On September 2, 2026, the Executive Branch issued Executive Decree No. 32 of 2026 (the “Regulation”), published in Official Gazette No. 30603-B, regulating Chapter II of Title I of Book IV of the Tax Code, as amended by Law 526 of May 28, 2026 (the “Law”), concerning economic substance rules applicable to certain passive foreign-source income.
The Regulation clarifies the scope of the economic substance requirements, the adequacy and proportionality criteria, reporting and record-keeping obligations, and the verification procedures applicable to entities belonging to multinational groups incorporated or domiciled in Panama.
1. COMPETENT AUTHORITY AND SCOPE OF APPLICATION
The Ministry of Economy and Finance (MEF) is designated as the competent authority responsible for administering, assessing, supervising, verifying, and enforcing compliance with economic substance obligations and requirements, without prejudice to the powers granted by law to other sectoral or supervisory authorities.
The Regulation applies to passive foreign-source income,¹ earned by entities incorporated or domiciled in Panama that form part of a multinational group,² whether they derive exclusively passive foreign-source income or also receive Panama-source income. For these purposes, “entity” means any person or legal vehicle, including, without limitation, corporations, limited liability companies, partnerships, trusts, and private interest foundations.
2. HOW IS ECONOMIC SUBSTANCE DEMONSTRATED?
The Regulation develops, in greater detail than the Law, each of the three economic substance requirements:
1. Adequate human resources and premises.
The entity must have, at a minimum, one qualified and remunerated individual (whether employed directly or engaged through a service provider) dedicated to the management and control of the relevant core activities, as well as physical premises in Panama, whether owned, leased, or shared, proportionate to such activity.
2. Strategic decision-making and risk management.
The entity must have a board of directors or equivalent governing body responsible for the direction, risk management, and strategic decisions concerning the core activities (i.e., decisions determining the entity’s general direction, the management of its assets, and the assumption of significant risks). Such body must hold at least two (2) meetings with physical presence in Panama per fiscal year, duly document the decisions made, and maintain the corresponding corporate records in Panama. Its members must possess the necessary knowledge and qualifications, and these functions may not be outsourced, delegated, or subcontracted.
3. Adequate operating costs and expenses.
Operating costs and expenses must be proportionate to the core activity, supported by appropriate documentation, and directly related to the generation of passive income, without duplicating personnel and premises costs already considered under the first requirement.
3. SPECIAL RULES FOR HOLDING AND REAL ESTATE ENTITIES
Entities belonging to a multinational group whose core activity consists of the non-routine holding of equity interests in other companies, or the non-routine acquisition, holding, or disposal of real estate, remain subject to the simplified standard already provided under the Law: they are only required to demonstrate the human resources and premises requirement, together with the applicable reporting obligations.
The Regulation introduces a presumption of compliance (a form of “safe harbor”): the human resources requirement will be presumed satisfied when the entity has at least one remunerated director, officer, or administrator residing in Panama who possesses the appropriate qualifications, or resident personnel meeting the same standard. In such cases, the entity may only carry out activities inherent to its nature and may not engage in substantial commercial or investment activities with respect to the interests it holds in other entities.
The Regulation clarifies that substantial commercial or investment activity exists when the entity actively participates in the day-to-day operational decision-making of the legal entities in which it holds interests, provides financing services to unrelated third parties, or engages in regulated financial intermediation activities.
4. REPORTING AND RECORD-KEEPING OBLIGATIONS
The annual income tax return must include, among other information: a description of the core activities carried out; a list of the human resources assigned to such activities (including name, identification, position, level of dedication, and remuneration); details of the premises and their cost; whether outsourcing was used; confirmation that strategic decisions were made in Panama; and details of the operating costs and expenses incurred.
All supporting documentation must be maintained in Panama, either in physical or digital format, for a period of five (5) years from the end of the corresponding fiscal period, and must be maintained in Spanish. Recommended supporting documentation includes contracts, invoices, financial statements, accounting records, lease agreements, evidence of salary payments, board minutes, meeting agendas, and supporting emails, among other evidence demonstrating that the activities were effectively carried out in Panama.
5. OUTSOURCING TO SERVICE PROVIDERS
The Regulation confirms that the human resources, premises, and operating costs and expenses requirements may be satisfied through the engagement of service providers domiciled in Panama, provided that: there is a contractual relationship and the expense incurred is identified; the service provider has adequate human resources and premises; the activities are carried out exclusively within Panama; the entity maintains supervision and control over the outsourced activities; and, where the service provider serves several entities within the group, its personnel’s working hours are not counted simultaneously to demonstrate the economic substance of more than one entity.
6. FOREIGN TAX CREDIT
Non-qualified entities that have paid abroad income tax or a similar tax on the same passive income subject to tax in Panama may credit such foreign tax against the 15% tax, up to the amount of tax that would otherwise be payable in Panama on such income.
The Regulation requires the payment to be supported by legalized or apostilled documentation, clarifies that credits generated by different types of income may not be offset against one another, and establishes that the credit is personal, non-transferable, and may not be carried forward to subsequent periods. Its value is determined in balboas at the time it arises, with no subsequent adjustments for foreign exchange differences.
7. COORDINATION WITH SECTORAL REGULATORS
For entities invoking any of the sectoral exclusions provided under the Law (including the financial sector, merchant marine, and regulated investment funds, among others), the MEF may request supporting evidence directly from the relevant supervisory authorities, including the Superintendency of Banks, the Superintendency of the Securities Market, the Superintendency of Insurance and Reinsurance, and the Panama Maritime Authority, among others. The MEF may also enter into information-sharing agreements with such authorities.
8. SPECIAL REGIME FOR INTANGIBLE ASSETS
As a separate matter, the Regulation establishes the methodology applicable to income derived from the assignment or exploitation of intangible assets registered in Panama (including patents, utility models, industrial designs, and copyright-protected software, subject to registration and approval by the competent authority; trademarks and image rights are expressly excluded).
The calculation of non-taxable income follows a “nexus” approach linking qualifying expenditures to income. The calculation must be performed separately for each intangible asset and requires separate accounting records for each asset.
Under this approach, qualifying expenditures incurred in Panama may be increased by up to 30% for purposes of the calculation, and the resulting ratio between such expenditures and the total expenditures associated with the asset determines the percentage of income eligible for the preferential tax treatment.
This is a technical regime subject to specific calculation rules. We recommend a case-by-case analysis for clients whose structures generate this type of income.
9. EFFECTIVE DATE
The Regulation will become effective as of the fiscal period beginning on or after January 1, 2027, in line with the effective date of Law 526 of 2026.
10. NEXT STEPS
With the Regulation now in effect, we recommend that entities falling within its scope:
1. Review the composition and schedule of their board of directors or equivalent governing body, ensuring at least two annual meetings with physical presence in Panama.
2. Assess whether their personnel, premises, and service providers engaged in Panama meet the required standards of adequacy and proportionality.
3. Prepare the supporting documentation (accounting records, contracts, and corporate minutes) that must be maintained in Panama for five years and in Spanish.
4. Confirm whether they qualify for the simplified standard applicable to holding entities or entities holding real estate.
5. Review, in advance of the 2027 fiscal period, the information that must be included in the annual income tax return.
FABREGA MOLINO has the capacity and experience to assist you in implementing these requirements and providing the related services. We remain at your disposal to explore how we can support you in complying with these regulations.
