In brief
Panama has enacted a new law introducing new economic substance rules for Panamanian entities that form part of multinational groups and receive certain foreign-source passive income. The law preserves Panama’s territorial tax system but introduces an exception under which foreign-source passive income may remain outside Panamanian income tax only if the relevant Panamanian entity meets the new reporting and substance requirements.
The rules may affect Panamanian holding, financing, investment, IP and real estate structures receiving dividends, interest, royalties, capital gains or other passive income from abroad. If the entity does not comply, the relevant income may become subject to a final 15% tax on net taxable income.
Importantly, the rules do not appear to include a minimum revenue, asset or income threshold. The analysis is mainly whether the Panamanian entity forms part of an in-scope multinational group and receives covered passive income.
Key takeaways
Preservation of the territorial system – with a new exception
Panama’s territorial tax system continues to apply as a general rule. However, this new law introduces a specific exception for Panamanian entities that form part of multinational groups and receive certain categories of foreign-source passive income. Under the new framework, such income retains its non-taxable character only if the entity satisfies the reporting and economic substance requirements established by the law.
Scope: covered entities and passive income
The rules apply to Panamanian legal entities that are part of a multinational group and receive covered foreign-source passive income. The categories of passive income covered include:
- Dividends
- Interest
- Royalties
- Capital gains
- Other categories of passive income of foreign source
Structures commonly affected may include Panamanian holding companies, financing vehicles, investment platforms, IP-holding entities, and real estate structures with foreign-source passive income flows.
No minimum threshold
The law does not appear to establish a minimum revenue, asset or income threshold for its application. The determination of whether the rules apply is predominantly structural and it depends on whether the Panamanian entity forms part of a multinational group and receives covered passive income, regardless of amounts involved.
Consequence of non-compliance: 15% final tax
If a Panamanian entity within scope fails to meet the economic substance and reporting requirements, the covered passive income that would otherwise be exempt under the territorial system may become subject to a final 15% tax on net taxable income. This represents a significant departure from the current treatment of foreign-source income in Panama.
Effective date: fiscal year 2027
The law, as enacted by the President, will introduce new economic substance rules expected to enter into force as of fiscal year 2027. Multinational groups should use the remaining time in 2026 to assess their Panamanian structures and take preparatory steps.
Conclusions
The enactment of this new law marks a significant development in Panamanian tax law. While Panama’s territorial system is preserved as a general rule, the new economic substance requirements introduce a meaningful obligation for Panamanian entities within multinational groups that receive foreign-source passive income. Failure to comply may result in a 15% tax on income that would otherwise remain outside the scope of Panamanian income tax.
Multinational groups using Panamanian entities should review their current structures before fiscal year 2027, including governance, decision-making, local substance, outsourcing arrangements and documentation, to assess whether their structures are within scope and whether any adjustments may be required.
At Baker McKenzie, we will continue to closely monitor regulatory developments in Panama and are ready to assist clients in evaluating the impact of these rules on their specific circumstances, including compliance, reporting obligations, and potential planning considerations under the new economic substance framework.