On May 28, 2026, Law 526 of 2026 was enacted and published in Panama’s Official Gazette. The law introduces economic substance requirements applicable to certain entities that are part of multinational groups and derive foreign-source passive income.
For purposes of the law, a multinational group is generally defined as a group consisting of two or more entities connected through ownership or control and tax resident in different jurisdictions.
The new regime applies to Panamanian entities that derive foreign-source passive income, including income arising from the holding, exploitation, transfer or investment of capital, financial assets, property or rights, such as dividends, interest, royalties and capital gains.
I. WHAT DOES THE LAW PROVIDE?
The law does not introduce a general tax on foreign-source passive income.
Its purpose is the opposite: entities that demonstrate adequate economic substance in Panama will continue to benefit from the territorial tax system currently in force, allowing their foreign-source passive income to remain exempt from taxation in Panama.
Entities subject to the economic substance regime will be required to file an annual income tax return with the Panamanian Tax Authority, disclosing the nature and source of their income and demonstrating compliance with the applicable economic substance requirements.
It is important to note that this obligation applies only to entities falling within the scope of the law. Not all Panamanian corporations or foundations are subject to this regime. A corporation or foundation that is not part of a multinational group, as defined by the law, falls outside its scope.
Failure to satisfy or demonstrate compliance with the applicable economic substance requirements may result, on an exceptional basis, in a 15% tax on net taxable income derived from foreign-source passive income.
Foreign-source passive income includes, among others:
- Dividends and profit distributions;
- Interest income;
- Royalties;
- Capital gains;
- Real estate investment income; and
- Other income derived from movable capital.
II. WHAT IS ECONOMIC SUBSTANCE?
Entities falling within the scope of the law must demonstrate compliance with the following requirements on an annual basis:
- Adequate human resources, consisting of qualified and appropriately remunerated personnel dedicated to the management of income-generating assets, as well as adequate facilities in Panama.
- Strategic decision-making functions carried out in Panama, including the assumption and management of relevant risks.
- Adequate operating expenditures incurred in Panama in connection with the assets generating the passive income.
Compliance with these requirements will be assessed by the Ministry of Economy and Finance based on the nature, scale and complexity of the relevant activities, the type and amount of passive income generated, and the operational structure maintained in Panama.
Entities must maintain supporting documentation sufficient to demonstrate compliance with the economic substance requirements declared to the authorities.
Importantly, the core income-generating activities required under the law may be outsourced to third-party service providers operating in Panama.
FABREGA MOLINO has the experience and capabilities to assist clients in implementing and maintaining the substance requirements contemplated by the new regime.
III. WHO IS SUBJECT TO THE LAW?
The law applies exclusively to entities that:
- Form part of a multinational group; and
- Derive foreign-source passive income.
Accordingly, a corporation or foundation that does not form part of a multinational group is not subject to the regime, regardless of whether it conducts activities in Panama.
Whether a particular entity falls within the scope of the law will be determined by the taxpayer in its filing, subject to review by the Ministry of Economy and Finance.
Several important considerations should be noted:
- Not every entity generating foreign-source income is automatically subject to the regime. The law applies only where both the multinational group and foreign-source passive income requirements are met.
- Holding companies, including entities whose activities are limited to holding shares, ownership interests, bank accounts or certain passive assets, benefit from simplified compliance requirements that reflect the nature of their activities.
- Certain regulated entities are excluded from the regime, including supervised financial institutions, merchant shipping entities and regulated investment fund managers, among others, provided that the applicable statutory conditions are satisfied.
IV. EFFECTIVE DATE AND REGULATORY DEVELOPMENT
Law 526 of 2026 was enacted on May 28, 2026.
Its provisions will apply beginning with fiscal year 2027.
The Executive Branch has been granted a 90-day period to issue the implementing regulations, which will be critical to the practical application of the regime.
We will continue to monitor the regulatory developments closely and keep our clients informed of any relevant updates.
V. NEXT STEPS
Entities that may potentially fall within the scope of the law should consider taking the following steps:
- Assess whether they form part of a multinational group.
- Analyze the nature of the income generated.
- Review their existing levels of economic substance in Panama.
FABREGA MOLINO has been actively involved in the analysis of this legislation from its inception. Our team has the experience and expertise to assist clients in evaluating their structures and navigating each stage of the compliance process. We invite you to contact us to assess the potential impact of this new regime on your particular structures and operations.
VI. CONTACT OUR SPECIALIZED TEAM
Our team, led by Juan Raúl Sosa, remains at your disposal to discuss the implications of this legislation and provide tailored advice regarding your particular circumstances.
