admin23Tax Law & Compliance
Executive Decree No. 32 of September 2, 2026, which regulates Law 526 of 2026 on economic substance for passive income from foreign sources, includes a nuance that much of the press coverage failed to explain clearly: not every entity faces the same standard. The decree establishes two distinct tiers, depending on each entity’s principal activity.
1. Two Tiers, Not One
Before the decree, the general reading of Law 526 suggested a single economic substance standard for every Panamanian entity with foreign-source passive income. The regulation corrects that reading: it divides obligated entities into two categories, with substantially different requirements.
| Tier | Who it applies to | What it requires |
|---|---|---|
| Reduced substance | Holders of shares or real estate, without habitual disposals | A single condition: adequate personnel and facilities |
| Complete substance | All other entities with foreign-source passive income | Three cumulative conditions: personnel/facilities, board decisions, operating expenses |
2. Reduced Economic Substance
Applies to entities whose principal activity is holding equity interests in other companies or real estate, without carrying out habitual disposals of those assets — that is, passive holding companies, not active buying and selling.
The single requirement
Adequate personnel and facilities. This is presumed met when the entity has at least one director, officer, or paid administrator, resident in Panama, who holds the appropriate experience or qualifications for the role — or equivalent personnel meeting those characteristics.
When the benefit is lost
If the entity actively participates in the day-to-day operational decisions of the companies it holds, provides third-party financing services, or engages in regulated financial intermediation, it falls under the complete tier instead.
3. Complete Economic Substance
Applies to all other entities — any structure that does not qualify as a passive holder of shares or real estate under the terms above. It requires meeting three cumulative conditions:
- Personnel and facilities: at least one duly qualified and remunerated employed or contracted person with management functions, plus adequate physical facilities in Panama.
- Strategic decisions: the board or equivalent body must hold at least two in-person meetings per fiscal period in Panama, with minutes and corporate documentation. This function cannot be outsourced.
- Operating expenses: costs and expenses proportional to the scale and complexity of operations, supported by accounting records.
4. Penalty, Deadlines, and What to Review Now
Entities that fail to demonstrate sufficient economic substance under their applicable tier are classified as a “non-qualified entity,” and their net taxable foreign-source income becomes subject to a single, definitive 15% rate, plus possible fines, surcharges, and interest.
The regime takes effect with fiscal year 2027. The first income tax return required to include this information is due in March 2028.
Questions for your company
- Does your Panamanian entity receive passive income from foreign sources (dividends, interest, royalties) within a multinational group?
- Is your principal activity holding shares or real estate without active management, or does it go beyond that?
- If the complete tier applies, do you have at least two in-person board meetings per fiscal period scheduled, with minutes?
- Can you demonstrate that personnel, facilities, and operating expenses are proportional to the volume of income administered?
- Is your supporting documentation kept in Panama and available in Spanish?
Conclusion: substance is proven by what the entity actually does
Decree 32 does not impose a single template. It distinguishes between an entity that simply holds interests or real estate and one that operates more actively — and calibrates the requirement to that reality. The first step for any structure with foreign passive income is identifying which of the two tiers applies, and only then building the compliance plan.
With fiscal year 2027 as the effective date and the first filing due in 2028, there is still time to act in an orderly way — but that window narrows month by month.
Need to determine which economic substance tier applies to your structure, or what concrete steps to take before 2027? Our team can guide you through the analysis.