Executive Decree 32 of 2026: How to Comply with the Regulations to Panama’s Law 526 on Economic Substance

Executive summary: On September 2, 2026, through Official Gazette No. 30603-B, Panama published Executive Decree No. 32 of 2026, which implements the economic substance rules for foreign-source passive income introduced by Law 526 of May 28, 2026 (Articles 707-A through 707-Ñ of the Tax Code). The regulations specify how each substance condition is evidenced —human resources and premises, strategic decision-making, and operating expenses—, detail the information that must be included in the annual income tax return and its schedules, create a simplified regime for holding entities, set the conditions for outsourcing and for the foreign tax credit, and will apply to fiscal periods beginning on or after January 1, 2027.

The Executive Branch thus met the ninety-day deadline that Law 526 itself set for its implementing regulations. For multinational groups with Panamanian entities —and for their advisors— this decree is the missing piece needed to move from conceptual analysis to practical implementation. At LAC Legal we have followed Law 526 since its legislative debate; in this article we explain, condition by condition, what the regulations require and how to comply.

Who Do the New Regulations Apply To?

The decree applies to any entity incorporated or domiciled in Panama that forms part of a Multinational Group and earns any of the foreign-source passive income categories listed in Article 707-C of the Tax Code, whether combined with Panamanian-source income or earned exclusively.

The concept of “entity” is deliberately broad: it includes corporations (sociedades anónimas), limited liability companies, partnerships, trusts, and foundations. In other words, wealth-planning structures also fall within scope when they form part of a multinational group.

The competent authority to administer, supervise, and audit compliance is the Ministry of Economy and Finance, without prejudice to the powers of sectoral regulators.

“The new regime changes how multinational groups must manage their Panamanian companies. It will no longer be enough to rely on a corporate service limited to the entity’s annual maintenance and the payment of its fees: compliance will demand ongoing coordination among lawyers, tax specialists, and accountants to properly document economic substance, prepare the information that must be reported, and anticipate potential contingencies. Groups that fail to adopt this integrated approach will be more exposed to non-compliance, audits, and penalties that timely planning can prevent”

— Diego Lacayo K., Managing Partner, LAC Legal

How to Comply with Each Economic Substance Condition

Law 526 required “adequate” substance without defining the term. The regulations fill that gap with sufficiency and proportionality criteria for each requirement of Article 707-E. Importantly, apart from the one-person minimum, the regulations set no rigid thresholds; the “adequate” standard is relative to each operation, which leaves the multinational group itself the opportunity —and the burden— of proving that its resources are proportional to the nature, scale, and complexity of its activity. Well documented, that flexibility works in the taxpayer’s favor. Below, what each condition requires and the concrete actions to evidence it.

Condition 1: Adequate Human Resources and Premises (Article 5)

This is the cross-cutting condition of the entire regime: it applies to all entities subject to the general economic substance rules and is, moreover, the only substance requirement that entities under the simplified regime must meet (the pure equity-holding and real estate-holding entities of Article 8). Two important notes: this condition may be outsourced to service providers in Panama, and, as we will see further on, the regulations offer holding entities an even simpler way to evidence it through a presumption of compliance.

a) Adequate Human Resources (paragraph 1)

What the regulations require. Qualified, remunerated personnel —employed or engaged under any arrangement, including through service providers— whose role is directly linked to the management, administration, and control of the core income-generating activities associated with the passive income. The floor is clear: in no case may it be fewer than one person. Dedication may be full- or part-time, but it must be quantitatively adequate for the nature of the operation.

