Economic Substance Law

Since the enactment of the Fiscal Code in 1956, Panama's tax legal framework has undergone numerous amendments, all of which must be consistent with the constitutional principles of Panamanian taxation: the principle of tax legality (Article 52 of our National Constitution), the principle of non-confiscation (Article 30 of our National Constitution), the ability-to-pay principle (Article 264 of our National Constitution), and the principle of equality (Articles 19 and 20 of our National Constitution). It is important to note that these constitutional-level provisions guarantee equal tax treatment for all taxpayers subject to tax obligations.

On the basis of the constitutional rules referred to above, and in light of the need to protect our territorial tax system and to comply with the international transparency standards required by the European Union and the OECD, Law No. 526 of May 28, 2026 was enacted and published in Official Gazette No. 30534B, "amending and adding articles to the Fiscal Code relating to income tax and to economic substance for certain foreign-source passive income." This law amends and incorporates economic substance rules for certain foreign-source passive income earned by entities belonging to multinational groups in Panama. It should be noted that this law will take effect as of 2027 and that the Executive Branch has 90 calendar days to issue implementing regulations, the content of which is critically important in determining how the law will be applied in practice.

Below we highlight the most important aspects introduced by Law No. 526 of May 28, 2026.

Scope of Application

Under the articles contained in Law No. 526 of 2026, these rules apply to entities that are members of multinational groups incorporated or domiciled in Panama and that earn foreign-source passive income. A multinational group is understood to mean two or more entities linked by ownership or control that are tax residents in different jurisdictions, including the parent company, its subsidiaries, and its permanent establishments.

The foreign-source passive income covered by Law No. 526 of 2026 consists of the following:

Dividends or shares in profits

Interest

Royalties

Capital gains

Income from immovable property

Other income from movable capital

Economic Substance Conditions

Law No. 526 of 2026 expressly provides that entities forming part of a multinational group that earn foreign-source passive income must demonstrate, on an annual basis and for each type of income earned, the following conditions (requirements):

Qualified, remunerated personnel dedicated to managing the income-generating assets, together with adequate physical facilities in Panama.

Making within the national territory the strategic decisions required for operations, and bearing the associated risks within the territory of the Republic of Panama.

Incurring adequate operating costs and expenses within the territory of the Republic of Panama — other than personnel remuneration and facilities — directly related to the assets that generate the foreign-source passive income.

Special Regime

It is worth noting that Law No. 526 of 2026 clearly establishes a special regime for entities whose principal activity is the passive holding of equity interests in other companies, without carrying out any commercial activity or substantial investment activity in respect of those interests, as well as for entities engaged exclusively in the non-habitual holding of real estate. These entities are subject only to a reduced economic substance requirement: demonstrating qualified, remunerated personnel and adequate physical facilities in Panama (the first requirement). They are not required to demonstrate local strategic decision-making or proportionate operating costs.

Outsourcing of Functions

Law No. 526 of 2026 expressly permits the economic substance requirements to be met by engaging third-party service providers in the Republic of Panama. However, the law does not regulate this in detail, so the implementing regulations are expected to clarify these points, which raise significant questions for companies subject to this economic substance regime.

Consequences of Non-Compliance

Panama's tax legal framework clearly sets out both rights and obligations for taxpayers, and Law No. 526 of 2026 is no exception. Entities that fail to demonstrate economic substance will be treated as non-qualified entities, and their passive income earned abroad will be subject to a 15% rate on net taxable income, calculated by deducting duly documented necessary costs and expenses. The foregoing applies without prejudice to any fines, surcharges, and interest that may arise under the provisions of the Fiscal Code.

It is important to mention that Law No. 526 of 2026 provides an exhaustive list of entities expressly excluded from the economic substance regime, referring exclusively to regulated financial institutions (banks, insurance companies, securities intermediaries, and fund managers) supervised by their respective regulators in the Republic of Panama, as well as merchant marine companies registered in Panamanian registries, with respect to income connected to their ordinary regulated activity.

Recommendations and Conclusions

Given that Law No. 526 of May 28, 2026 will take effect from fiscal year 2027 and that the implementing regulations have yet to be issued, we consider it advisable for all companies belonging to a multinational group, duly incorporated in Panama, and earning foreign-source passive income to carry out a thorough analysis of their structure in order to determine how the law applies to their operations in light of the requirements it establishes.

At AUDITAXES SERVICIOS TRIBUTARIOS S.A., we have an interdisciplinary team of consultants and experts in accounting, tax, and tax law matters, fully equipped to advise you on the steps companies should take to ensure compliance with Law No. 526 of May 28, 2026.