Global Tax Alert (News from Transfer Pricing) | 23 August 2013

Panama approves Executive Decree regarding transfer pricing, attribution of income to permanent establishments, and tax residency

  • Share

Panama's Executive Decree No. 958, issued on 7 August 2013, (the Executive Decree) adopted regulations related to Fiscal Code provisions on the transfer pricing regime,1 the attribution of income to permanent establishments, the definition of tax residence and the validity of the tax residence certificates issued in other jurisdictions.

Transfer pricing

The main regulations on transfer pricing are the following:

  • The fulfillment of the arm's length principle under Article 762-A of the Tax Code must be established on a transaction-by-transaction basis. A joint analysis2 in cases where transactions are closely related3 or continuous is accepted.
  • The comparability analysis under Article 762-E of the Tax Code, which is made with respect to products or business life cycles covering more than one tax year, may apply to comparable transaction information from two or more tax periods (preceding or subsequent).
  • Rules are established to implement adjustments with the purpose of increasing comparability provided for in Article 762-E of the Tax Code, including cases in which adjustments could be made, factors that should be taken into account, or types of adjustments that may be used.4
  • They define internal and external comparables, establish a mandatory priority in the implementation of internal comparables over external ones and require that the reasons for not applying an internal comparable be duly documented.
  • Public and available databases developed by editors that gather information from public companies may be used when applying external comparables. In the absence of available information about companies or comparable transactions in Panama, public information about companies or comparable transactions from other countries may be used.
  • They provide steps to apply both implementation options of the Profit Split method:5 (i) contribution analyses and (ii) residual analyses.
  • They list the information and documentation that must be submitted as part of the transfer pricing study.
  • The transfer pricing study, and any information requested by the tax authorities, must be submitted in the Spanish language.

Rule for the allocation of income to permanent establishments

In accordance with Article 762-M of the Tax Code, permanent establishments should be subject to income tax on their Panamanian source income, via an annual tax affidavit.

The Executive Decree states that the income attributable to a permanent establishment is that one which would be obtained by the permanent establishment as a separate and independent enterprise, taking into account the functions performed, assets used and risks assumed.

Tax Residence of individuals

Article 762-N of the Tax Code includes as tax residents the individuals that have established their permanent home in Panama. In this regard, the Executive Decree establishes a list of examples of criteria used to determine whether an individual has a permanent home in Panama, including:

  • A permanent dwelling in the territory of Panama (house, apartment or room) at their disposal.
  • Their center of economic interests is in Panama.
  • The center of their family interests is in Panama.

Tax residence of business entities

Article 762-N of the Tax Code includes as tax residents the entities that are incorporated under the laws of Panama and that have means of management and administration within the Panamanian territory. It also includes entities incorporated in a foreign country that have means of management and administration within the Panamanian territory and that are duly registered in the Public Registry in Panama.

Under the Executive Decree the following criteria should be used to determine if an entity has means of management and administration in Panama:

  • Whether the Board of Directors or equivalent corporate body holds its meetings in Panama, where decision-making processes that influence the management and administration of the entity take place.
  • In the event that all or most of the members of the Board of Directors or equivalent corporate body have transferred, legally or de facto, their management and administration responsibilities to third parties, whether the third parties are based in Panama at the time of exercising such responsibilities.
  • Whether the company undertakes in Panama commercial activities of support to other entities, irrespective of the source of income, provided the main offices are established within Panama.

Term of the certificates of tax residence issued by foreign authorities

In accordance with article 762-Ñ of the Tax Code, the benefits of the conventions for the avoidance of double taxation will only be applicable when it can be proved that the beneficiary is a tax resident of the contracting state. For tax residency purposes, the certificates issued by foreign authorities, duly legalized and officially translated, should be considered as a reliable proof.

Pursuant to the Executive Decree, these certificates should be valid for 12 months as of their date of issuance, unless a shorter period is set forth by the issuing state.


1. Defined in Law 33 of June 2010 and Law 52 of August 2012. A specific tax alert was issued on each law.

2. According to OECD rules on Transfer Pricing matters.

3. According to OECD rules on Transfer Pricing matters.

4. E.g., working capital adjustment designed to reflect differing levels of accounts receivable, accounts payable and inventory the controlled and uncontrolled parties.

5. As defined in section B of Article 762-F of Law 33.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited Corp., Panama City
  • Luis Eduardo Ocando
    +507 208 0144
  • Maria Jose Luna
    +507 208 0100
  • Carol Abuchaibe
    +507 220 8980
  • Isabel Chiri
    +507 208 0100
Mancera, S.C. , Mexico City
  • Jorge Castellon
    +52 55 5283 8671
Ernst & Young, S.A., San José, Costa Rica
  • Rafael Sayagués
    +506 2208 9880
  • Alexandre Barbellion
    +506 2208 9800

EYG no. CM3754