Economic Substance in Panama: Which Companies Are Affected

From the 2027 fiscal year, Panama is changing the way it taxes foreign income, and for some companies economic substance in Panama becomes the condition for keeping their tax exemption. The territorial system itself remains in place, and company formation in Panama is still an attractive route for international business. The new requirements do not apply to everyone, so the practical question is whether a particular structure falls within their scope.

What Law 526 Changed

Law 526 was passed on 28 May 2026 and published in Panama’s Official Gazette. It does not abolish the territorial tax system, and foreign-source income remains exempt from tax. For certain companies, however, that exemption is now tied to genuine economic substance in Panama.

The territorial system stays. The one change is that companies within a multinational group must now back their exemption on foreign income with real substance.

The purpose of the law is to bring Panama’s tax regime into line with OECD and European Union standards. Panama currently appears on the EU list of non-cooperative jurisdictions, largely because its exemption for foreign income did not require any real presence. The new law is designed to close that gap and to support Panama’s removal from the list at a future review, although that outcome is not yet guaranteed.

Practitioners describe the new regime as “territoriality 2.0”: the benefit remains, but it now has to be earned through substance. The implementing regulations have not yet been issued and are expected around September 2026, and many practical details will depend on them. They are likely to clarify the minimum level of presence, the reporting procedure and the criteria for particular categories of company.

Which Companies the Substance Rules Affect

The law applies only where two conditions are met at the same time:

1. The company belongs to a multinational group, meaning it is linked by ownership or control to an entity in another jurisdiction.
2. The company earns passive income from foreign sources, such as dividends, interest or royalties.

If either condition is missing, the law does not apply. Foreign income on its own no longer guarantees an exemption for companies that form part of a group, yet most structures with a single owner fall outside the rules entirely. Checking these two features is the first and most important step, because it quickly rules out the structures that the change does not touch. In practice, the majority of Panamanian company owners will find that the new rules do not concern them.

What Counts as a Multinational Group

A multinational group is two or more legal entities linked by ownership or control and resident for tax purposes in different jurisdictions. The group exists only when both features are present, and it includes the parent company, its subsidiaries and any permanent establishments. An entity forms part of the group if it is, or should be, included in the parent’s consolidated financial statements.

There is no revenue threshold. A structure of just two related companies in different countries can fall within the law.

This sets the law apart from the OECD’s global rules (Pillar Two), which apply only above a turnover of EUR 750 million. Even a very small structure can be caught. For example:

• a Panamanian company with a subsidiary in Colombia;
• a private foundation holding a foreign operating company;
• a Panamanian company owned by a foreign entity.

An individual who holds shares in Panamanian companies does not create a group, because the definition refers specifically to legal entities. The classic case of a single company with an individual owner therefore remains outside the law.

What Economic Substance Means

Economic substance in Panama means the genuine presence in the country of staff, assets and premises, together with real management appropriate to the nature of the passive income. The law sets three main conditions for a company to be treated as “qualified”:

• adequate human resources and premises in Panama;
• key management decisions taken within the country;
• adequate operating expenditure incurred in Panama.

Some functions under the first and third conditions may be outsourced to service providers based in Panama. The mere formal existence of a company in Panama is not enough; the presence has to be real. Adequacy is judged by the nature and scale of the activity, the type and amount of passive income, the number of income-generating assets and the level of risk involved, so there is no universal minimum.

The Ministry of Economy and Finance will keep a register of companies that fall within the regime. The information is confidential and is shared only through the exchange of tax information, and each company must keep documents in Panama that support the presence it has declared.

Which Income Counts as Passive

The law treats several categories of income as passive:

• dividends from foreign companies;
• interest on loans and deposits;
• royalties for the use of rights;
• capital gains;
• other movable-capital income.

Active income from genuine commercial activity does not fall within the definition. It was precisely this passive income that concerned the European Union, since exempting it without any real activity was seen as insufficiently justified.

