Published on June 4, 2026
On May 28, 2026, the Panamanian Executive Branch enacted Law 526, which amends and supplements the Panamanian Tax Code, specifically with respect to income tax and economic substance requirements for Panamanian companies.
The regulation responds to Panama’s commitment to the international standards promoted by the OECD and to the requirements established by the European Union for its removal from the list of non-cooperative jurisdictions for tax purposes. It has been agreed that the new provisions will become effective as of the 2027 tax year.
The changes introduced by the Law apply to entities that are members of multinational groups and are incorporated or domiciled in Panama, provided they receive foreign-source passive income. Groups are defined as two or more entities linked through ownership or control and that are tax residents in different jurisdictions. It is sufficient for the ultimate beneficial owner outside Panama to control both the Panamanian company and any other entity in the country of the beneficial owner’s residence.
Passive income is defined as dividends, interest, royalties derived from the use of intellectual property assets, capital gains, income derived from real estate capital, and other income derived from movable capital.
The Law does not create a general tax. Entities that are able to demonstrate adequate economic substance will retain the current territorial tax treatment under which foreign-source income is excluded from taxation. Entities that fail to meet the requirements will be subject to an exceptional tax rate of 15% on their net taxable income.
It is important to note that, in order to be considered a “qualified entity,” an entity must demonstrate, for each type of passive income generated and for each tax period: (i) adequate human resources, properly compensated and duly qualified, dedicated to its core activities, together with sufficient physical facilities within Panamanian territory; (ii) that strategic decisions are made in Panama and that operational risks are assumed therein; and (iii) adequate operating costs and expenses incurred in Panama that are directly related to the assets generating the income.
Entities in the financial sector supervised by the Superintendency of Banks, the Superintendency of the Securities Market, or the Superintendency of Insurance and Reinsurance are excluded from the regime with respect to passive income derived directly and effectively from their ordinary regulated activities. The Merchant Marine sector is also excluded. In addition, partial exemptions are provided for holding entities whose principal activity consists of the non-habitual ownership of equity interests, as well as for entities whose exclusive purpose is the acquisition or holding of real estate.
The classification of an entity as a “non-qualified entity” may only be carried out through proceedings conducted in accordance with Panama’s Tax Procedure Code, thereby providing certain procedural safeguards to taxpayers.
Finally, the scope of the aforementioned provisions depends to a significant extent on the corresponding regulations, which have not yet been issued as of the date of this publication.
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