Panama Establishes Economic Substance Requirements for Offshore Entities

On April 30, the Ministry of Economy and Finance introduced a bill No. 526 to amend the Tax Code of Panama, which establishes economic substance requirements for certain categories of entities incorporated or domiciled in Panama that are part of a multinational group and earn foreign-source passive income.

A multinational group is defined as a group of two or more entities, linked through ownership or control, that are tax resident in different jurisdictions (e.g., entities included in the group’s consolidated financial statements), as well as permanent establishments.

The rules will not apply to the following categories: financial institutions duly licensed and subject to supervision by the Superintendency of Banks, the Superintendency of the Securities Market, the Superintendency of Insurance and Reinsurance; insurance and reinsurance companies; entities engaged in brokerage activities in securities markets or other regulated investment services;  managers or administrators of investment funds, pension funds, or other regulated collective investment vehicles.

An entity must comply with the following conditions in order to be recognized as qualified:

– It has qualified available personnel, which receives appropriate remuneration and works in premises in Panama;

– Strategic decision-making and risk assumption are taking place in Panama;

– Operating costs and expenses are incurred in Panama.

Income derived from foreign-source passive income earned by a non-qualified entity will be subject to a 15% tax on net taxable income.

The law will apply as from January 1, 2027.