PANAMA Trends and Developments Contributed by: Mariano Oteiza Díaz and Estefanía Alemán, Icaza, González-Ruiz & Alemán
and imposing those requirements on such structures would be both disproportionate and commercially unrealistic. Panama’s regulations should address the treatment of pure equity holding entities explicitly and introduce a proportionate standard consistent with international practice. A calibrated reduced standard, focused on compliance with applicable corporate obligations and the maintenance of a duly appointed registered agent in Panama, would be both legally defensible and com - mercially appropriate. Without this guidance, advis - ers and their clients will be left to navigate significant uncertainty in designing holding structures that are compliant without being operationally artificial. Outsourcing : defining the permissible scope Law 526 permits certain core activities to be out - sourced to service providers in Panama, provided that those activities are carried out within the national territory under the direct supervision and control of the contracting entity. The regulations, however, will need to define the parameters of permissible outsourcing with sufficient specificity to give entities and practi - tioners clear guidance. In Singapore, outsourcing of economic activities is recognised under the economic substance frame - work applicable to foreign-sourced disposal gains under Section 10L of the Income Tax Act 1947. Out - sourcing is accepted as a valid means of meeting the substance requirement provided that: the outsourced entity conducts genuine economic activities in Sin - gapore; the outsourcing entity exercises direct and effective control over those activities; and the out - sourced entity has adequate dedicated resources, not merely shared or incidental staff, committed to the arrangement. Singapore also permits a single service agreement to cover the economic activities of multiple entities within a multinational group, which provides useful structural flexibility. Uruguay requires detailed documentation of out - sourcing arrangements, including specification of the human resources engaged, the hours applied to the relevant activities, and the physical facilities in which those activities are performed. Panama’s regulations should provide comparable clarity on the documen -
tary basis for outsourced arrangements, the condi - tions under which shared service arrangements within a group may satisfy the substance test, and the dis - tinction between genuine outsourcing and the mere formal delegation of functions without operational substance. Consequences of non-compliance Panamanian entities within the scope of Law 526 that fail to demonstrate adequate economic substance will be classified as “non-qualifying entities.” The principal tax consequence is that their passive foreign-source income will be subject to a flat income tax rate of 15% on net taxable income for the relevant fiscal peri - od, a charge that could represent a significant and unexpected liability for structures that have histori - cally operated under the full exemption afforded by Panama’s territorial tax system. Non-compliance may also give rise to penalties, surcharges, and interest under the Panamanian Fis - cal Code. In addition, Law 526 includes a general anti-avoidance provision empowering the Ministry of Economy and Finance to disregard structures or arrangements whose principal purpose is to obtain tax advantages that are incompatible with the law’s objectives. This provision introduces a substance- over-form principle that operates alongside the spe - cific economic substance tests, giving the tax authori - ties broad discretion to look through arrangements that are formally structured but economically hollow. Entities within the scope of Law 526 that are required to comply with economic substance requirements will also be required to file an annual income tax return, regardless of whether their income consists exclu - sively of passive foreign-source income. This annual filing obligation is a new formal requirement for many Panamanian holding entities that have historically had no interaction with the Panamanian tax administration, and it should be factored into the operational planning of affected structures well before the 2027 fiscal year commences. Preparing for 2027: a Practical roadmap With Law 526 entering into force for fiscal year 2027 and the regulatory decree expected within weeks of publication of this article (August 2026), the window
508 CHAMBERS.COM
Powered by FlippingBook