Panama’s National Assembly has approved a new law introducing economic substance rules applicable to certain entities belonging to multinational groups that earn foreign-source passive income. The measure represents one of the most significant changes in international taxation in the Panamanian jurisdiction in recent years.
The legislation forms part of Panama’s commitments to international standards promoted by the European Union and seeks to strengthen tax transparency, preserve the jurisdiction’s competitiveness and facilitate its removal from international monitoring lists.
What changes under the new law?
The legislation incorporates into the Panamanian Tax Code an economic substance regime for certain multinational group entities that earn passive income from abroad, including:
- Dividends
- Interest
- Royalties
- Capital gains
- Real estate income earned outside Panama
Under this new framework, entities must demonstrate real economic presence in Panama in order to retain the corresponding tax treatment.
Economic substance requirements
The law requires entities to demonstrate elements such as:
- Qualified personnel.
- Adequate premises.
- Real operating expenses.
- Effective strategic decision-making within Panamanian territory.
The rationale behind the law reflects an increasingly pronounced international trend: international structures must demonstrate real economic activity, not merely legal or formal existence.
15% tax for entities lacking economic substance
One of the most significant aspects of the new legislation is that entities failing to demonstrate economic substance will be subject to a single, final rate of 15% on net taxable income derived from certain foreign passive income.
This substantially alters the traditional analysis of many structures used by multinational groups with a presence in Panama.
Additional changes introduced by the law
The law also introduces elements that are particularly relevant from a corporate tax and international tax planning perspective:
- Modernisation of the permanent establishment concept.
- Introduction of anti-abuse clauses.
- Credit for taxes paid abroad.
- Special rules for intangible assets developed in Panama.
- Strengthened tax transparency mechanisms.
Implications for multinational groups and international structures
The approval of this law confirms an international trend that has been consolidating since the OECD’s BEPS project: jurisdictions are raising their requirements regarding economic substance, real functions, effective decision-making and value creation within each territory.
In this context, companies with international holding companies, investment vehicles, regional structures, entities receiving passive income or intangible assets should review in advance the level of economic substance of their structures and the operational consistency of their international transactions.
Potential effects from a Colombian perspective
From a Colombian perspective, measures of this kind may have an impact on matters such as:
- International tax planning.
- Beneficial ownership.
- Audits of cross-border transactions.
- Application of anti-abuse rules.
- Review of international holding structures.
- Support for functions, assets and risks within multinational groups.
The discussion is no longer limited to an entity’s legal existence, but extends to its ability to demonstrate real operations, management and economic substance within the relevant jurisdiction.
Entry into force
The law will enter into force as from the 2027 tax year, and the Executive Branch will have 90 days to issue the implementing regulations.
The approval of this legislation represents a change that will likely require many companies to review existing international structures, particularly those using Panamanian entities within regional or multinational arrangements.
Should you require a review of your international structures or of the potential tax effects of this new legislation, the Cañón Asociados team is available to provide specialised assistance.
