Meeting Substance Requirements: Achieving Tax Residency in Panama

Presented by Global Offshore Company (G.O.C)

In the realm of international taxation, substance has taken center stage as the driving force behind achieving tax residency. Under heightened scrutiny from global governing bodies like the Organization for Economic Co-operation and Development (OECD), jurisdictions are compelled to uphold economic substance requirements to counter international tax abuse. This guide, brought to you by Global Offshore Company (G.O.C), unravels the essence of substance in attaining tax residency in Panama and navigating its impact on entities and foreign owners.

The Significance of Economic Substance

The OECD's influence underscores the pivotal role of substance in the modern tax landscape. Residency is a cornerstone in international taxation, shaping the application of tax treaties and laws. The implications are profound: if an entity is tax resident in one jurisdiction, it might incur taxation in that jurisdiction, regardless of its place of incorporation. This principle is enshrined in Action 5 of the OECD/G20 Base Erosion and Profit Shifting Project (BEPS). Panama, aligning with these global standards, has interwoven substance requirements into its Income Tax legislation.

Decoding Panama's Substance Requirements

In essence, an entity seeking tax residency in Panama must embrace the tenets of economic substance, ensuring the authentic representation of its operational reality. To fulfill this, the entity must:

1. Conduct Core Income Generating Activities in Panama

Core income generating activities are the lifeblood of an entity's revenue. These activities must transpire within Panama's borders, tangibly connecting the entity's operations to the country.

2. Employ Qualified Personnel

An entity must employ an adequate number of suitably qualified individuals, either directly or indirectly. This underscores the importance of a competent workforce driving the entity's operations.

3. Incur Proportional Expenditure

Expenditure should mirror the entity's level of activities, reinforcing a proportional commitment to its operations.

Ensuring Effective Management and Control

Entities seeking tax residency in Panama must also manifest effective management and control within the country. A significant portion of the board of directors, entrusted with strategic decisions, must be physically present in Panama during crucial deliberations. The meticulous recording of minutes and pivotal documentation is essential in substantiating these decisions.

Outsourcing and Substance

Entities are permitted to outsource activities to third-party service providers. However, these services must be conducted within Panama's borders. The outsourced activities should be thoroughly documented, including details of the personnel involved, their qualifications, and expertise.

Navigating Challenges: COVID-19 and Substance

The COVID-19 crisis has introduced unique challenges, notably affecting the ability to physically manage and control entities due to travel restrictions. The OECD clarifies that this exceptional circumstance is unlikely to alter an entity's residence status under a tax treaty, given its temporary and extraordinary nature.

Panama's Tax Residency Landscape

Tax residency in Panama adheres to regulations outlined in Executive Decree 958 of 2013 and Resolution 201-0354 of 2016. These regulations underscore Panama's commitment to maintaining a robust tax framework aligned with international standards.

G.O.C: Your Navigator in Substance Compliance

Global Offshore Company (G.O.C) stands as your trusted companion in achieving tax residency in Panama while embracing substance requirements. With a proven track record in offshore services, G.O.C tailors solutions to your unique needs, ensuring compliance with evolving standards.

Conclusion

The emergence of substance as a tax residency criterion ushers in a new era of fiscal transparency and accountability. Panama, as a proactive participant, ensures the alignment of its tax framework with global norms. Partnering with G.O.C empowers foreign entrepreneurs to navigate the intricacies of Panama's substance requirements, harnessing the benefits of tax residency while fostering international tax fairness and sustainable development.

*For personalized guidance on achieving tax residency in Panama, contact Global Offshore Company at info@globaloffshorecompany.com.*

*Disclaimer: While G.O.C endeavors to provide accurate information, this article serves as a reference guide and should not substitute professional legal advice. Please consult G.O.C's professional team of support for advice tailored to your specific circumstances.*