for tax purposes in different jurisdictions. Furthermore, it includes criteria relating to their inclusion in consolidated financial statements. Consequently, the mere existence of a company, private interest foundation or other Panamanian vehicle within an international structure does not automatically mean that the regime applies.
For example, where a foreign individual directly owns a Panamanian company used to make financial investments, that arrangement does not, on that fact alone, constitute a multinational group. The position might be different where a Panamanian company belongs to a business group with entities that are resident for tax purposes in different jurisdictions and receives dividends, interest or other foreign-source passive income. Each structure requires an assessment of ownership or control, tax residence and consolidation before its economic substance requirements can be determined.
Where the regime applies, the law distinguishes between qualifying and non-qualifying entities. An entity that meets the reporting and economic substance requirements in respect of each category of passive income may retain the corresponding treatment under the principle of territoriality. Conversely, certain foreign-source passive income earned by a non-qualifying entity may be subject to income tax in Panama at a rate of 15%.
The law also provides for income tax, or a tax of a similar nature, effectively paid abroad in respect of the same income to be credited against that tax due in Panama. Executive Decree No. 32 of 2 September 2026 sets out the conditions for this credit, which may not exceed the tax that would otherwise be payable in Panama.
The decree also specifies how ‘substance’ must be demonstrated, including through adequate human resources, facilities, operating costs and strategic decision-making in Panama. Furthermore, it permits shared facilities and the outsourcing of certain resources and activities, provided that these take place in Panama, the service provider has adequate resources, and the entity maintains supervision and control. Strategic decisions falling within the remit of an entity’s governing bodies, however, cannot simply be delegated to a service provider.
The regulations also provide for reduced requirements for certain entities primarily engaged in holding equity interests and certain circumstances involving immovable property, reflecting the principle that the level of substance should be proportionate to the activity carried out.
Looking ahead to 2027, international structures involving Panamanian entities should review whether they form part of a multinational group, identify the nature and source of their income, and determine the economic substance requirements that may apply. Not every international structure will fall within the scope of the regime. Those that do, however, will need not only to maintain adequate economic substance, but also to demonstrate that they meet the applicable requirements.
Reach out to our Panama office at panama@tridenttrust.com for more information on how the new Economic Substance requirements might affect your Panama entities.