Economic Substance Framework in Panama: Key Regulatory Updates

The Government of Panama has issued Executive Decree No. 32 of 2 September 2026 (the Regulations), which regulates the economic substance framework introduced by Law 526 of 28 May 2026 (the Legislation).

The Economic Substance framework will apply to the fiscal periods beginning on or after 1 January 2027.

Applicability

According to the Regulations, entities incorporated or registered in Panama including companies, partnerships, foundations and trusts that form part of a multinational group and derive passive income from foreign sources are within scope and subject to the economic substance framework.

Entities within scope must comply with the applicable economic substance requirements throughout the 2027 fiscal period and report the corresponding information in their annual income tax declaration, to be filed within three (3) months after the end of their respective fiscal periods. Entities must continue to report this information annually thereafter.

For economic substance purposes, the fiscal period or fiscal year is the 12-consecutive-month period used by an entity to determine and report its income and assess compliance with the applicable economic substance requirements. For most entities in Panama, it runs from 1 January to 31 December. However, an entity may establish a different 12-month fiscal year, subject to the applicable legal and administrative requirements.

Economic Substance Requirements

1. Annual Reporting and Record-Keeping

Entities within scope must report the information relevant to each fiscal period, through their annual income tax declaration, to the Ministry of Economy and Finance of Panama (the Competent Tax Authority according to the Regulations).

All information and supporting documentation must be submitted in Spanish and the report must include, but is not limited to declaring the:

1. Activities carried out in connection with the foreign-source passive income;
2. Personnel involved and their remuneration;
3. Premises used in Panama;
4. Outsourcing arrangements implemented;
5. Location where strategic decisions were made; and
6. Operating costs and expenses incurred in Panama.

Records of the information and supporting documentation must be maintained at the entity’s domicile in Panama, in physical or electronic format, for at least five (5) years following the end of the relevant fiscal period.

2. Demonstrate effective economic presence in Panama

Compliance with the economic substance requirements will be assessed according to the nature, scale and complexity of the entities’ activities, as well as the type and amount of foreign-source passive income received.

Entities subject to the full economic substance requirements must have and concurrently demonstrate:

a. Adequate personnel and premises:

• At least one appropriately qualified and remunerated employee, contractor or service provider must perform the relevant activities in Panama.
• Access to suitably equipped physical premises in Panama, whether owned, leased or shared.

b. Strategic decision-making and in-person meetings:

• The Board of Directors or equivalent governing body must make strategic decisions, manage and assume the main risks associated with the activities generating the relevant income.
• At least two in-person meetings must be held in Panama during each fiscal period, and the corresponding minutes must be maintained in Panama.

c. Adequate local operating expenditure:

• Costs and expenses incurred in Panama that are directly connected with the passive income-generating activities and proportionate to the nature and scale of those activities.

Special Provisions

1. Outsourcing Arrangements

Entities may outsource some or all of their passive income-generating activities to a qualified service provider domiciled in Panama, provided that:

1. The activities are effectively performed in Panama;
2. The entities maintain adequate control and supervision over the outsourced activities; and
3. The personnel and resources allocated to the entities are properly identified and are not counted more than once when assessing the substance of other entities.

Activities outsourced outside Panama will not count towards satisfying the economic substance requirements. In addition, the strategic management and decision-making functions of the Board of Directors or equivalent governing body may not be outsourced or delegated.

2. Special treatment for Entities Holding Equity Interests and Real Property

The Regulations provide reduced substance requirements for entities whose principal activity is limited to:

1. Holding ownership interests in other local or foreign entities; or
2. Occasionally acquiring, holding or transferring real estate.

These entities remain subject to the annual reporting and record keeping obligations but are only required to:

• Maintain suitable premises in Panama, whether owned, leased, shared or otherwise made available under a documented contractual arrangement; and
• Satisfy the personnel requirement by having either:

i. At least one qualified, experienced and remunerated director, officer or administrator who is resident in Panama; or

ii. Adequate and remunerated human resources residing in Panama, with the experience or qualifications necessary to perform the activities generating foreign-source passive income.

This reduced treatment will not apply where the entities actively participate in the day-to-day management of its subsidiaries, provide financing to unrelated parties, carry out substantial investment activities or engage in regulated financial intermediation.

3. Foreign Tax Credit to Mitigate Double Taxation

Where an entity fails to meet the applicable Economic Substance requirements and its foreign-source passive income becomes subject to the 15% tax in Panama, it may claim, through its annual income tax return, a credit for income tax or a similar tax effectively paid abroad on the same income.

The credit is limited to the amount of tax payable in Panama and must be supported by duly legalized or apostilled documentation. Any unused credit cannot be refunded, transferred or carried forward to subsequent fiscal periods.

At OMC Group we are assessing the implications of the Regulations requirements and will be providing further information to assist your entities in complying with the requirements shortly. Please stay tuned for our further notices.