The enactment of Law 526 of May 28, 2026, introduced a new economic substance regime into Panama’s Tax Code, applicable to certain entities incorporated or domiciled in Panama that form part of multinational groups and derive foreign-source passive income.

It is important to emphasize that this new legislation does not alter Panama’s territorial tax system nor does it create a general tax on foreign-source passive income. Its scope is limited to specific circumstances where an entity is unable to demonstrate compliance with the economic substance requirements established under the law.

Accordingly, the entry into force of this new regime requires multinational corporate structures and private wealth arrangements with a connection to Panama to carefully assess whether they fall within its scope of application.

Which Entities Are Subject to Law 526?

Law 526 applies only when certain conditions are met. In general terms, an entity should evaluate its obligations under this regime when it:

• Is a legal entity incorporated or domiciled in Panama;
• Forms part of a multinational group; and
• Derives foreign-source passive income.

The mere existence of a Panamanian corporation or private interest foundation within a structure does not automatically mean that it is subject to economic substance requirements. It is necessary to analyze the composition of the group, the tax residence of the entities involved, the nature of the income generated, and the particular characteristics of each structure.

What Is Considered a Multinational Group?

Law 526 defines a multinational group as a group of two or more entities linked through ownership or control, tax resident in different jurisdictions, including its parent entity, subsidiaries, and permanent establishments, provided that the conditions established by the law are met.

Therefore, the existence of entities in more than one jurisdiction should not be assessed in isolation but rather under the specific criteria established by the legislation.

What Constitutes Foreign-Source Passive Income?

The law considers, among others, the following types of income as foreign-source passive income:

• Dividends or profit distributions;
• Interest;
• Royalties;
• Capital gains;
• Income derived from real estate capital; and
• Other income derived from movable capital.

Under Panama’s territorial tax principle, these types of foreign-source income have traditionally not been subject to taxation in Panama. However, Law 526 establishes an exceptional taxation mechanism in certain cases where an entity fails to qualify under the economic substance requirements.

What Does Economic Substance in Panama Mean?

Economic substance requires that an entity maintains, in accordance with the nature and complexity of its activities and the income generated, elements such as:

• Adequate and qualified human resources;
• Appropriate facilities in Panama;
• Strategic decision-making within the country;
• Management and control of risks associated with its activities; and
• Adequate operating expenses directly related to the generation of the relevant income.

The assessment of these elements will depend on the specific circumstances of each entity and the nature of the passive income generated.

Reporting and Compliance Obligations

Entities falling within the scope of Law 526 will be required to report the relevant information in their annual income tax return and demonstrate compliance with the applicable economic substance requirements.

The specific procedural and formal requirements will depend, in part, on the regulations to be issued by the Executive Branch.

What Happens if an Entity Does Not Meet the Requirements?

Law 526 establishes that an entity considered a “non-qualified entity” may become subject to an exceptional 15% tax on its taxable net income derived from foreign-source passive income, in accordance with the criteria established in the Panamanian Tax Code.

Special Considerations for Private Wealth Structures

In practice, many Panamanian private wealth structures, including corporations and private interest foundations, should carefully analyze whether they effectively form part of a multinational group and whether they generate the categories of passive income contemplated under Law 526.

The existence of a Panamanian entity within a private wealth structure does not, by itself, mean that it must comply with all economic substance requirements. The determination will depend on a comprehensive analysis of the facts and circumstances of each case.

The Importance of an Individualized Assessment

The new economic substance regime represents a significant development for certain international structures connected to Panama. However, its application is neither automatic nor general.

Each structure should be evaluated based on factors such as the composition of the multinational group, the tax residence of the entities involved, the nature of the income generated, and the ability to demonstrate compliance with the economic substance requirements established by law.

FABREGA MOLINO’s multidisciplinary team has extensive experience advising local and international clients on tax matters, private wealth structures, and cross-border corporate arrangements. We are prepared to assist clients in assessing the impact of Law 526 and implementing appropriate compliance strategies.