PANAMA Trends and Developments Contributed by: Rafael Rivera, BDO Legal Panama
In such cases, foreign-source passive income shall be subject to the 15% tax rate applicable to the fiscal period in which it was generated, without prejudice to the application of penalties, surcharges, and interest in accordance with the provisions of the Tax Code. Why are the rules applicable to intermediaries and the permanent establishment regime in the Tax Code being modified? In line with the most recent amendments to the OECD Model Tax Convention, certain activities ‒ such as the provision of services, the execution of works, the exploitation of resources, the use of equipment, or the performance of professional activities ‒ may constitute a permanent establishment when carried out in Pan - ama through an agent or representative authorised to contract in the name or on behalf of a foreign entity. Likewise, situations that previously did not constitute a permanent establishment due to the contractual status of an “independent agent” may now give rise to such status where such agent plays the principal role in the conclusion of contracts, provided that the economic substance and operational elements ‒ such as assets, functions, and risks ‒ indicate that these are effectively assumed by a contracting entity domiciled abroad. What does the new obligation to file a foreign- source passive income return consist of? To strengthen audit and traceability mechanisms, entities or companies that are members of multina - tional groups, as defined under the new regulations, and that earn foreign-source passive income will be required to file an annual sworn return including such income. This obligation applies regardless of whether such income is deemed to be sourced within Pana - manian territory, that is, even where no tax payment obligation arises, the obligation to report such income to the DGI remains.
Additionally, such entities must submit the necessary information to evidence compliance with the condi - tions demonstrating adequate economic substance for the relevant entity or company. Final considerations In general terms, Law 526 entails a profound modi - fication of the regime applicable to passive foreign- source income in Panama by introducing a substantial departure from the traditional principle of territoriality. These new rules shall become effective as of fiscal year 2027. This new scenario effectively signals the end of the incorporation of shell entities with no real economic activity or role and will require companies with inter - national corporate structures to comprehensively review their structures, outsourcing schemes, models for holding and exploiting intangible assets, as well as their compliance and documentation systems, in an environment characterised by a higher level of tax scrutiny and exchange of information. In this context, preventive tax planning technically supported and aligned with these new legislative pro - visions, which respond to international standards on tax co-operation and exchange of information, will be essential.
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