Panama – Bill No. 641 on Economic Substance: What You Should Know (and Why You Should Wait Before Acting)

Panama is currently debating Bill No. 641, which would establish economic substance requirements for entities of multinational groups receiving passive foreign-source income – including dividends, interest, royalties, and capital gains. At this stage, our recommendation to clients and businesses with Panamanian companies is clear: stay informed, but refrain from making structural decisions based on the current draft. The reasons are set out below.

The bill is currently in the first of three legislative debates, before the Economy and Finance Commission of the National Assembly. Once the Commission concludes its review, the bill must still pass the second and third debates before the full Assembly, before being sent to the President for sanction. The process, therefore, is still at an early stage.

Yesterday, while addressing the Commission, the Minister of Economy and Finance publicly indicated that a significant number of the modification requests submitted by participants in the Commission discussions are likely to be accepted. Those participants include lawyers, accountants, and professional organizations representing a wide range of industries, including international family offices. This is a significant signal: the text that ultimately becomes law will likely look materially different from the version currently under discussion.

In particular, two of the most consequential elements of the current draft are expected to change:

·        The definition of “multinational group” is expected to be narrowed substantially.
·        A list of exceptions and carve-outs is expected to be added.

These two elements are precisely what determine whether a given Panamanian entity falls within the scope of the law. Any analysis performed against the current draft is therefore likely to produce conclusions that will not hold once the final text is approved.

Our recommendation for clients and businesses with Panamanian companies: The prudent course of action is to monitor the legislative process and conduct a targeted impact analysis once the final text is sanctioned by the Executive Branch. At that point, it will be possible to advise with precision on whether a specific structure is affected and, if so, what adjustments may be required to preserve the strategy.

We will continue to monitor the process closely and will publish further updates as more significant information becomes available. Once a final version of the bill is projected to be sanctioned by the President, we will be in a position to assist clients in analyzing their structures, determining whether they are affected, and identifying the actions – if any – that are necessary or advisable.

If you have questions in the meantime, feel free to reach out.

Ricardo Chanis