Panama’s economic substance rules establish requirements intended to ensure that certain entities receiving foreign-source passive income maintain a genuine operational presence in Panama. Within this framework, human resources constitute a key and verifiable component of economic substance.

The mere existence of a Panamanian entity, corporate records, or formal appointments does not, by itself, demonstrate compliance. The entity must be able to demonstrate that it has access to qualified personnel with the experience and technical expertise required to perform its relevant activities and that such personnel effectively participate in the management, administration, or control of those activities.

Accordingly, the human-resources structure should reflect the entity’s actual operations. The functions performed, time devoted, compensation, qualifications, and supporting documentation should be consistent with the nature and scale of the activities carried out by the entity.

Scope of Panama’s Economic Substance Rules

The economic substance requirements addressed in this article apply to entities incorporated or domiciled in Panama that are part of a multinational group and receive foreign-source passive income.

For these purposes, a multinational group consists of two or more entities related through ownership or control and that are tax residents of different jurisdictions. This may include a parent entity, subsidiaries, and permanent establishments.

An entity may be considered part of a multinational group where it:

• is included in the group’s consolidated financial statements;

• would have been included in the consolidated financial statements if the group were required to prepare them;

• would have been included if its equity interests were publicly listed; or

• is excluded from consolidation solely because of its size or materiality.

The passive income covered includes, among others:

• dividends and profit distributions;

• interest;

• royalties;

• capital gains;

• income derived from immovable property; and

• other income derived from movable capital.

General Human Resources Requirement

Under the economic substance framework, an entity must maintain adequate human resources and facilities in relation to the relevant activities.

The human-resources component requires at least one individual who has the qualifications, experience, and technical expertise necessary to perform one or more of the entity’s relevant activities associated with passive income and to effectively participate in its management, administration, or control.

The individual may be employed directly by the entity or engaged through another contractual arrangement. The arrangement may be full-time or part-time, depending on the entity’s actual activities and operational requirements.

The key consideration is not simply whether an individual appears on a payroll or holds a formal corporate position. The entity should be able to demonstrate effective participation in its operations and decision-making processes.

Substance Over Formality

From both an employment-law and economic-substance perspective, the entity’s operational reality should be consistent with its documentation.

A formal title, appointment, or payroll record, standing alone, does not necessarily establish effective participation. The entity should be prepared to substantiate:

• the functions actually performed;

• the decisions and processes in which the individual participates;

• the time devoted to the entity;

• the relevance of the individual’s professional experience and technical expertise; and

• the relationship between the individual’s functions and the activities generating the relevant passive income.

This makes the human-resources component an ongoing compliance matter rather than a one-time formal requirement.

Key Elements to Review

When assessing whether an entity has adequate human resources for economic substance purposes, the following elements should be reviewed:

Job description and functions. The individual’s responsibilities should correspond to the entity’s actual activities.

Professional qualifications and experience. The individual’s résumé, certifications, education, and professional background should support the functions performed.

Actual time dedicated to the entity. The entity should be able to identify and substantiate the time devoted to its activities, particularly where personnel provide services to more than one entity.

Compensation. Compensation should be properly documented and consistent with the functions performed.

Employment, immigration, and social-security compliance. Where applicable, the relevant employment arrangements, work permits, and social-security records should be maintained.

Contemporaneous evidence of participation. Reports, correspondence, meeting minutes, deliverables, and other records may help demonstrate that the individual is actively involved in the entity’s relevant activities.

Human Resources for Pure Holding Entities

Entities whose principal activity consists of holding equity interests or acquiring, holding, or disposing of immovable property may be subject to a simplified economic substance standard.

For these entities, the human-resources requirement may be satisfied by having at least one appropriately qualified and compensated director, administrator, or other relevant individual who is resident in Panama, or by maintaining compensated Panama-resident personnel who support the entity’s activities.

However, a nominal appointment should not be relied upon as evidence of economic substance.

The entity should be able to document the individual’s:

• residence in Panama;

• qualifications and relevant experience;

• compensation;

• functions and responsibilities; and

• actual participation in the activities of the entity.

The distinction between a formal appointment and genuine operational involvement is particularly relevant when assessing the substance of holding structures.

Outsourcing Human Resources and Services

Economic substance requirements do not necessarily require all functions to be performed by personnel directly employed by the entity. Certain activities may be outsourced to a service provider domiciled in Panama, provided that the relevant conditions are satisfied.

