Panama enacted Law No. 526 on 28 May 2026, that modifies the country’s Tax Code and introduces a new economic substance framework applicable to entities that are part of multinational groups domiciled in Panama and that derive certain passive income from abroad. These provisions will enter into force from the 2027 fiscal year.
The Law represents a significant step forward in strengthening Panama’s tax and economic framework, its competitiveness and stability, and in supporting the country’s commitment to international standards on tax transparency and economic substance.
Scope of Application
The law’s dispositions apply to entities incorporated or domiciled in Panama that are members of a multinational group and that earn foreign-source passive income.
For these purposes, a multinational group is defined as a group of two or more companies linked by ownership or control that are tax residents in different jurisdictions, including their parent companies, subsidiaries, and permanent establishments.
An entity shall be deemed to be part of a multinational group where:
- It is included in the group’s consolidated financial statements for reporting purposes in accordance with the accounting principles applied by its parent company, or would be required to be included if such statements were prepared or if its equity interests were listed on a public securities market;
- It is excluded from the financial statements on the basis of size or materiality.
Economic Substance and Reporting Requirements
The Law defines economic substance as the existence and effective use in Panama of appropriate human resources, assets, facilities, leadership, management, control, risk management, and operating expenses proportionate to the nature, scale, complexity, and type of foreign-source passive income earned.
Accordingly, to be treated as a qualified entity and retain the exemption on foreign-source passive income, an entity must demonstrate compliance on an annual basis through the filing of an affidavit that it meets the following conditions:
- Availability in Panama of adequate human resources who are properly compensated and qualified and have adequate facilities for carrying out the primary activities;
- Strategic decision-making within the country regarding operations and assumption of operational risks within the territory of Panama;
- Incurrence of adequate operating costs and expenses in Panama.
Entities within a multinational group that derive foreign-source passive income and whose principal activity is the holding of equity participation in local or foreign entities are not required to meet the strategic decision‑making and operating expenditure requirements, provided they do not engage in any commercial activity or make any substantial investment in the equity interests they hold.
Failure to meet the economic substance requirements will result in the entity being classified as a non-qualified entity, subject to a flat tax rate of 15% on its net taxable income.
Types of Foreign-source Passive Income in Scope of the Law
The categories of foreign‑source passive income covered by the law include:
- Dividends
- Interest
- Royalties
- Capital gains
- Income from movable and immovable capital
- Other forms of passive income derived from movable capital
Excluded Entities
The law excludes certain regulated and sector‑specific entities, including:
- Financial institutions licensed and subject to supervision by the Superintendency of Bank, the Superintendency of the Securities Market, the Superintendency of Insurance and Reinsurance, or any other competent financial supervisory authority;
- Insurance and reinsurance companies;
- Entities engaged in brokerage activities in securities markets or other regulated investment services, subject to licensing and oversight by the Superintendency of the Securities Market;
- Managers or administrators of investment funds, pension funds, or other regulated collective investment vehicles authorized and supervised in Panama;
- Entities engaged in the commercial operation of vessels or ships registered under the Panamanian registry and governed by the special merchant marine legislation. This includes shipowners, operators, and vessel managers, subject to specific substance conditions.
Outsourcing Economic Substance Reporting
The availability of human resources and the incurrence of operating costs and expenses may be carried out by third-party service providers, provided that:
- The outsourced activities are performed within Panama;
- The service provider has adequate human resources and appropriate facilities to deliver the services;
- The entity retains appropriate oversight and control over the outsourced activities.
Non-qualified Entities
An entity shall be deemed a non-qualified entity where any of the following occur:
- Failure to comply with the reporting requirement in the tax return regarding passive income from foreign sources;
- Failure to meet the economic substance conditions applicable to such income;
- Failure to provide or partial provision of information in the tax return;
- Submission of false information within the tax return or information that is clearly inconsistent with the actual nature of the reported activities, assets, risks, human resources, facilities, or operating expenses.
Tax Treatment of Non-qualified Entities
Foreign-source passive income earned by a non-qualified entity will be subject to a 15% tax on net taxable income, without this resulting in the imposition of any other tax.
Net taxable income is determined by deducting from gross income the costs and expenses that are necessary for its generation, preservation, and maintenance, provided they are duly substantiated and directly related to the income concerned.
Foreign Tax Credits
Entities may claim a credit for income tax effectively paid abroad on the same income, up to a maximum equivalent to the tax due in Panama. These credits are strictly personal to the taxpayer and are not refundable, transferable, or capable of being carried forward to subsequent tax periods.
Our Panama team is available to answer any questions and guide you through the economic substance reporting process. For further information, please reach out to panama@tridenttrust.com.