How to comply in practice:

1. Formalize the engagement through an employment contract or professional services agreement, with remuneration agreed in writing.
2. Document the person’s qualifications: résumé, academic degrees, certifications, or verifiable experience appropriate to the type of core activity (managing an investment portfolio is not the same as administering intellectual property royalties).
3. Draft a job description that expressly connects the role to the core activity generating the passive income.
4. Keep evidence of payment of remuneration: social security (CSS) payroll if an employee, or invoices and proof of payment if engaged as a contractor.
5. If dedication is part-time, keep a record of the time allocated (contracts with defined hours, time reports), since the regulations require it to be quantitatively adequate.
6. If outsourcing is chosen, meet the Article 11 conditions explained below (provider in Panama, written contract, supervision, and no double-counting of hours).

b) Adequate Physical Premises (paragraph 2)

What the regulations require. Physical premises located in Panama —offices, commercial spaces, or business centers that are owned, leased, or available under any arrangement, including shared use— equipped with the material and technological resources necessary for the activity. The right of use, whether exclusive or shared, must be documented.

How to comply in practice:

1. Keep sufficient documentation evidencing the right of use or effective availability of the space, whether through ownership, lease, coworking, serviced office, shared use, or any other legally valid arrangement.
2. Verify that the contract identifies the obligated entity as the holder of the right of use (it is not enough for the space to be in the name of another group company).
3. Keep invoices for associated services (electricity, internet, telephone, coworking fees) evidencing actual use.
4. Document the available equipment: furniture, computer equipment, systems, and technology licenses used for the core activity.

Condition 2: Strategic Decision-Making and Risk Bearing (Article 6)

What the regulations require. A board of directors or equivalent body that directs, manages, and supervises the core activities and manages their risks, and that holds at least two (2) meetings with physical presence in Panama per fiscal period, with documentary evidence. An important clarification: the regulations do not require directors to be residents of Panama — what they require is their physical presence at meetings held in Panamanian territory. The members must collectively possess the knowledge and experience needed. These functions may not be outsourced, delegated, or subcontracted.

How to comply in practice:

1. Schedule at least two in-person sessions in Panama from the start of the fiscal period (we recommend scheduling three, to allow for contingencies).
2. Prepare detailed minutes of each session recording the strategic decisions adopted: the entity’s overall direction, the administration of its income-generating assets, and the assumption of significant risks. Generic, boilerplate minutes do not evidence substance.
3. Keep the original or a copy of the minutes in Panamanian territory, available for review by the authority.
4. Document physical presence: signed attendance records and, for directors traveling from abroad, travel evidence (immigration stamps, boarding passes) as additional support.
5. Ensure the board’s collective profile is defensible: include at least one member with demonstrable experience in the subject matter of the core activity.
6. Review the articles of incorporation or bylaws so that they adequately govern the call and holding of meetings, share transfers, and corporate governance, as required by paragraph 4 of Article 6.
7. Prepare a risk matrix (economic, financial, operational, legal, reputational) whose management is exercised and documented from Panama.

Condition 3: Operating Costs and Expenses (Article 7)

What the regulations require. Expenses proportional to the nature, scale, and complexity of the activity, incurred in Panamanian territory through the acquisition of goods or the engagement of local services. Like Condition 1, this requirement may be met directly or through outsourcing to service providers, pursuant to Article 707-G. A key accounting caveat: personnel remuneration and premises-related expenses are counted independently and cannot be recycled to evidence this pillar.

How to comply in practice:

1. Set up cost centers or separate accounts in the books distinguishing: (i) remuneration, (ii) premises, and (iii) other operating expenses linked to the core activity.
2. Engage the activity’s support services in Panama: accounting, audit, legal and tax advice, custody, investment management, technology.
3. Keep contracts, invoices, and accounting records demonstrating a direct and verifiable relationship between each expense and the core activity.
4. Assess proportionality annually and document that analysis: the burden of proving that expenses are proportional rests with the group — and so does the opportunity to defend them in an audit. The greater the passive income and the complexity of the assets, the greater the defensible operating expense should be.

Simplified Regime for Holding Entities (Article 8): The Easiest Path

Entities whose core activity is the mere holding of equity interests or the non-habitual acquisition, holding, or disposal of real estate need only meet Condition 1 (human resources and premises) and the reporting obligations. Neither the board-meeting requirement nor the operating-expense requirement of the general regime applies to them as a substance condition.

