Law 526 of May 28, 2026 established a new economic substance regime in Panama, applicable, effective as of the 2027 tax year, to certain passive income from foreign sources earned by entities belonging to multinational groups.
This income includes dividends, interest, royalties, capital gains, income from real estate, and other income from movable capital.
In order for certain passive income from foreign sources to retain the tax-exempt treatment provided under Panama’s territoriality principle, the entities in question must demonstrate compliance with the economic substance requirements established by Law 526 and its implementing regulations.
Executive Decree No. 32 of September 2, 2026 elaborates on these requirements and specifies, among other aspects, the criteria related to personnel, facilities, decision-making, operating expenses, documentation, and the proportionality of the resources used in relation to the activity carried out.
However, being subject to this regime does not mean that an entity is automatically subject to the rules on Transfer Pricing.
Two Regimes with Different Objectives
The economic substance regime seeks to determine whether the entity has sufficient resources and activities in Panama that are proportional to the income earned.
To this end, aspects such as the following are considered:
- qualified personnel;
- adequate facilities;
- strategic decision-making;
- operating expenses;
- activities actually carried out; and
- documentation supporting the entity’s economic reality.
Transfer Pricing rules, on the other hand, seek to determine whether transactions between related parties are conducted under conditions comparable to those that would have been agreed upon by independent parties.
In Panama, Article 762-D of the Tax Code establishes, in general terms, that transactions with related parties resident in other jurisdictions fall under the Transfer Pricing regime when such transactions result in income, costs, or deductions in the determination of the tax base.
Therefore, the existence of passive income or a related party does not, in and of itself, automatically imply a Transfer Pricing obligation.
When Might They Be Related?
Both regimes may overlap when passive income arises from a transaction with a related party.
This can occur, for example, in certain:
- intra-group loans;
- interest payments;
- licenses for intangible assets;
- royalties; or
- investment structures among related entities.
In these cases, the analysis must be conducted separately.
On the one hand, it must be verified whether the entity meets the economic substance requirements for the corresponding income.
On the other hand, it must be determined whether the transaction falls within the scope of the Transfer Pricing rules and whether the agreed-upon remuneration complies with the arm’s-length principle.
Panama’s Ministry of Economy and Finance itself has clarified that economic substance and Transfer Pricing are separate regimes, with different objectives and obligations. Therefore, compliance with one does not automatically imply compliance with the other.
Regulations Emphasize the Importance of Evidence
The publication of Executive Decree No. 32 adds a significant element to the analysis: economic substance must not be evaluated solely from a formal perspective.
The entity must have evidence demonstrating that the resources, functions, and decisions carried out in Panama are related to the activity that generates the income.
This means that corporate documentation, contracts, accounting records, management decisions, and operational information must be consistent with the entity’s economic reality.
From a Transfer Pricing perspective, this same documentary consistency is relevant when there are transactions with related parties, as the contractual characterization of a transaction must be consistent with the functions actually performed, the assets used, and the risks assumed.
What Should Multinational Groups Review?
Panamanian entities that derive passive income from foreign sources must assess, starting in 2027:
- whether they fall within the scope of Law 526;
- what category of passive income they derive;
- what specific economic substance requirements they must meet;
- whether the resources and activities carried out in Panama are sufficient and proportionate;
- what documentation they must retain to demonstrate such compliance.
Furthermore, when there are transactions with related parties, the following must be analyzed independently:
- whether the transaction falls under the Transfer Pricing regime;
- whether the arm’s-length principle applies;
- what transfer pricing documentation is required; and
- whether the characterization of the transaction is consistent with the actual conduct of the parties.
It should be noted that Article 762-D describes the general Transfer Pricing regime in Panama, without prejudice to specific rules that may apply to certain special regimes or zones.
Two Analyses That Must Be Kept Separate
The entry into force of the new economic substance regime does not, in and of itself, replace or modify existing Transfer Pricing obligations.
Both regimes may interact when a single transaction presents elements relevant to both analyses, but their objectives are distinct:
Economic substance: determines whether there is sufficient economic presence and activity in Panama for the purposes of the corresponding tax treatment.
Transfer Pricing: determines whether the economic terms of a transaction between related parties comply with the arm’s-length principle.
Consequently, the application of one does not automatically determine the application of the other.
For multinational groups, the new regulatory landscape requires reviewing both dimensions in a coordinated yet technically separate manner, ensuring that the documentation, operational structure, and economic reality of the transactions are consistent with one another.
At TPC Group, we help multinational groups with entities in Panama assess their Transfer Pricing obligations in light of this new regulatory landscape, identifying potential points of interaction with the economic substance regime and strengthening the technical and documentary basis of their intercompany transactions.
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