Panama issues regulations for its economic substance regime
Panama has issued the regulations that complete the operating framework introduced by Law 526 of 2026 for entities within multinational groups that receive passive foreign-source income. Executive Decree No. 32 of September 2, 2026 develops how affected entities must assess, document and report their economic substance in Panama before the regime applies from fiscal year 2027.
Who should review the new regulations?
The analysis applies to entities incorporated or domiciled in Panama that form part of a multinational group and receive one or more covered categories of passive foreign-source income. The assessment is specific to each entity, each type of income and each fiscal period. A structure should therefore be reviewed at operating-company level rather than through a single conclusion for the group as a whole.
What the regulations develop
The Decree provides greater detail on management and direction in Panama, the core income-generating activities connected with each category of income, and the human resources, operating expenditure and premises that may be required. These elements are assessed under a proportionality standard that considers the nature, scale and complexity of the activity.
The regulations also address outsourcing arrangements. Relevant activities may be performed through providers in Panama when the entity maintains appropriate supervision and supporting records, and when the provider’s resources are sufficient and are not counted more than once across different clients.
Pure equity holding companies remain subject to a reduced substance framework, but they must still satisfy the requirements that apply to their category and maintain the records needed to support their position.
The evidence should be built during the fiscal period
Economic substance is demonstrated through consistent facts and records. Governance documents, decision-making, personnel, service providers, contracts, expenditure, premises and accounting information should support the role attributed to the Panamanian entity. Preparing the file only after a request from the tax authority can leave gaps that are difficult to reconstruct.
Before 2027, affected groups should map their Panamanian entities and income streams, confirm which activities are performed in Panama, review outsourcing and governance arrangements, identify evidence gaps and assign responsibility for annual reporting and document retention.
