Bill 641.

Summary.

The bill adds a chapter to the Fiscal Code on economic substance for multinational group entities incorporated or domiciled in the Republic of Panama that earn foreign-source passive income. For that income to retain the treatment arising from the territoriality principle, the entity must demonstrate that it meets the conditions prescribed for each type of income. The provisions define core activities, qualifying and nonqualifying entities, multinational groups, and the categories of income and economic substance. They cover dividends or shares in profits, interest, royalties, capital gains, income from real estate, and other passive income. Income earned by a nonqualifying entity would, exceptionally, be taxed at a fixed rate of 15% on gross income, beginning in the tax period following promulgation.

Each covered entity must report that income annually in its income tax return and demonstrate that it has remunerated, qualified personnel; suitable premises; strategic decision-making and risk assumption within Panama; and operating costs and expenses linked to the income-generating assets. Entities engaged in the nonhabitual holding of equity interests, without substantial commercial activity or investment in them, and entities engaged exclusively in the nonhabitual acquisition, holding, or transfer of real estate are exempt from the requirements concerning decisions, risks, and operating expenses. They remain subject to the requirements concerning personnel and premises, reporting, information, and incorporation or registration. They must file the relevant return and retain supporting records. The Ministry of Economy and Finance (Ministerio de Economía y Finanzas) verifies the information and maintains a register; the Executive Branch (Órgano Ejecutivo) issues regulations through that ministry.

Failure to provide information, partial submission, or failure to meet the economic substance requirements results in the entity being classified as nonqualifying and its income for the relevant period being taxed, without prejudice to fines, surcharges, and interest. The bill permits certain core activities to be outsourced only within the Republic of Panama, using adequate resources of the service provider that cannot also be used to demonstrate another entity’s substance. It requires supervision, control, and supporting documentation; outsourcing outside Panama results in classification as a nonqualifying entity. Taxes actually paid abroad may be credited against domestic tax on the same income, up to the corresponding domestic tax amount, without refund, assignment, transfer, or use in subsequent periods.

For income from intangible assets registered under the laws of the Republic of Panama and commercially exploited outside its territory, the bill establishes an asset-specific proportion of nontaxable income. The formula compares certain development expenses incurred in Panama, increased by 30%, with the asset’s total expenses and applies that proportion to its net income. Records and documentation must be available to the Ministry of Economy and Finance; noncompliance triggers treatment as a nonqualifying entity. Entities benefiting from preferential tax regimes must also report their passive income and demonstrate economic substance. A provision allows the ministry, by reasoned decision, to disregard improper arrangements aimed at obtaining a tax advantage and apply the prescribed rate. The information is confidential, subject to statutory exceptions for tax information exchange and to liabilities provided for, among other laws, in the Criminal Code.

The bill adds to Article 710 duties to report income, dividends, shares in profits, and interest, including reports of multinational groups’ foreign-source passive income. It amends Article 762-M to define a permanent establishment through places of business, activities lasting more than 183 days within 12 months, and agents who habitually participate in contracts. It governs the aggregation of related activities, exceptions for auxiliary or preparatory activities, and taxation of attributable income, with reference to double taxation treaties. It provides for regulations by the Executive Branch and entry into force in the tax period following promulgation. These provisions connect the Ministry of Economy and Finance and the Executive Branch with multinational groups, service providers, holders of intangible assets, and foreign operators active in Panama.