Panama’s New Economic Substance Standard: Implications for Multinational Groups and International Structures
Panama is entering a new phase of economic substance regulation. Law 526 of May 28, 2026 introduced substance rules into the Tax Code for certain foreign-source passive income earned by Panamanian entities that belong to multinational groups. Executive Decree No. 32 of September 2, 2026 (Gaceta Oficial 30603-B) now sets out how that substance must be demonstrated. For fiscal periods beginning on or after January 1, 2027, the question is no longer only whether an entity exists in Panama. Entities within the regime must be able to show that their personnel, premises, decisions and expenses, as applicable, are appropriate to the activities they carry out. If they cannot, the income loses its non-taxable treatment and is subject to a single 15% tax on net taxable income. Who Is in Scope: Three Sequential FiltersThe regime does not apply to every Panamanian entity. An entity is subject to the substance requirements only if it passes three filters, in order: • Entity. It is a company, limited liability company, partnership, trust or foundation incorporated or domiciled in Panama. The decree defines the term “entity” broadly, to include any legal vehicle. • Multinational group. It belongs to a multinational group, as defined in Law 526. • Relevant passive income. It receives foreign-source passive income of the types the law expressly names: dividends, interest, royalties, capital gains, income from immovable property, and other income from movable capital. An entity that fails any filter falls outside the regime, and its income keeps its existing treatment. An entity that passes all three must demonstrate economic substance for that income. If it cannot, the income is subject to a single 15% tax on net taxable income. Once an entity is in scope, the general or simplified regime depends on its principal activity, as described below. Certain regulated entities, such as banks, insurers and shipping companies, are subject to special rules or exclusions and must document that status before the Ministry of Economy and Finance. What the Regime RequiresThe regime may apply to corporations, limited liability companies, partnerships, trusts and foundations that belong to a multinational group and meet the conditions set by law. Structures differ widely. Some entities perform active functions within a group. Others hold shares, equity interests or real estate, and others form part of broader wealth structures. The regulations recognize these differences but apply a common principle: the substance an entity can demonstrate in Panama must correspond to the activities it actually carries out. Proportionality, Not a Fixed FormulaThe decree does not prescribe one substance formula for every entity. It applies standards of adequacy and proportionality tied to the nature, scale and complexity of each activity, so the assessment is made case by case. An entity whose sole activity is holding equity interests should not need the same structure as one engaged in complex operations. Personnel, premises and expenses that are reasonable for a straightforward holding may be insufficient for an entity with a much larger volume of activity. This flexibility makes substance requirements reflect the economic reality of each structure. It also places a clear burden on the taxpayer: to explain and document why its resources are appropriate to its activities. The central question will be whether an entity’s presence in Panama is reasonably proportionate to its activities and income. Two Routes: General and Simplified General regime Simplified regime (holding and passive real estate entities) Scope Entities that pass the three scope filters and whose principal activity is not limited to holding equity interests or passive real estate Entities that pass the three scope filters and whose principal activity is holding equity interests, or the non-habitual acquisition, holding or disposal of real estate Personnel At least one qualified, remunerated person in Panama, linked to the core income-generating activities Presumption of compliance with at least one qualified, remunerated director, officer or administrator who is a Panamanian national or resident, or another qualified, remunerated resident in Panama Premises Available in Panama, with the physical and technological resources the activity requires Available in Panama Strategic decisions At least two governing body meetings per fiscal period with physical presence in Panama, with records of strategic decisions and risk management Not required locally Operating expenses Proportionate to the activity Specific operating expenses not required Simplification has a limit. A holding entity that begins performing functions beyond mere ownership may no longer qualify and may fall under the general regime. Simplified treatment must be monitored continuously, not assumed. Decisions Matter as Much as Physical PresenceFor entities under the general regime, the decree addresses three main components: adequate personnel and premises, strategic decision-making and risk management, and proportionate operating costs. The governing body must hold at least two meetings per fiscal period with physical presence in Panama, and the records must document the strategic decisions made and the risks managed. This is more than a corporate formality. Its purpose is to establish a genuine link between the Panamanian entity and the decisions that matter to its activities. For that reason, strategic decision-making and risk management cannot be outsourced, delegated or subcontracted. Outsourcing Supports Operations, Not ControlThe decree allows some substance components to be met through service providers located in Panama. Personnel, premises and certain operating expenses may be supported through outsourced services, subject to the decree’s conditions. This gives groups meaningful flexibility. International groups do not necessarily need, and may find little economic sense in maintaining, separate infrastructure for every entity. There is, however, a fundamental distinction between outsourcing support functions and outsourcing control of the entity. The group must keep mechanisms to monitor and supervise contracted services. Strategic decisions and risk management for core activities remain the responsibility of the entity’s governing body. Outsourcing can provide infrastructure, but it cannot replace effective governance. 2027 Is a Year of Continuous DocumentationMuch of the discussion about economic substance has focused on people, offices, meetings and expenses. The harder challenge may be proving that these elements exist and function as described. For fiscal periods beginning on or after January 1, 2027, compliance must be reflected in the income tax return and its schedules. Entities within the regime must report the core activities that generate their passive income, the personnel involved (including time commitment and remuneration), available premises, outsourced services, strategic decisions made in Panama, risks assumed, and the associated costs and expenses. Supporting records must be kept for five years at the entity’s Panamanian domicile, in physical or digital form, and made available in Spanish on request. Because the regime applies to fiscal periods beginning on or after January 1, 2027, groups should prepare their Panamanian entities before that date. For a calendar-year entity, this means completing the review before December 31, 2026. Entities acquired during 2026 should be treated the same way: the new owner is responsible for adapting them so they can meet the requirements from 2027, regardless of what the seller did before the transaction. Transactions completed in 2026 deserve particular attention. Standard due diligence on a Panamanian entity has traditionally focused on corporate records, tax compliance and liabilities. It may not have tested whether the entity can demonstrate economic substance under the new regime. Buyers should add economic substance to their due diligence scope: whether the entity belongs to a multinational group, what passive income it receives, and what personnel, premises, governance and records it has or will need for 2027. Any gaps should be addressed in the transaction documents or in the post-closing plan, since the obligation falls on the entity from the first fiscal period beginning in 2027. Economic substance cannot be treated as an exercise performed once a year when preparing a tax return. Decisions, services, activities and expenses must generate evidence throughout the fiscal period. Groups that assess the proportionality of their structures early, and build evidence throughout the year, will be better placed to meet their obligations. Reconstructing that reality at year-end can create difficulties and exposures that timely planning would have prevented. For groups with cross-border operations, economic substance should be part of a broader approach to international taxation and tax risk management. What Groups Should Do NowThe months before 2027 are the opportunity to: • Identify which Panamanian entities fall within the regime and which, if any, qualify for simplified treatment. • Assess whether personnel, premises, decision-making processes, expenses and records match the activities the entities actually perform. • Review outsourcing arrangements to confirm that control over strategic decisions stays with the governing body. • Build the documentary evidence the regime requires, from the first day of the fiscal period. Under this standard, asking where an entity was incorporated is no longer enough. Groups must be able to explain what the entity does, what resources it uses, where its decisions are made, and how they can prove those facts. About the authors Diego Lacayo K. Managing Partner, LAC Legal Raúl González Partner, Tax Department, LAC Legal
