PANAMA Trends and Developments Contributed by: Mariano Oteiza Díaz and Estefanía Alemán, Icaza, González-Ruiz & Alemán
planning purposes without structural links to entities tax resident in other jurisdictions, will not fall within the scope of Law 526. For these structures, the law introduces no new substantive obligations, and the foundational principle of Panama’s territorial tax sys - tem remains fully intact. For entities that do fall within scope, the passive foreign-source income categories covered include dividends, interest, royalties, capital gains, real estate income, and other foreign-source capital income. These entities must demonstrate economic substance in Panama through adequately qualified and remuner - ated human resources, adequate physical premises, strategic decision-making conducted from within Panama, genuine risk-bearing in Panama, and oper - ating costs incurred in Panama proportionate to the level of activity. Law 526 also expressly permits the outsourcing of certain activities to service providers in Panama, subject to conditions that the regulations will further define. Pending questions: what the regulations must resolve Law 526 establishes the broad framework, but its prac - tical application will depend critically on the content of the regulatory decree that the Executive Branch must issue within 90 days of promulgation. Three issues stand out as particularly consequential, and practi - tioners advising clients with Panamanian structures should monitor the regulatory process closely. The definition of tax residency in Panama Under existing Panamanian law, an entity is consid - ered a fiscal resident of Panama if it is a Panamanian income taxpayer, which generally implies the receipt of Panamanian-source income, or if, in accordance with Article 762-N of the Fiscal Code, it has material means of management and administration in Panama that allow it to apply for a tax residency certificate before the Dirección General de Ingresos (DGI). If the forthcoming regulations seek to apply a broader or different interpretation of fiscal residency for pur - poses of the economic substance regime, a funda - mental legal question arises: can that outcome be achieved by regulatory decree, or would it require a direct amendment to Article 762-N of the Fiscal
Code, which currently governs the determination of fiscal residency under Panamanian law? The answer has material structural implications for international groups with Panamanian holding entities, and the regulations must address it with precision. Pure equity holding companies : the case for a proportionate standard Perhaps the most commercially significant question under Law 526 concerns the economic substance standard applicable to entities whose sole or primary activity is the holding of participations in other compa - nies, commonly referred to in international practice as “pure equity holding companies” or “pure equity hold - ing entities”(PEHEs). These structures are widely used in international estate planning, family office arrange - ments, and multinational group hierarchies involving Panama, and their treatment under Law 526 will have broad practical implications. Comparable jurisdictions have consistently recognised that the substance requirements applicable to a pure equity holding entity should be proportionate to the limited operational character of that activity. The Brit - ish Virgin Islands introduced its economic substance framework under the Economic Substance (Compa - nies and Limited Partnerships) Act 2018. Under Sec - tion 8 (2) of that Act, a pure equity holding entity is defined as an entity that carries on no relevant activity other than holding equity participations in other enti - ties and earning dividends and capital gains. Such entities are subject to a materially reduced economic substance test. For entities with purely passive hold - ings, compliance is achieved by maintaining adequate arrangements through a registered agent in the BVI and meeting applicable statutory filing obligations. No full-time employees, dedicated office premises, or detailed reporting on local operational expenditure is required at the reduced test level. Uruguay adopts a comparable approach. Under Uru - guayan corporate income tax rules, the employee and premises requirements that form part of the general economic substance framework do not apply to enti - ties whose core business consists of holding interests in other entities. The policy rationale is sound: a pas - sive holding vehicle does not need a dedicated work - force or physical offices to perform its core function,
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