PANAMA Trends and Developments Contributed by: Rafael Rivera, BDO Legal Panama
What does the exceptional tax regime on passive foreign-source income consist of? Law 526 introduces an exceptional tax regime appli - cable to certain categories of passive foreign-source income when such income is received by entities (corporations, limited liability companies, or private interest foundations) incorporated under Panamanian law, which are members of multinational groups and which fail to demonstrate that they possess adequate economic substance in the Republic of Panama. It provides for the application of a 15% rate on the net taxable income for the relevant fiscal period, without giving rise to any additional tax, without prejudice to the provisions contained in Article 733 of the Fiscal Code. For purposes of determining net taxable income for the relevant fiscal period, costs and expenses nec - essary for the generation, preservation, and main - tenance of income ‒ duly documented and directly related to the generation of passive foreign-source income ‒ shall be deductible from gross income, in accordance with general rules What income is subject to the new tax regime established under Law 526? The following categories of passive income are sub - ject to this tax: “dividends, interest, royalties, capital gains, real estate capital income, and other movable capital income, provided that such income is derived from assets located or rights economically used out - side the national territory,” that is, what has histori - cally been referred to as extraterritorial or offshore activities. Law 526 defines the principal activities of these entities as “the generation, administration, con - trol, acquisition, preservation, exploitation or disposi - tion of passive foreign-source income, the execution, direction or effective control of which must be carried out in the Republic of Panama by the entity itself or through outsourcing,” in accordance with the condi - tions provided therein. Failure to demonstrate economic substance shall result in the classification of the entity as a “non- qualified entity.” Consequently, such income shall be subject to the exceptional tax regime provided in Law 526.
The New Tax Framework for Foreign-Source Passive Income Background On 30 April 2026, the Ministry of Economy and Finance of the National Government of Panama (MEF) filed Bill No 641 of 2026, before the National Assembly of Dep - uties, entitled “Which Modifies and Adds Provisions to the Fiscal Code Regarding Income Tax, Establishes Economic Substance Requirements for Certain Cat - egories of Passive Foreign-Source Income, and Pro - vides Other Provisions” (hereinafter “Bill 641”). The proposed reform was subject to multiple exchanges, debates, and contributions at the level of the Public Finance Committee of the National Assem - bly of Deputies during its first debate and represents a significant structural change to the traditional prin - ciple of territoriality, considering that such income has historically not been subject to taxation in Panama. It introduces a differentiated regime based on the demonstration of adequate economic substance in the country. Likewise, Bill 641 was discussed, analysed, amended, and approved in its second debate, where, primarily, various economic sectors were included as excluded from the special regime applicable to passive income, considering that, in theory, they are subject to pru - dential supervision by other governmental regulatory entities, such as the Superintendency of Banks, the Superintendency of Insurance and Reinsurance, and the Superintendency of the Securities Market. Simi - larly, an exclusion was established for the Panama - nian merchant marine, which is subject to supervi - sion by the Panama Maritime Authority. The Bill was subsequently approved in the third debate before the Plenary of the National Assembly of Deputies on 27 May 2026. Finally, Bill 641 was sanctioned by the Executive Branch on 28 May 2026, resulting in its enactment in the Official Gazette of the Republic of Panama as Law No 526 of 28 May 2026, “Which Modifies and Adds Provisions to the Fiscal Code Related to Income Tax and Economic Substance for Certain Passive Foreign- Source Income” (hereinafter “Law 526”)
842 CHAMBERS.COM
Powered by FlippingBook