And for these entities the regulations go further: they establish a presumption of compliance with the human resources requirement when the entity has at least one remunerated director, officer, or administrator who is a Panamanian national or resident with adequate qualifications, or other remunerated personnel residing in Panama who meet those conditions. Outsourcing is also permitted under this regime: the human resources may be provided through service providers in Panama, meeting the Article 11 conditions.

How to comply in practice:

1. Appoint (or confirm) a director or administrator who is a Panamanian national or resident and formalize their remuneration in writing, keeping proof of payment — remuneration is the element that triggers the presumption.
2. As an alternative, engage the human resources through a service provider in Panama (outsourcing is permitted), documenting the contract and the expense in accordance with Article 11.
3. Document the physical premises in accordance with Condition 1.b (shared use and coworking are permitted).
4. Mind the activity boundary: the holding entity may only carry out dealings inherent to its nature. If it actively participates in the day-to-day operational decisions of its subsidiaries, provides financing to unrelated third parties, or carries out regulated financial intermediation, it loses the simplified regime and becomes subject to all three conditions.

Outsourcing (Article 11)

Outsourcing to service providers can evidence Conditions 1 and 3 (human resources/premises and operating expenses) —never strategic decision-making— subject to five conditions.

How to comply in practice:

1. Sign a contract with the provider identifying the services, the core activities covered, and the amount of the expense incurred in Panama.
2. Verify that the provider’s assigned personnel are adequate in number and qualification, and that its premises are equipped for the activity — it is advisable to document this in the contract itself or in an annex.
3. Confirm that the activities are performed exclusively in Panamanian territory: anything outsourced outside Panama is disregarded.
4. Implement documented monitoring and supervision mechanisms: periodic provider reports, review minutes, entity approvals.
5. If the provider serves several entities of the group or of third parties, obtain confirmation that its employees’ hours are not counted simultaneously for more than one entity. Corporate service providers will need to keep per-client time records.

The Income Tax Return in Panama: What Must Be Reported (Article 9)

This is the regulations’ central operational point: compliance with economic substance is evidenced within the annual income tax return and its schedules, pursuant to Article 707-E and paragraph 7 of Article 710 of the Tax Code. It is not a separate form, but information integrated into the annual return — which makes the fiscal year-end closing the critical compliance moment.

The obligated entity must include:

1. General information on the obligated entity.
2. Taxes paid abroad on the foreign-source passive income — only where the entity claims the foreign tax credit.
3. A detailed description of the core activities performed to earn each item of passive income under Article 707-C. The description is per income type: an entity earning both interest and royalties must describe the activities for each.
4. A named list of the human resources serving the core activities during the period: names, type and number of personal identification document, position or role, dedication (full- or part-time), and remuneration. Article 8 holding entities may include here their directors, officers, or administrators who perform activities in Panama.
5. The total expense on human resources in charge of the core activities.
6. A description of the premises and the associated expense.
7. An indication and detail of outsourcing, if any, in respect of paragraphs 1 and 3 of Article 707-E.
8. Confirmation that strategic decisions were made in Panamanian territory.
9. Detail of the risks assumed by the entity in Panama.
10. The nature and amount of the other costs and expenses incurred to perform the core activities, other than human resources and premises.
11. A detailed description of the intellectual or industrial property, where the income derives from intangible assets.

Entities operating under preferential tax regimes (Article 707-J) must likewise report in their income tax return the information on their foreign-source passive income and the detail needed to evidence their economic substance.

