admin23Tax & Corporate Law · Panama
Economic Substance in Panama: What Bill 641 Means for Your Company
On May 21, Panama’s National Assembly Committee on Economy and Finance approved Bill 641 on first debate. The bill establishes an economic substance regime for passive income of foreign source earned by entities domiciled in Panama. The full Assembly has until June 5 to pass it into law.
If enacted, the regime takes effect in fiscal year 2027, with 90 days for the Ministry of Economy and Finance (MEF) to issue implementing regulations. For companies with Panamanian structures generating income abroad, this is not an abstract legislative development. It is a decision that must be made before the year is out.
What Does Bill 641 Establish?
The law applies to entities that are part of multinational groups domiciled in Panama and that receive passive income of foreign source. The scope covers:
- →Dividends from foreign subsidiaries
- →Interest on loans extended outside Panama
- →Royalties of foreign origin
- →Capital gains on foreign assets
- →Income from real estate located outside Panama
The bill creates two categories with radically different tax consequences:
The two categories of the regime
Category A
Qualifying Entity
Demonstrates real economic substance in Panama. Retains the existing territorial exemption.
0%
Category B
Non-Qualifying Entity
Fails to demonstrate sufficient substance. Taxed on net foreign-source passive income.
15%
The shift from gross to net income as the taxable base for the 15% rate was a significant amendment introduced during the first debate. It represents a meaningful technical improvement for companies with a substantial cost structure.
What Does Demonstrating Economic Substance Require?
The law requires each entity to demonstrate, with respect to every passive income-generating asset, compliance with four requirements:
- 1Qualified, remunerated personnel in Panama — staff with effective functions over the activity generating the income.
- 2Adequate physical facilities in Panama — real physical presence proportionate to the scale of operations.
- 3Strategic and control decisions made from Panama — boards of directors and decision-making bodies must deliberate and resolve within the country.
- 4Operating expenses proportionate to the activity — the cost structure must be consistent with the volume and nature of declared income.
Exception for pure holding entities: Entities that solely hold equity interests in other companies or real estate without conducting direct commercial activity are only required to satisfy the first requirement: having qualified personnel in Panama. This exception may be determinative in any restructuring analysis.
Who Needs to Act Urgently?
Bill 641 is relevant to any company or structure that simultaneously meets these three conditions:
- ✓Is incorporated or domiciled in Panama
- ✓Forms part of a group with presence in more than one jurisdiction
- ✓Receives dividends, interest, royalties, or other passive income generated outside Panama
The treatment of private interest foundations and patrimonial trusts receiving foreign-source passive income remains subject to regulatory interpretation that the MEF must clarify during the 90-day rulemaking period. These structures require individualized analysis.
What Should Your Company Do Now?
Companies exposed to this regime have three courses of action, each with distinct implications for timing, cost, and structure:
I
Build genuine substance
Establish real presence in Panama to preserve the 0% territorial exemption. Requires operational and human resources planning.
II
Accept the rate
Assess whether 15% on net income is fiscally acceptable given the volume of passive income and existing cost structure.
III
Restructure operations
Relocate activities or structures to jurisdictions where genuine presence and verifiable substance already exist.
Key Dates
June 5, 2026
Final vote in the National Assembly. The bill could become binding law within days.
90 days post-enactment
MEF implementing regulations. This period will define the specific criteria for “sufficient substance” with immediate practical effect.
October 2026
FATF/EU evaluation — potential removal from the grey list. Bill 641 is part of the compliance package Panama is presenting to international bodies.
January 2027
New economic substance regime enters into force for entities domiciled in Panama.
The Time to Review Is Now
The regulations the MEF must issue within 90 days of enactment will set the specific criteria for what constitutes “sufficient substance” in practice. That said, the structural elements of the regime are already clear enough to begin the analysis.
Companies that initiate their review before those regulations are issued will be better positioned to make informed decisions and implement necessary adjustments within the timelines the law itself imposes.
At EDTIJ, we advise clients on the analysis of their corporate and asset structures in light of Bill 641’s new requirements.
If your company operates in Panama or through a Panamanian structure with foreign-source passive income, the analysis cannot wait for the regulations.