Income from Panamanian sources remains outside the new regime, as does foreign income that does not fall into the categories above. Where a company earns both active and passive income, the regime affects only the passive part. The nature of the income therefore has to be assessed separately for each company.

When Economic Substance Is Not Required

In practice, many common structures remain outside the law. This applies where there is no second related entity in another jurisdiction, and to companies whose passive income comes only from Panama.

A company with a single individual owner and no related structures abroad has no obligation to demonstrate substance.

The table below sets out typical cases on each side of the line.

Within the law	Outside the law
• a company with a foreign subsidiary; • a foundation holding a foreign company; • a group with a non-resident member and assets abroad	• a company with a single individual owner; • a standalone company with no related structures; • passive income only from Panama

These examples rest on the definition of a group and on the nature of the income. The final classification of a particular company will depend on the implementing regulations.

Economic Substance for Holding Companies

For holding companies, the law provides a simplified regime. Where the main activity is holding shares in other companies, the second and third conditions do not apply, and it is enough to satisfy the first condition on staff and premises, together with annual reporting. The same approach applies to companies that merely hold real estate abroad, provided this involves non-habitual acquisition and holding rather than active trading. Any commercial or active investment activity removes the right to the relief.

The simplified treatment does not amount to a full exemption: a minimum of real presence in Panama is still required. This matters for anyone using a Panamanian structure as an overseas holding company.

Economic Substance in Practice

Consider three typical cases:

1. A Panamanian company holds an interest in an operating company abroad and receives dividends from it. This is a multinational group with foreign passive income, so the company falls within the law. As a pure holding, however, it need only demonstrate basic substance.
2. An individual owns a single Panamanian company with no related structures in other countries. No group arises, so the law does not apply, even where there is foreign passive income.
3. A Panamanian company belongs to a group but carries on genuine trading activity. Its income is active rather than passive, so the second condition is not met.

Exclusions for Shipping and Finance

Certain regulated companies are taken outside the law entirely:

• supervised financial institutions;
• merchant shipping entities under the Panama flag;
• regulated investment fund managers.

The exclusion applies where the conditions set by the law are satisfied, and it is not automatic. The precise parameters will be set out in the implementing regulations.

This exclusion matters in particular for the maritime sector, since Panama operates one of the largest merchant fleet registers in the world. Vessels under a foreign flag do not benefit from the exclusion and require a full substance analysis.

The 15% Tax and When It Applies

Where a company falls within the law and does not demonstrate substance, there are consequences. The previously exempt passive income is then subject to a final tax at 15%, calculated on the net taxable income for the period. The rate applies only to the passive income that is caught, not to all of the company’s receipts, so the rest of the territorial regime is unaffected.

A company can be treated as “non-qualified” only through proceedings under the Tax Procedure Code, which gives the taxpayer certain procedural safeguards, and the tax is not applied automatically. Companies within the regime file an annual return confirming that they meet the substance conditions.

The law applies from the 2027 fiscal year, while the implementing regulations are expected around September 2026. The intervening time is best used to review the structure.

What Company Owners Should Check

For the owner of a Panamanian company, a few steps are worth taking:

1. Establish whether the structure includes a second related entity in another country.
2. Determine whether the company earns passive income from foreign sources.
3. Where the law applies, assess the staff, premises and management in Panama.
4. Put the accounting records and annual renewals in order.
5. Keep documents in Panama that support the declared presence.

For holding companies, it is enough to demonstrate basic substance and file the annual reporting. A company that has lost good standing should restore it first.

What the New Regime Means for Business

For most owners of Panamanian companies, nothing changes. Structures with a single individual owner and standalone companies remain outside the law. Genuine economic substance in Panama is required only from companies within a multinational group that earn foreign passive income.

The new regime is a significant but manageable change, and its clear exclusions and simplified rules cover many common structures. The key question for any company is whether the group includes a related entity in another jurisdiction and whether there is foreign passive income. Because much depends on the forthcoming regulations, conclusions for a particular company are best reached on an individual basis.