“The new regime represents a significant change for Panamanian companies that form part of multinational groups and earn passive income from abroad. As of 2027, that income must be reported in the annual income tax return, and entities will have to substantiate compliance with the applicable economic substance conditions. This makes it necessary to assess in advance what level of human resources, premises, and expenses is adequate and proportional to the nature, scale, and complexity of each structure. Our recommendation is to treat fiscal year 2027 as a year of continuous documentation: those who assess the proportionality of their structure in good time and build throughout the year the evidence needed to support their economic substance will reach year-end better prepared to meet their new tax obligations; those who leave it for the end will be taking on risks that could have been prevented”

— Raúl González, Tax Attorney, LAC Legal

Practical recommendation: the information in items 3 through 10 cannot be improvised at filing time. We suggest building, from day one of fiscal year 2027, a substance file that feeds these schedules: contracts and payroll (items 4 and 5), premises contract and invoices (item 6), outsourcing agreements (item 7), board minutes (items 8 and 9), and cost-center accounting (item 10). An entity that reaches year-end with the file assembled can report in days; one that does not faces a documentary reconstruction against the clock.

Document Retention: Five Years, in Panama, and in Spanish

Article 10 requires keeping at the entity’s Panamanian domicile —in physical or digital format— all supporting documentation for five (5) years from the close of the fiscal period, to verify the accuracy and sufficiency of what was reported in the tax return. And Article 19 adds a requirement with real operational impact: supporting documentation must be submitted in Spanish, which will require translating the group’s foreign contracts, financial statements, and supporting records.

Foreign Tax Credit (Article 12)

Non-qualified entities may credit against Panamanian tax the amount effectively paid abroad on the same income. The conditions: the tax must have been effectively paid or withheld abroad, it must be an income tax or of an analogous nature, and supporting documentation must be submitted duly legalized or apostilled.

The limits are strict: the credit may not exceed the Panamanian tax that would be due on that income, no offsetting between credits from different income items is allowed, it is strictly personal (not assignable or transferable to third parties), and it may not be carried forward to later fiscal periods. The value is determined in balboas at the date it arises, and exchange differences do not alter the recognized amount.

How to comply in practice: obtain in good time the withholding certificates or proof of payment from the foreign tax authority, have them apostilled or consular-legalized before closing, and apply the credit in the return for the period in which the income was earned and the tax was paid (with the special rule for taxes assessed in a different period, provided payment is reliably evidenced within the legal term of the relevant jurisdiction).

Intangible Assets: A “Nexus”-Type Formula (Articles 13 to 16)

For income derived from the assignment or exploitation of intangible assets registered in Panama, the regulations adopt a formula inspired by the OECD nexus approach: the income eligible for special treatment results from multiplying the intangible’s net income by the ratio of direct development costs and expenses increased by 30% (uplift, capped at the denominator) to the asset’s total expenses.

Only intangibles protected by patents, utility models, registered industrial designs or drawings, and copyright-protected software qualify; trademarks, image rights, and marketing intangibles are excluded. The calculation is per individual asset —no offsetting profitable intangibles against loss-making ones— and requires keeping separate accounting and non-accounting records per asset: income, expenses, acquisition costs, useful life, and the numerator/denominator calculation, all kept in Panama.

When Do the Regulations Take Effect?

Executive Decree 32 of 2026 will apply as of the fiscal period beginning on or after January 1, 2027. This leaves multinational groups a window of only a few months to audit their Panamanian structures, formalize personnel and premises contracts, schedule the in-person board meetings, and assemble the substance file that will feed the tax return.

LAC Legal’s Recommendations

We suggest that groups with Panamanian entities immediately begin an economic substance diagnostic answering three questions: (i) which group entities earn foreign-source passive income under Article 707-C?; (ii) do they qualify for the Article 8 simplified holding regime, or must they meet all three conditions?; and (iii) what gaps exist today in personnel, premises, governance, expenses, and documentation against the standards of the regulations?

At LAC Legal, together with LAC Tax and LAC Accounting, we assist multinational groups and family offices with the diagnostic, implementation, assembly of the substance file, and reporting in the income tax return under Law 526 and its new regulations.

Frequently Asked Questions on Executive Decree 32 of 2026