Does it earn foreign-source passive income?

(dividends, interest, royalties, capital gains, real estate income). If not, the law does not apply.

Is it part of a multinational group?

(two or more related entities in different jurisdictions). If not, the law does not apply.

What type of entity is it?

Pure holding or real-estate holding entity → simplified regime. Others → general regime.

Law 526 of 2026 - Economic Substance in Panama: The Essentials for Executives and Business Owners

Panama maintains its territoriality principle. Law 526 of 2026 introduces a narrow exception: certain entities in multinational groups that earn foreign-source passive income must demonstrate economic substance in Panama to preserve their exemption. If they fail to do so, that income may be taxed at a flat 15% rate on net taxable income, starting with fiscal year 2027.

Law

Law 526 of May 28, 2026 (Official Gazette No. 30534-B)

Legal framework

Fiscal Code, Articles 707-A to 707-K

Effective date

Fiscal year 2027 · regulations due within 90 days

Who does it apply to? Three filters

Filter 1: Does it earn foreign-source passive income? (dividends, interest, royalties, capital gains, real estate income). If not, the law does not apply.
Filter 2: Is it part of a multinational group? (two or more related entities in different jurisdictions). If not, the law does not apply.
Filter 3: What type of entity is it? Pure holding or real-estate holding entity → simplified regime. Others → general regime.

Simply having a Panamanian company, foreign investments, or overseas accounts does not, by itself, bring an entity within scope.

How economic substance is demonstrated

There is no fixed minimum spend or headcount: the law applies a proportionality standard based on activity, assets, and risk. The pending regulations will clarify several details.

Requirement

Who does it apply to?

Outsourcing?

a) Human resources and premises in Panama

All entities. The only requirement for pure holdings and real-estate holding entities

Yes, with an exclusive provider in Panama

b) Strategic decision-making and risk management in Panama

General regime only

c) Adequate operating expenditure in Panama

General regime only

Yes, with an exclusive provider

Consequences of non-compliance

If an entity cannot demonstrate the required substance, its foreign-source passive income becomes subject to a flat 15% tax on net taxable income (not gross income). This is not a general tax — it is the direct consequence of non-compliance. A tax credit is recognized for taxes already paid abroad, and standard tax-procedure guarantees apply.

What to do before 2027

1. Inventory — the group´s Panamanian entities and their related entities abroad.
2. Classify — income sources and identify foreign-source passive income.
3. Determine — the applicable regime for each entity: simplified or general.
4. Assess — current substance: personnel, premises, decision-making, and documentation.
5. Prepare — necessary adjustments once the regulations are published.

Conclusion

The period between enactment and the 2027 entry into force is a valuable window to review structures and strengthen corporate governance — not an immediate emergency, but not a reason to delay either. International experience shows the real test comes with implementation and enforcement, not enactment.

Review now whether your structure includes Panamanian entities within a multinational group.
Start documenting strategic decisions and real activity in Panama today.
Contact your trusted advisor for an individualized assessment.

This document is for informational purposes only. It does not constitute legal or tax advice. It reflects the text of Law 526 of 2026, subject to pending implementing regulations. Application to any specific case requires individualized analysis.

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