Panama has issued Executive Decree No. 32 establishing economic substance requirements for multinational group entities receiving foreign-source passive income, including rules on local personnel, premises, governance, outsourcing, reporting, and tax treatment. The rules will apply to fiscal periods beginning on or after 1 January 2027.
Panama’s Ministry of Economy and Finance has published Executive Decree No. 32 in the Official Gazette on 2 September 2026 providing the official regulatory framework for economic substance requirements in Panama. These rules specifically target multinational group entities that earn foreign-source passive income, ensuring they maintain a legitimate physical and operational presence within the country.
The decree outlines that all supporting documentation presented to tax authorities must be in Spanish and retained in physical or digital format within Panama for five years. Furthermore, the decree outlines strict reporting obligations and the specific documentation required for tax authorities to verify that income is not being artificially shifted.
Other key provisions include:
Qualified entity requirements (economic substance criteria)
A Qualified Entity must meet four core economic substance requirements to retain tax exemptions or preferential treatment on foreign passive income:
- Human resources: At least one suitably qualified person must work in Panama and perform core income-generating activities.
- Physical premises: The entity must maintain adequate office or business premises and resources in Panama.
- Governance: Core management and strategic decisions must be made in Panama, including at least two in-person board meetings per fiscal year. These functions cannot be delegated or outsourced.
- Local expenditure: The entity must incur adequate operating expenses in Panama in connection with generating the foreign-source passive income.
Outsourcing rules
Subcontracting core activities to local third-party service providers is permitted under strict conditions:
- A formal contract must establish the service fees and operating costs.
- Service provider personnel assigned to the activity must possess appropriate qualifications and cannot be double-counted across multiple multinational entities.
- The entity must maintain active tracking, control, and supervision over the outsourced activities.
- Outsourced core activities must be executed within Panamanian territory.
Special asset categories
- Pure holding & real estate entities: Entities engaged solely in non-routine holding or disposal of equity interests or immovable property face streamlined substance requirements. They must have at least one paid, Panama-resident director, officer, administrator, or qualified employee, and maintain a physical office or premises in Panama.
- Intangible assets: For qualifying intellectual property, passive income is subject to a modified nexus formula based on each asset separately. Direct R&D costs incurred in Panama receive a 30% uplift, subject to the overall cost limit, relative to total acquisition, licensing, and development costs. Entities must also maintain separate accounting and loss-tracking records for each intangible asset.
Tax return & compliance disclosures
Qualified entities must report detailed economic substance information in their annual tax return, covering their activities and strategic decisions, personnel, physical premises and infrastructure costs, outsourcing arrangements, operating expenses, and intellectual property assets and development costs.
Non-qualified entities & foreign tax credit
If an entity fails to demonstrate sufficient economic substance, it is classified as a Non-Qualified Entity, meaning its foreign-source passive income loses the applicable tax exemption or preferential treatment and becomes subject to Panamanian corporate income tax at a final rate of up to 15%.
Tax paid abroad on the same income may be claimed as a foreign tax credit, but only up to the amount of Panamanian tax payable for that fiscal year.
Any unused credit cannot be carried forward to future tax years or transferred to another party.
Executive Decree No. 32 will apply to fiscal periods beginning on or after 1 January 2027.
