On 28 May 2026, Panama passed Law No. 526, which introduces new economic substance rules for Panamanian entities that belong to multinational groups. The rules apply from the 2027 tax year.
Scope
The Law applies only to entities incorporated or domiciled in Panama that belong to a multinational group and earn foreign-source passive income (dividends, interest, royalties, capital gains and rental income, among others).
A multinational group is defined as two or more entities linked by ownership or control and tax resident in different jurisdictions. Entities incorporated in Panama are not automatically considered tax resident there; they are only considered so once they have obtained a Tax Residency Certificate issued by the Directorate General of Revenue.
Economic substance requirements
Entities within the scope must demonstrate real economic substance in Panama in order to remain under the territorial principle. This requires:
- Qualified and paid personnel dedicated to managing and controlling the assets that generate such income.
- Adequate physical premises in Panama.
- Strategic decisions taken and risks assumed from Panama.
- Operating costs and expenses in the country, in proportion to the activities carried out.
Core activities may be outsourced to providers located in Panama, provided they are actually carried out in Panama and remain under the direct supervision and control of the entity.
Consequences of non-compliance
An entity that does not demonstrate economic substance will be classified as a “non-qualifying entity”, and its foreign-source passive income will be taxed at a flat rate of 15% on net income. Non-compliance may also give rise to fines, surcharges and interest.
The Law includes an anti-abuse clause allowing the Ministry of Economy and Finance to disregard purely formal or artificial structures with no real substance.
Entry into force
The Law applies from the 2027 tax year, so its effects will first be reflected in the obligations for that year. The Executive Branch has 90 days from its enactment to issue the implementing regulations.
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