Panama’s National Assembly has approved a significant new law requiring multinational entities domiciled in the country to demonstrate genuine local operations. Under the legislation, these entities will face a flat 15% tax on passive foreign income if they fail to prove real economic substance within Panama. The Ministry of Economy and Finance stated on Wednesday that this move is aimed at fulfilling European Union tax transparency requirements, a critical step towards the country’s removal from EU monitoring lists. This legislative action underscores Panama’s commitment to aligning with international fiscal standards.
The law explicitly targets companies seeking mere tax advantages, compelling them to establish physical operations and real activity. To meet the economic substance criteria, entities must show they possess qualified personnel, adequate facilities, strategic decision-making processes, and legitimate operating expenses within Panama. Should a multinational group fail to demonstrate these requirements, it will incur the 15% tax rate on net taxable passive foreign income. This passive income includes dividends, interest, royalties, capital gains, and real estate income earned abroad.
While the President, Jose Raul Mulino, still needs to sign the legislation into law, it is set to take effect from fiscal year 2027. The executive branch has been granted 90 days to issue the necessary implementing regulations. Notably, the law also provides special treatment for income derived from intangible assets, such as patents, trademarks, and copyrights, developed within Panama, a measure designed to foster innovation. The merchant marine sector and financial entities under the supervision of banking, securities, and insurance regulators are expressly excluded from the new regime’s scope.
