Panama joins in, the UAE moves the checks into the tax return, Brussels shelves Unshell: why substance matters more, not less, and where the question is really decided
For decades Panama was the country where foreign income simply was not taxed. Since 28 May 2026 it has a law that changes exactly that for part of the company population, and since 2 September 2026 it also has the regulation that explains how the law is meant. At the same time, Brussels has buried its Unshell directive. If you conclude from this that substance is no longer an issue, you are reading the situation the wrong way round.
Economic substance in 2026: the rules do not vanish, they move
Substance requirements are not disappearing in 2026, they are changing form. In the EU, the Council stopped work on the Unshell directive (ATAD 3) in June 2025, and the Commission then withdrew the proposal. Substance stays on the agenda, though. The Commission’s proposal of 24 June 2026 to recast the Directive on Administrative Cooperation (DAC) keeps the substance criteria in DAC6 hallmark D2 and wants to develop them further through a Council implementing act (Commission, COM(2026) 308, analysis by Leiden University). So far this is a proposal, not applicable law. Member states keep their own anti-abuse rules.
Outside the EU the same pattern shows up. The UAE scrapped its stand-alone substance filing but ties tax rates to substance. Singapore links tax-free foreign income to it. And Panama is introducing something that did not exist before. Everywhere the trend is the same: fewer forms, more tax consequences if substance does not hold up in an audit.
Panama: substance rules for foreign income from 2027
Panama still taxes mainly local-source income, but from 2027 a new rule applies to a defined group of companies. Law 526 of 28 May 2026 covers Panamanian companies that belong to a multinational group and receive foreign-source passive income, meaning dividends, interest, royalties, capital gains or real estate income. If substance is not shown, that income is taxed at a final rate of 15 percent. The implementing decree (Executive Decree 32) was published on 2 September 2026, the rules apply to tax periods from 1 January 2027, and the first return falls due in 2028 (summary by EY, Infobae).
What does the decree ask for in practice? According to published summaries: at least one qualified, paid person in Panama (employed or through a service provider), office space on the ground, two in-person board meetings per year in Panama with documented strategic decisions, and operating expenses that fit the business. Directors do not have to live in Panama. Pure equity holding companies get a simplified regime: personnel and premises must fit a holding activity, plus proper governance and records. What matters is that steering, risk management and control are actually exercised in Panama. Board decisions therefore cannot be outsourced.
But, you might object, I only have a single company in Panama. That may be true. Still, a group means companies linked by ownership or control that are tax resident in different countries. Whether your set-up falls under it should be checked with a licensed adviser against the text of the decree, not against a summary.
UAE: substance now sits inside the corporate tax rate
The UAE abolished its Economic Substance Regulations for financial years ending after 31 December 2022 (Cabinet Decision 98 of 2024), penalties included (Clyde & Co). That was not an all-clear. A Qualifying Free Zone Person who wants to keep the 0 percent corporate tax rate still has to show adequate substance in the free zone: qualified staff, real premises, local spending and the core income-generating activities carried out in the zone.
If that fails, the standard 9 percent rate applies for the current and the following four tax periods, because the free zone status falls away for that time (Deloitte, KPMG on the tax authority’s guide). The check no longer happens through a form but during a tax audit. How a UAE structure can be set up in comparison with Singapore is covered in our article on Singapore and the UAE.
Singapore: tax-free foreign income depends on your people on the ground
Since 1 January 2024, Singapore taxes certain foreign-source income, for instance disposal gains, when it is remitted, unless the company is an excluded entity with adequate economic substance (Section 10L). The rule concerns companies in a group where at least one member has a place of business outside Singapore.
For pure equity-holding companies, regular accounts, operations in Singapore and adequate human resources there are enough. For everyone else, the tax authority looks at the number and qualifications of employees in Singapore, the expenditure incurred there and whether key decisions are made by people in Singapore. IRAS assesses this case by case and publishes rulings on concrete cases, for example Advance Ruling Summary No. 8/2026 in June 2026.
Your home country asks first: where is the company managed?
The most important substance question is often not the one in the country of incorporation, but the one in the country where you are tax resident. Many jurisdictions ask where a company is actually run and put the registered seat aside, at least initially. Germany looks at the centre of management (section 10 of the Fiscal Code), the UK, as we understand it, at central management and control, Switzerland at the registered seat or the place of effective management. The wording differs in detail, the direction is the same. If you steer a foreign company from your own living room, you risk that it becomes fully taxable where you live, regardless of its registered seat.
A permanent establishment is another possibility. The German Federal Fiscal Court has held that a managing director working in Germany can be a permanent representative of a foreign corporation (BFH, 23 October 2018, I R 54/16). Other countries know comparable arguments.
Then there are controlled foreign company rules. Every EU member state must have them (ATAD), and many countries outside the EU do as well. Thresholds, ownership quotas and exceptions differ widely. In Germany, as we understand it, attribution applies when taxpayers hold more than 50 percent, the company earns passive income and the foreign tax burden is below 15 percent (before the reform it was 25 percent). The exception for genuine economic activity only works there for the EU and the EEA, and even there it requires proof. A company in Singapore or the UAE with perfect local substance therefore does not automatically solve the problem. What applies to you is decided by the law of your country of residence.
A worked example: a holding with 400,000 euros of dividends
Substance costs money, missing substance can cost more. Take a Panamanian holding that belongs to a group with subsidiaries in two countries and receives 400,000 euros a year in passive foreign income. Without proof of substance, a flat 15 percent would apply from 2027, which is 60,000 euros a year.
Under the simplified holding regime the company would need one paid person and office space on the ground. Let us assume, purely as an assumption, 25,000 to 35,000 euros a year. The break-even then lies at roughly 170,000 to 235,000 euros of passive income a year. At 50,000 euros of income the effort does not pay, and the question becomes whether the structure is still the right one. Treat the figures as a calculation frame, not a cost forecast. And remember that substance in Panama says nothing about what your home country thinks about where the company is managed.
What this means for your planning
Three questions help to review a structure soberly. Where are decisions actually taken? Who really works on the ground? What costs arise there? If the honest answers are at my kitchen table, nobody and next to none, action is needed, whatever the country of incorporation.
In practice that means keeping minutes, service contracts and evidence in order, not confusing a virtual address with substance, and not treating every rule as final, because conditions can change. Banks also look closely these days, as we describe in our article on rejected business accounts. And why the question of the best country is often the wrong one is in our piece on choosing a jurisdiction. For tax and legal detail, a licensed adviser from the Singabiz Network is the right address.
How you can proceed
If you want to know whether your existing structure holds up against the requirements of the country of incorporation and of your home country, talk to us. We look at your set-up and tell you openly where substance is missing and where it does not pay. A letterbox has one advantage: it is quiet and cheap. It just never asks who is actually reading the mail. The tax office does.
