Law 526 of 2026, published in Official Gazette No. 30534-B of May 28, 2026. Effective as of fiscal year 2027.
A. Purpose
To add a new Chapter II to Title I of Book IV of the Tax Code, establishing economic substance rules for certain foreign-source passive income earned by entities of multinational groups incorporated or domiciled in Panama. It seeks to support Panama’s removal from the European Union’s list of non-cooperative jurisdictions.
B. What is a multinational group?
Two or more entities linked by ownership or control, tax residents in different jurisdictions (parent company, subsidiaries, and permanent establishments). An entity is part of the group if: (i) it is, or should be, included in the consolidated financial statements of the parent company; (ii) it would have to be included if its equity interests were traded on a public securities market; or (iii) it is excluded from consolidation on the basis of size or materiality. Permanent establishments are always part of the group.
C. Which entities does it apply to?
The regime applies to a Panamanian entity that simultaneously meets the following requirements:
• Being incorporated or domiciled in the Republic of Panama;
• Being a member of a multinational group; and
• Generating foreign-source passive income (dividends, interest, royalties, capital gains, income from immovable property, or other passive income).
D. Classification of entities
Qualified entity: An entity that demonstrates economic substance with respect to each income-generating asset. The foreign passive income is not subject to taxation in Panama, as the ordinary territorial treatment is preserved.
Non-qualified entity: An entity that does not demonstrate economic substance. The foreign passive income is taxed at a single and definitive rate of 15% on the net taxable income for the relevant fiscal year, without triggering any other tax.
Grounds for disqualification: an entity becomes non-qualified (and its passive income is taxed at 15%) if it: (i) fails to report the foreign passive income in its tax return; (ii) fails to demonstrate adequate economic substance; (iii) fails to provide, or only partially provides, the required information; or (iv) submits false information or information that is evidently inconsistent with the reality of its activities, assets, risks, personnel, facilities, or expenses.
E. Economic substance requirements
To be considered a qualified entity and maintain the favorable tax treatment, the entity must simultaneously demonstrate, with respect to each income-generating asset:
1. Human resources and infrastructure: adequately compensated and qualified personnel dedicated to the management, direction, and/or control of the assets generating the foreign-source income, and having adequate facilities in Panama for carrying out the activities associated with the asset.
2. Direction and decision-making: adopting the strategic decisions within Panamanian territory and bearing the associated risks from Panama.
3. Operating costs and expenses: incurring adequate operating costs and expenses in Panama, other than personnel compensation and facilities.
F. Reduced requirements for holding entities
Entities of a multinational group that earn foreign-source passive income and whose principal activity is the holding of equity interests in other entities, local and/or foreign, involving the non-habitual acquisition, holding, and disposal of such interests, shall not be required to comply with items 2 and 3 above (Section E.), provided that they do not carry out any commercial activity or substantial investment with respect to the interests acquired in other entities. These requirements likewise do not apply to entities of a multinational group that earn foreign-source passive income and whose principal activity consists exclusively of the non-habitual acquisition, holding, or transfer of immovable property. In both cases, however, the entity must still comply with item 1 (human resources and facilities), with the reporting and information obligations, and with the legal provisions applicable to its incorporation or registration in Panama.
G. Outsourcing
The activities related to human resources/facilities and to operating costs and expenses may be carried out by third parties, provided they are performed within Panamanian territory. An entity of a multinational group may outsource these services; however, the provider’s resources used to demonstrate the economic substance of an entity may not result in an overlap of hours of the assigned resources where services are provided to multiple recipients. An entity of a multinational group that uses outsourcing must maintain adequate supervision and control over the activities carried out by the service provider within the territory of the Republic of Panama. The Ministry of Economy and Finance will establish the form and means by which an entity of a multinational group that uses outsourcing must provide the information.
H. Income tax return
Every entity of a multinational group incorporated or domiciled in the Republic of Panama must file annually, within the deadlines established in the Tax Code (which, as a general rule, is by March 31), an income tax return reporting the foreign passive income earned and the information supporting compliance with the economic substance conditions, even where it is classified as a qualified entity.
I. Preferential regimes
Entities covered by a preferential tax regime (e.g., Multinational Enterprise Headquarters – SEM, EMMA, free trade zones, City of Knowledge, and similar regimes) that earn foreign-source passive income are not outside the regime: they must likewise demonstrate qualified-entity status with respect to each type of passive income. The Law contemplates two scenarios:
• With an economic substance return before the regime administrator: if the regime already requires them to file an economic substance return before its administrator, they must also report the foreign passive income and the substance information in the income tax return for the relevant period.
• Without such a return: if the regime does not require them to file an economic substance return, they must demonstrate qualified-entity status under the terms of the Law.
J. Sector-specific exclusions
The regime does not apply to certain regulated entities, to the extent that the foreign passive income is directly and effectively linked to their ordinary regulated activity. The following are excluded:
• Financial and insurance entities: banks supervised by the Superintendency of Banks; brokerage firms and securities market entities supervised by the SMV (Superintendency of the Securities Market); and insurers/reinsurers supervised by the Superintendency of Insurance and Reinsurance. Important: insurance or reinsurance entities captives that are part of a multinational group do not benefit from the exclusion.
• Securities intermediaries and fund managers: brokerage firms and investment service providers licensed by the SMV; and managers or administrators of investment funds, pension funds, or other regulated collective investment vehicles, with respect to income generated on behalf of the managed funds and subject to special tax treatment.
• Merchant marine: entities engaged in the commercial operation of vessels registered in the Panamanian registries (shipowners, operators, and managers), given the inherently mobile nature of the activity. Substance is demonstrated through registration/authorization before the Panama Maritime Authority and compliance with the special maritime regulations; it even covers returns on treasury surpluses, reserves, or guarantees linked to the operation of the vessels.
The exclusion is not automatic. The entity must: (i) demonstrate to the MEF (Ministry of Economy and Finance) that it is duly licensed, authorized, or registered and that it continuously complies with the applicable prudential, corporate governance, and supervisory requirements; (ii) show that the passive income is directly and effectively linked to its regulated activity and does not stem from structures designed to obtain a tax advantage; and (iii) maintain in Panama the effective direction and management, as well as adequate human resources, assets, and infrastructure.
K. Other relevant aspects
• Intangible assets: Special regime based on a proportional exemption tied to the development of the asset carried out in Panama. It applies only to registered intangibles (industrial property or copyright).
• Credit for taxes paid abroad: Creditable against Panamanian income tax, capped at the local tax; personal and non-transferable. Any excess is not refundable and may not be carried forward to subsequent fiscal years.
• Permanent establishment: The Law rewrites Article 762-M of the Tax Code (Art. 3), broadening and modernizing the concept of permanent establishment.
• Registry, supervision, and confidentiality: The MEF will maintain a registry of the entities subject to the regime and may verify compliance at any time. The information reported is confidential and restricted, and may only be shared under international tax information exchange agreements.
• Recordkeeping: The entity must keep in Panama the supporting documentation that allows the MEF to verify the accuracy and sufficiency of the declared substance, including itemized accounting records in the case of intangible assets.
L. Effective date and regulations
The Law applies as of fiscal year 2027. The Executive Branch must issue implementing regulations for the Law within a maximum period of 90 calendar days. The operational aspects remain pending such regulations.
This article provides a high-level summary of Law 526 of 2026, recently enacted. Certain operational aspects will be defined in the regulations to be issued by the Executive Branch. It does not constitute legal or tax advice. To assess the specific impact on your organization, please contact us.