The outsourcing arrangement should establish a genuine contractual relationship and identify the activities, personnel, and services provided.

The local provider should have adequate human resources, experience, facilities, and material or technological resources to perform the outsourced activities. The activities should be performed exclusively in Panama, and the entity should maintain appropriate supervision and control over the services.

Particular attention should be given to shared service arrangements within multinational groups. The time and functions of personnel should be properly allocated among the entities receiving the services. The same employee’s working time should not be counted simultaneously as evidence of substance for multiple entities without an appropriate and verifiable allocation.

Accordingly, shared service centers and similar arrangements should maintain reliable records identifying the allocation of personnel time and activities among the relevant entities.

Personnel Information and Supporting Documentation

The economic substance framework requires entities to provide information concerning their personnel and maintain supporting documentation.

The relevant declaration includes information regarding the personnel assigned to the entity, together with the applicable details concerning their functions and compensation.

Supporting documentation should be retained in Panama, in physical or digital form, for at least five years following the end of the relevant fiscal period.

For practical purposes, entities should consider maintaining a dedicated economic-substance file for each relevant entity within the multinational group.

The following documents may be particularly relevant:

Document	Evidentiary Purpose
Employment Contract and Job Description	Establishes the formal relationship and connects the individual’s duties to the relevant activities.
Résumé and Professional Certifications	Supports the individual’s education, experience, qualifications, and technical expertise.
Payroll, Proof of Payment, and Applicable Records	Demonstrates compensation and the regularity of the arrangement.
Work Permit, Where Applicable	Supports the legal authorization of foreign personnel to work in Panama.
Reports, Emails, Minutes, and Deliverables	Provides contemporaneous evidence of effective participation in the entity’s activities.
Time Records or Allocation Matrices	Identifies actual time dedicated to the entity and helps prevent double counting.
Contract with Local Service Provider	Documents outsourced activities, personnel, and the place where services are performed.

Risks Associated with an Inadequate Human Resources Structure

An entity that cannot demonstrate the presence of appropriately qualified personnel, or cannot adequately document their effective participation, may face difficulties substantiating its compliance with the economic substance requirements.

The risk may become more significant where:

• the same individual is assigned to several entities without verifiable time allocation;

• documented job functions do not correspond to the entity’s actual operations;

• personnel are formally appointed but do not demonstrate effective participation; or

• outsourced activities are performed outside Panama.

For this reason, tax and corporate planning should be coordinated with the entity’s employment and operational structure.

Before submitting the relevant declaration, entities should review their hiring arrangements, functions, compensation, residence, immigration and work-permit status, social-security compliance, and operational documentation.

Immediate Recommendations for Multinational Groups

Entities within multinational groups that may be subject to Panama’s economic substance requirements should consider taking the following steps:

1. Identify the relevant entities and activities. Determine which entities receive foreign-source passive income and identify the activities to which the economic substance requirements apply.

2. Assess the existing human-resources structure. Review whether the entity has appropriately qualified personnel and whether their functions correspond to the relevant activities.

3. Review employment and supporting documentation. Verify employment agreements, job descriptions, compensation, payroll records, social-security compliance, and work permits, where applicable.

4. Document actual participation. Establish appropriate procedures for maintaining evidence of decisions, activities, reports, correspondence, meetings, and deliverables.

5. Formalize outsourcing arrangements. Where services are outsourced, ensure that contracts, personnel allocation, place of performance, and supervision arrangements are properly documented.

6. Establish a five-year documentation protocol. Maintain the relevant supporting records in Panama, whether physically or digitally, for the required retention period.

7. Coordinate legal, employment, tax, accounting, and corporate functions. Economic substance should be addressed as an integrated compliance matter rather than as an isolated tax exercise.

Final Consideration

The human-resources requirement under Panama’s economic substance framework is substantive and ongoing. For multinational groups receiving foreign-source passive income, maintaining qualified personnel in Panama and being able to demonstrate their effective involvement in the relevant activities are important elements in substantiating genuine operational presence.

The analysis should therefore go beyond formal corporate appointments and focus on whether the entity’s people, functions, activities, documentation, and operational reality are aligned.

A properly documented human-resources structure can provide a stronger basis for demonstrating compliance with the applicable economic substance requirements and for responding to potential information or verification requests.

FABREGA MOLINO can assist clients in reviewing and implementing the legal, employment, corporate, and compliance aspects associated with Panama’s economic substance requirements.