Arias analyzes Panama’s new economic substance regulations

Arias has analyzed Panama’s new economic substance regulations under Executive Decree No. 32 of September 2, 2026, which implements the provisions introduced into the Fiscal Code by Law No. 526 of May 28, 2026. The new framework will apply to fiscal periods beginning on or after January 1, 2027.

The regulations clarify the economic substance conditions applicable to certain entities incorporated or domiciled in Panama that belong to a multinational group and receive passive foreign-source income.

Key requirements include maintaining adequate human resources and physical premises in Panama, conducting strategic decision-making and risk management from Panama, and incurring operating costs and expenses proportionate to the relevant activities.

For entities subject to the general regime, the regulations contemplate at least one qualified and remunerated individual and a minimum of two in-person meetings of the board of directors or equivalent governing body in Panama during each fiscal period.

The Decree also introduces specific rules for entities whose principal activity involves holding equity interests or certain real estate assets, while addressing outsourcing arrangements, information to be included in the annual income tax return and the requirement to retain supporting documentation for five years.

Strategic decision-making, management and risk-related functions are particularly relevant under the new framework. The regulations require documentary evidence showing that such decisions are effectively made from Panama and establish limits on the outsourcing or delegation of these functions.

The Arias analysis, prepared by María Cristina Fábrega, Partner, and Ivelisse Bonilla, Legal Tax Director, highlights the practical relevance of the regulations for taxpayers potentially falling within the new regime and the importance of assessing existing structures ahead of its entry into force.

Key facts

• Panama will apply new economic substance requirements beginning in fiscal year 2027.
• The regime affects certain Panamanian entities belonging to multinational groups that receive passive foreign-source income.
• Entities within scope will need to demonstrate genuine economic presence in Panama, including adequate personnel, premises and operating expenditure.
• Strategic decision-making and risk management must effectively take place in Panama and be properly documented.
• The regulations also introduce corporate governance, reporting and recordkeeping requirements, as well as limitations on the outsourcing of certain functions.
• Arias recommends reviewing potentially affected structures in advance to assess compliance before the new regime takes effect.