Panama’s Government has issued implementing regulations governing economic substance requirements for multinationals that receive certain categories of foreign-source passive income. This was done under Executive Decree No. 32, issued on September 2, 2026, provides further details on the economic substance requirements introduced into the Tax Code through Law No. 526 of May 28, 2026.
The Decree establishes the criteria for determining whether entities meet the economic substance requirements prescribed by the Law. The main provisions concern the expanded definition of an entity, adequate staffing and physical facilities in Panama, strategic decision-making and evidence that such decions are taken in Panama, risk management and supervision, operating costs and expenses proportionate to the activities undertaken, procedures for claiming foreign tax credits, conditions of outsourcing of core activities, reporting obligations and date of application of the decree: 1 January 2027.
The Main Provisions of the Executive Decree in More detail:
- Scope of Application
The Decree covers entities incorporated or domiciled in Panama that belong to a Multinational Group and generate any category of foreign-source passive income listed in Article 707-C of the Tax Code. These rules apply irrespective of whether the entities also receive income originating in Panama.
Under the decree, the term “entity” encompasses individuals and legal arrangements, including corporations (sociedades anónimas), limited liability companies, partnerships, trusts, and foundations.
- Economic Substance Requirements
Compliance with economic substance obligations will be assessed according to several criteria, including the nature, size, and complexity of business operations; the category and value of passive income received;,the quantity of assets generating that income, the risks undertaken, and the organizational structure of the Multinational Group’s activities in Panama.
Human Resources and Physical Facilities: Each entity must employ or contract at least one qualified individual, including external service providers, with sufficient expertise and experience to oversee its income-generating operations. E.g. a paid director, officer, or manager who is resident in the Republic of Panama. Companies must also maintain appropriately equipped premises in Panama, whether owned, rented, or shared, with the technology and physical resources required for their activities.
Strategic Decision-Making: A company’s board of directors or comparable governing body must assume responsibility for the risks arising from its operations. This body must convene at least two (2) physical meetings in Panama during each fiscal period, with the original meeting minutes or their copies retained locally and accessible to the relevant authorities.
The members of the board or equivalent governing body must have the relevant knowledge, professional experience, and/or capabilities to manage and oversee the entity’s principal activities, taking into account their nature, operational complexity, and size.
Proportional Operating Costs and Expenses: Entities must purchase goods or procure services in Panama to support their principal business activities, with the associated expenditures accounted for separately from those already declared for personnel and premises.
Executive Decree 32 establishes separate provisions for companies whose sole principal activity involves holding equity interests or real estate. These entities need only satisfy the staffing requirement, which can be fulfilled by appointing at least one remunerated director, officer, or manager who is qualified and resides in Panama.
However, such entities are prohibited from conducting commercial operations, significant investment activities, or regulated financial intermediation.
- Outsourcing of Core Activities
Companies may fulfill their obligations concerning staffing, premises, and operating expenditures through external service providers, subject to the following conditions:
A formal agreement exists with the service provider, with the operating expenses incurred in Panama under that arrangement clearly identified.
- Sufficient personnel and suitable premises are available to perform the activities.
- All outsourced functions are performed within Panamanian territory.
- The entity retains responsibility for monitoring, directing, and supervising the outsourced operations.
- Personnel working hours are not attributed simultaneously to more than one entity for compliance purposes.
- Reporting Obligations and Supporting Documentation
Entities subject to the regulations must disclose information in their Income Tax Affidavit and accompanying schedules demonstrating that they meet the economic substance requirements for each applicable category of foreign-source passive income. All relevant supporting records must be kept in Panama for five years.
The decree further specifies the eligibility conditions for claiming tax credits on taxes paid overseas and establishes rules governing income generated from certain intangible assets.
- Verification of Exclusions
Where an entity claims an exemption under Article 707-N of the Tax Code, the MEF may seek evidence from the entity or the competent sectoral regulator confirming compliance with the relevant regulatory obligations and the validity of its licenses, registrations, or authorizations. This verification is intended to establish whether the conditions for exclusion have been satisfied, without restricting the tax authority’s existing inspection and supervisory powers.
- Effective Date
The regulations will become applicable to fiscal periods starting on or after January 1, 2027.
The Ministry of Economy & Finance has been designated as the sole competent authority responsible for administering, evaluating, supervising, and auditing compliance with these economic substance obligations.
Implications for Multinational Companies
Multinational companies are advised to identify their Panama-based entities, assess their respective income streams, document staffing, premises, contractual arrangements and decision-making procedures, ensure that board meetings are formally held in Panama, and revise outsourcing and contractual arrangements ahead of the first filing in 2028.
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