Panama's economic substance regulations: what a holding company must have in place by 2027.

If you already hold companies in the British Virgin Islands, the Cayman Islands or Bermuda, you know the economic substance regime and you have probably concluded that a pure equity holding company is the easy case there. Panama has now built its own version of that regime, and on one point of practical consequence it is stricter than the models it otherwise follows.

Executive Decree 32 of 2026, published in Official Gazette 30603-B on 2 September 2026, implements Law 526 of 28 May 2026 (cited in full below), which inserted articles 707-A to 707-Ñ into the Panamanian Fiscal Code. Both apply to fiscal periods beginning on or after 1 January 2027. The general framework is covered in our guide on economic substance in Panama; this entry deals with what the implementing decree adds.

Whether you are in scope

Two conditions must be met together: the entity belongs to a multinational group — two or more entities linked by ownership or control and resident in different jurisdictions — and it receives passive income of foreign source.

Dividends are expressly listed as such passive income, in article 707-C, paragraph 1. That single fact settles most cases. A Panamanian company whose only purpose is to hold shares in operating companies abroad and receive their dividends meets both conditions. This is not an edge case; it is the intended addressee of the statute.

An entity that does not qualify is taxed at a single and definitive 15 % rate on the net taxable passive income of foreign source (article 707-D). There is no additional tax on top of it.

Where Panama is comparable

For a pure holding entity, Executive Decree 32 requires only paragraph 1 of article 707-E, and it presumes the adequate-human-resources condition satisfied by either one of two alternatives (article 8):

1. at least one director, officer or administrator who is remunerated and resides in Panama, with suitable experience or qualifications; or
2. adequate remunerated staff resident in Panama.

Premises may be owned, leased, used or made available, including shared use, provided they are proportionate and equipped. One formal requirement is easy to miss: the right of use must be documented. A co-working desk satisfies the wording of the rule; a co-working desk without a contract does not.

So far this reads like a reduced substance test in the familiar sense. The difference is in the outsourcing rules.

Where Panama departs from the BVI and Cayman models

In the British Virgin Islands, the Cayman Islands and Bermuda, a pure equity holding entity needs no employee of its own: the services of the registered agent count towards adequate human resources. The BVI Rules put it plainly:

Any legal entity will of course retain the services of a RA, and the performance of those services will be taken into account when assessing economic substance for pure equity holding entities.

— BVI Economic Substance Rules v4 (April 2024), rule 8.4

The Cayman guidance is to the same effect: a pure equity holding company «maintaining a registered office in the Islands engaging its registered office service provider… may be able to satisfy the reduced ES Test». Such an entity is also not required to be directed and managed locally, a point the Cayman guidance makes expressly for the avoidance of doubt.

Panama's decree takes a different route on the second half of that arrangement. Article 11, paragraph 5, provides:

That where the Service Provider renders services to more than one entity […] the working periods or time actually incurred by the employees […] may not be counted simultaneously to evidence compliance with the economic substance requirement of another entity.

Paragraph 4 of the same article adds that outsourced work must be performed exclusively within Panamanian territory.

The distinction, stated precisely. The reduced test in the BVI carries no apportionment rule, so a registered agent may serve hundreds of companies and that same service counts for all of them. Panama requires a remunerated resident person and forbids counting that person's hours twice.

The consequence is not that Panama asks for somewhat more. It is that compliance stops behaving like a shared structural cost spread across a service provider's book of companies, and starts behaving like a cost per company. If you hold several Panamanian entities, that is the sentence to model.

That change does not close outsourcing off; it reshapes it. Article 707-G of Law 526 expressly allows the core activities of paragraphs 1 and 3 of article 707-E to «be carried out by third parties, provided they are performed within the territory of the Republic of Panama». What the decree adds is the exclusivity condition on hours: a provider may still render the service, but as a dedicated allocation to each entity rather than as a book of business spreading the same time across several. That is the legal basis for a per-entity dedicated substance service, not the end of outsourcing as a route.

A limit on the comparison, so it is not overstated. Jersey does not follow this pattern either: it formally retains a local board requirement with no express statutory carve-out. Guernsey and the Isle of Man were not verified for this entry. The solid contrast is with the British Virgin Islands, the Cayman Islands and Bermuda, and it should not be generalised to «all leading jurisdictions».

Two activities that forfeit the treatment

The decree withdraws the favourable treatment from a holding entity that:

• actively participates in the day-to-day operational decision-making of the companies it holds; or
• provides financing services to unrelated third parties, or carries on regulated financial intermediation.

The first deserves attention from any owner who places a Panamanian company at the head of a group he himself runs. The regime distinguishes between holding participations and operating through them, and places the benefit on the first.

Before you price the compliance, check article 707-H

Article 707-H credits tax already paid abroad against the Panamanian tax on the same income, capped at the Panamanian amount. Where the income has already borne foreign withholding at 15 % or more, the resulting Panamanian tax may be nil — and the expense of qualifying buys nothing.

On the cost side, the components are a remunerated resident individual with the associated social security contributions, premises with a documented right of use, accounting, and the evidentiary file. On contributions, article 96 of Law 51 of 2005 sets the employer's social security rate at 13.25 % until 28 February 2027 and 14.25 % from 1 March 2027, plus a 10.75 % special contribution on the thirteenth-month payment. The first period in which the regime applies therefore coincides with that step up.

There is accordingly a level of passive income below which the annual cost of evidencing substance exceeds the tax it avoids. Where that level falls depends on figures particular to each structure, and the calculation is done with those figures rather than with an average.

Reporting is not optional either way

The new paragraph 7 of article 710 of the Fiscal Code imposes the reporting obligation regardless of the outcome. An entity that decides not to qualify does not fall outside the regime: it stays inside it, taxed at 15 % and administratively classified as a non-qualified entity.

What this entry does not tell you

Stated plainly, because leaving it out would suggest the matter is settled.

• There is no published market rate for the remunerated resident director required by article 8. The decree sets the requirement and its qualitative content, not a fee or a minimum number of hours verifiable from outside.
• Nothing here addresses the tax law of your own country of residence, and the decree could not do so either. A structure that satisfies Panamanian economic substance may still be caught by controlled foreign company rules, by residence based on place of effective management, or by income attribution rules where its owner resides. These are two independent tests: passing the Panamanian one tells you nothing about the other, and anyone assessing a structure of this kind needs tax advice in their own jurisdiction as well.
• The full text of Executive Decree 32 of 2026 is not yet in the legislation section of this site. Its provisions are therefore quoted here from the text published in Official Gazette 30603-B, in our translation, and the Spanish original governs.

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