Economic Substance Law in Panama 2025: Complete Guide for Investors

In an increasingly interconnected and regulated world, fiscal transparency has become a priority for global economies. Panama, consolidated as a business and financial hub in the Americas, is taking firm steps to align its regulatory framework with the highest international standards. The proposed Economic Substance Law in Panama is the most recent and significant move in this direction. For international investors or entrepreneurs considering Panama as their base of operations or tax residency, understanding this reform is not just important—it’s crucial.

This change, far from being a threat to the country’s appeal, represents a strategic evolution that seeks to strengthen its reputation, offer greater legal certainty, and ensure its long-term competitiveness. In this article, we break down everything you need to know about the new regulations, who they truly affect, and what they mean for the future of investment in Panama.

What is the Economic Substance Law and Why is it Important?

The Economic Substance Law is a bill promoted by Panama’s Ministry of Economy and Finance (MEF) with a clear objective: to comply with the European Union (EU) criteria on fair taxation and Foreign Source Income Exemption (FSIE) regimes. The ultimate goal is to have Panama removed from the list of non-cooperative tax jurisdictions by 2026.

In essence, the concept of “economic substance” requires companies operating from Panama and benefiting from its tax system to demonstrate a real and tangible presence in the country. This is a measure designed to combat artificial corporate structures, whose sole purpose is tax avoidance without generating genuine economic activity in the territory.

The reform seeks to provide the State with legal tools to validate the real presence of companies in the country. The objective is to demonstrate that international companies effectively have operations, generate employment, and make strategic decisions from Panama.

This move aligns Panama with OECD best practices and follows in the footsteps of other successful jurisdictions such as Uruguay and Costa Rica, which have already implemented similar measures to strengthen their tax systems.

The Principle of Territoriality Remains: The Key to the Reform

One of the biggest concerns that arises with any tax reform in Panama is its potential impact on its fundamental pillar: the principle of territoriality. This principle establishes that only income generated within Panamanian territory is taxed, exempting foreign-source income.

Authorities have been emphatic on this point: the new law does not alter or eliminate the principle of territoriality. The Vice Minister of Finance, Eida Gabriela Sáiz, has confirmed this, assuring that the bill does not compromise this pillar of the Panamanian system.

The change is surgical and targets a specific type of entity and income, seeking to eliminate situations of “double non-taxation,” where income is not taxed either in Panama (because it is foreign-source) or in the jurisdiction of origin. Therefore, for the vast majority of residents, investors, and local businesses, the tax system they know and which makes Panama attractive remains intact.

Who Does This New Regulation Really Affect?

It is essential to understand that this law is not a generalized measure. Its scope is clearly defined to primarily affect:

Entities Belonging to Multinational Groups

The regulation focuses on entities that are part of a Multinational Business Group (MBG). This refers to a set of linked companies operating in different jurisdictions. An independent local company or a small personal investment structure would not, in principle, fall into this category.

Foreign Source Passive Income

The focus is on passive income obtained from sources outside Panama. These primarily include:

Dividends
Interest
Royalties
Capital Gains

For these multinational entities, their foreign-source passive income will remain tax-exempt only if the entity is considered “qualified”, meaning it demonstrates adequate economic substance in Panama. If you need advice on the optimal structure for your business, you can consult our guide on how to start a company in Panama as a foreigner.

Key Requirements to Demonstrate “Economic Substance”

For a multinational entity to be considered “qualified” and maintain the exemption on its foreign passive income, it must demonstrate, regarding each asset that generates said income, compliance with several requirements. The most important are:

Adequate Human Resources: Having sufficient, duly qualified employees with appropriate remuneration in Panama.
Appropriate Facilities: Having offices or other adequate physical facilities to carry out the main activity.
Strategic Decision-Making: Key decisions and the assumption of primary risks must be made from national territory.
Operating Costs and Expenses: Incurring an adequate level of operating expenses in Panama, directly related to the income-generating activity.

The law contemplates the possibility of outsourcing certain activities, but on the condition that supervision remains in Panama and the service provider is also located in the country.

New Obligations: The Annual Sworn Statement

Transparency is a central component of the reform. Therefore, a new reporting obligation is introduced for affected entities. They must annually submit an Economic Substance Sworn Statement to the Directorate General of Revenue (DGI).

This statement, which must be submitted within six months after the close of the fiscal period, will serve for the entity to demonstrate compliance with substance requirements. It will include detailed information about its activities, income, expenses, personnel, facilities, and audited financial statements. Failure to submit this statement will result in the entity being considered “non-qualified” and its foreign-source passive income becoming subject to taxes.

A Modern Tax Framework: What Does Panama (and its Investors) Gain?

At first glance, new regulations might seem like an obstacle. However, this reform is a strategic step that benefits both Panama and serious investors seeking a stable and predictable environment.

Greater Legal Certainty: By aligning with EU and OECD standards, Panama reduces the risk of future international sanctions or pressures, creating a safer business environment.
Improved International Reputation: Being removed from discriminatory lists is fundamental to strengthening Panama’s image as a reliable and cooperative financial and business center.
Long-Term Competitiveness: A transparent and robust tax framework attracts higher quality investment and consolidates the country’s position as a preferred destination for businesses and individuals. To understand the system in its entirety, we recommend reading about taxes in Panama for expats and tax residents.

Conclusion: A Necessary Evolution for a Solid Future

The proposed Economic Substance Law in Panama is not a radical change to the country’s tax model, but rather a precise and necessary modernization. It keeps the attractive principle of territoriality intact while addressing the demands of a global environment that requires greater transparency. For individual investors or companies with real operations in the country, the impact will be minimal or non-existent. For large multinational structures, it establishes clear rules that promote genuine investment over mere paperwork.

Ultimately, this is a step that strengthens Panama, providing it with a more resilient and internationally respected system. It is a clear signal that the country is committed to sustainable growth and to being a reliable partner in the global economy.

Navigating these changes requires expert analysis. If your business structure involves multiple jurisdictions or if you simply want to ensure your project in Panama complies with all regulations, our team is here to help. Contact us at Panamaway for a personalized consultation and take the next step with complete confidence.