PANAMA Trends and Developments Contributed by: Rafael Rivera, BDO Legal Panama
What are the special rules applicable to income derived from intangible assets? With respect to income derived from the transfer or exploitation of intangible assets ‒ such as patents, trademarks, copyrights, or similar rights ‒ registered in accordance with Panamanian law but economical - ly exploited outside the national territory, the reform introduces a technical mechanism allowing a portion of the net income to be classified as non-taxable or extraterritorial. Such partial exclusion shall be subject to compliance with specific registration, documenta - tion, and proper accounting traceability requirements allowing for the reasonable substantiation of the determination made. Failure to comply with these obligations shall result in the automatic classification of the entity as non-qual - ified, triggering the application of the exceptional tax regime to the entirety of the relevant passive income. What is the definition of a multinational group adopted for purposes of Law 526? For purposes of this new regulation, qualified or non- qualified entities, depending on whether they dem - onstrate the economic substance requirements set forth in Law 526, must belong to multinational groups, defined as a group of two or more entities, related through ownership or control (understood as distinct concepts), which are tax residents in different jurisdic - tions. This definition includes the parent company, its subsidiaries, and permanent establishments. Certain specific rules are established for this deter - mination: • the entity is included in the consolidated financial statements of the group for reporting purposes under the accounting principles applied by its par - ent company; • it would have been included had the parent com - pany been required to prepare such financial state - ments; or • it would be included in consolidated accounts if its participations were traded on a public securities market. If the Panamanian entity is excluded from such con - solidation due to size or materiality, it shall still be con -
sidered part of the multinational group for purposes of this regulation. Is it possible to demonstrate economic substance through outsourcing of certain functions and services? Law 526 allows the outsourcing of relevant functions for demonstrating economic substance, meaning that Panamanian entities may subcontract functions and activities to comply with this requirement. However, this possibility is limited and subject to spe - cific rules: • activities related to maintaining adequate human resources; and • operational costs and expenses necessary for the development of the entity’s activities may be car - ried out by third parties, provided that such servic - es are rendered within the territory of the Republic of Panama (ie, resources or means located outside the national territory shall not qualify). For these purposes, the resources used by the pro - vider to demonstrate adequate substance for an entity may not result in overlapping hours of such resources where services are provided to multiple recipients. The contracting entity must maintain effective supervi - sion and control over the outsourced activities, duly supported by sufficient contractual, operational, and accounting documentation, and outsourcing outside the territory of Panama is expressly prohibited. Non-compliance with this prohibition shall result, by operation of law, in the loss of qualified entity status and the application of the exceptional tax regime to the relevant passive income. What method to eliminate or mitigate double taxation does Law 526 provide with respect to taxes paid abroad? Panamanian entities within a multinational group that obtain passive foreign-source income may credit income tax or similar taxes paid abroad against the tax payable in Panama arising from the application of this special regime. Such foreign tax credit is limited to the maximum amount that would have been payable in Panama upon applying the 15% rate established
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