Panama, recognized for decades as a premier financial and logistical hub, is taking a decisive step to consolidate its reputation on the global stage. The government has announced the implementation of a key requirement for international companies: the demonstration of economic substance in Panama. Far from being an obstacle, this measure represents a strategic evolution that aligns the country with the highest international standards, offering greater security, transparency, and stability for serious investors and entrepreneurs looking to establish real and lasting operations in the hub of the Americas.

What Exactly Is Economic Substance in Panama?

The concept of “economic substance” or “real presence” is an international standard promoted by organizations like the OECD and the European Union to combat tax evasion and ensure that a company’s profits are taxed where economic activities are genuinely generated. For Panama, this means moving from a model where corporate structures could exist on paper to one that requires a tangible and operational connection with the country.

In practical terms, an international company operating through a Panamanian corporation must demonstrate that its activity is not merely administrative or formal. The three fundamental pillars of economic substance are:

• Local Management and Direction: Key strategic decisions of the company must be made in and from Panama.
• Adequate Economic Activity: The company must have an infrastructure commensurate with its activity, which includes:
  • Having appropriate physical offices or premises in the country.
  • Employing an adequate number of qualified employees with local contracts.
  • Incurring reasonable and demonstrable operational expenses within Panama.
• Generation of Relevant Income: The main activities that generate the company’s income (Core Income-Generating Activities or CIGAs) must be carried out in Panamanian territory.

Why Is Panama Implementing This Requirement Now?

The adoption of economic substance requirements is not an isolated decision but a direct response to the demands of the global environment. The main objective of the Panamanian government is to achieve definitive exclusion from lists of non-cooperative jurisdictions in tax matters, such as those maintained by the European Union.

This measure is not a tax reform. It does not imply an increase in taxes or the elimination of incentives. It is an alignment with international standards to strengthen the Panamanian system’s reputation, transparency, and long-term stability.

By implementing these changes, Panama sends a clear message to the world: it is a country committed to transparency and international cooperation. This protects legitimate investors, increases confidence in the system, and ensures that the country remains a competitive and respected destination for doing business.

Who (and Who NOT) Is Affected by the New Regulations?

It is fundamental to understand the scope of these new regulations to determine how they may impact your business structure. The measure is precisely designed to affect only a specific type of entity.

Companies That Must Demonstrate Economic Substance

The regulations are primarily aimed at international economic groups that use Panamanian companies (such as corporations) but whose real operations and effective management are outside the country. The goal is to discourage the use of “shell companies,” which have no real connection to the Panamanian economy beyond their legal registration.

Entities and Regimes Exempt from the Requirement

One of the most important clarifications from the Ministry of Economy and Finance is that a large part of the business fabric will not be affected. The following are specifically exempt:

• Local Panamanian Companies: Companies that operate and serve the domestic market.
• Multinational Company Headquarters Regime (SEM): These companies, by definition, already amply meet substance requirements by establishing their regional headquarters in Panama.
• EMMA Regime: Multinational Companies for the Provision of Manufacturing-Related Services, which also require substantial physical operation.
• Special Economic Zones: Entities established in zones such as the Colón Free Zone, Panama Pacifico, and other free zones, whose regimes already require local operations, personnel, and infrastructure.

For those considering how to start a company in Panama under one of these special regimes, this news reaffirms the solidity and stability of these frameworks.

Myths vs. Realities: What Does NOT Change in the Panamanian Tax System

In the face of any regulatory change, it is natural for doubts and uncertainties to arise. Below, we debunk the most common myths associated with these new regulations.

Reality 1: The Principle of Territoriality Remains Intact

Panama reaffirms its commitment to the territorial taxation system. This means that only income generated within Panama’s borders is subject to taxes. Foreign-source income will remain exempt from income tax in Panama, one of the system’s main advantages. This fundamental pillar, which you can explore in detail in our guide on taxes in Panama for expats, will not be altered.

Reality 2: No Tax Increase or Elimination of Incentives

The government has been emphatic: this is not a disguised tax reform. Tax rates will not increase, and existing tax incentives to attract foreign investment will remain in effect. The focus is exclusively on the structure and real operation of companies, not on increasing the tax burden.

A Strategic Opportunity for International Investors

Instead of viewing the economic substance requirement as a burden, visionary investors should interpret it as an opportunity. This regulatory change acts as a filter that differentiates legitimate operators from opaque structures, which ultimately benefits everyone.

The advantages of this new scenario are clear:

• Greater International Prestige: Operating from a jurisdiction that meets the highest OECD and EU standards provides credibility and facilitates global business and banking relationships.
• Long-Term Stability: By moving off gray lists, Panama reduces the risk of facing sanctions or defensive measures from other countries, ensuring a more stable business environment.
• Boost to the Local Economy: The need to hire personnel and rent offices creates a virtuous cycle that strengthens the Panamanian economy, creating a more prosperous environment for living and investing.

Conclusion: The Future of Business in Panama Is Real and Transparent

The implementation of the economic substance requirement in Panama marks the beginning of a new era for the country as an international business center. It is a bold step towards transparency, legitimacy, and sustainability. For the global entrepreneur or investor seeking a solid operational base with an impeccable reputation, this evolution makes Panama an even more attractive option. Now, more than ever, establishing a tax residency in Panama goes hand in hand with creating real value in the country.

Navigating these regulatory changes is crucial for the success of your project in Panama. At PanamaWay, we specialize in helping entrepreneurs and investors establish a real presence and comply with all regulations. Contact our experts today for a consultation and ensure a smooth transition to success in the hub of the Americas.