What Is Law No. 526 of May 28, 2026?

Law No. 526 of May 28, 2026, published in Gaceta Oficial No. 30534-B, modifies and adds provisions to Panama’s Tax Code concerning income tax and establishes an economic substance framework for certain foreign-source passive income received by qualifying entities. The law responds to evolving global standards regarding base erosion, profit shifting and international tax transparency.

The law does not affect all Panama entities equally. Its primary focus is on legal entities incorporated or domiciled in Panama that form part of a multinational group and that receive specific categories of foreign-source passive income. For entities that fall within this scope, the law introduces requirements related to economic substance, reporting, and — in cases of non-compliance — a potential 15% final tax on the relevant net taxable income.

The regime generally applies beginning with fiscal year 2027, giving entities time to review their structures, assess their obligations and, where applicable, implement appropriate substance or compliance measures. Future implementing regulations from the Ministry of Economy and Finance (MEF) or the Directorate General of Revenue (DGI) may provide additional procedural details.

Does Law 526 Apply to Every Panama Company or Foundation?

No. A Panama corporation, private interest foundation or other entity is not automatically subject to this regime merely because it is organized under Panamanian law. The law establishes specific conditions that must all be present for an entity to fall within its scope.

The three key threshold questions are:

1. Is the entity incorporated or domiciled in Panama?
2. Does it form part of a multinational group as defined by the law?
3. Does it receive foreign-source passive income that is covered by the law?

If the answer to any one of these questions is no, the law may not apply directly to that entity. However, structures may evolve, income streams may change, and the applicable legal framework may be clarified by future regulation. Every structure should therefore be assessed individually by qualified legal and tax professionals.

What Is a Multinational Group?

A multinational group generally refers to a group of two or more legal entities or structures that are linked through ownership or control and are tax-resident in different jurisdictions. This includes parent companies, subsidiaries, holding entities, affiliates, branches and permanent establishments that form part of the same consolidated or commonly controlled group.

The analysis involves examining ownership percentages, control relationships, tax residency in each relevant jurisdiction, and whether the entities are included — or would be required to be included — in consolidated financial statements or a similar group-level reporting structure.

These examples are simplified illustrations only. Whether a specific structure constitutes a multinational group under Law 526 depends on the particular facts, ownership structure, tax residence and applicable legal definitions.

What Is Foreign-Source Passive Income?

Foreign-source passive income, for purposes of Law 526, generally refers to income derived from assets or rights held outside Panama or from activities sourced outside Panamanian territory, that does not arise from active commercial or industrial operations carried out directly by the entity in Panama. The law identifies specific categories of income that may fall within its scope.

Whether specific income constitutes covered foreign-source passive income depends on the source, the nature of the underlying asset, the entity’s role within the group and the applicable definitions. Professional review is essential.

How the Territorial Tax System Is Affected

Panama’s territorial tax system — under which income earned from sources outside Panama is generally not subject to Panamanian income tax — remains the foundational principle of the country’s tax framework. Law 526 does not eliminate or replace Panama’s territorial tax system. Rather, it introduces a specific economic substance and reporting framework that applies to certain multinational group entities receiving covered foreign-source passive income.

A Panama entity within the scope of Law 526 that meets the applicable substance and reporting requirements may continue to benefit from Panama’s territorial approach. An entity that does not meet those requirements — and is therefore classified as a non-qualified entity — may face the 15% final tax on covered net taxable income. The law thus creates a distinction within the broader territorial system, not a departure from it, but a compliance framework for a defined category of entities and income streams.

Qualified Entity vs Non-Qualified Entity

The classification is determined on a fiscal period basis. An entity’s status may vary from year to year depending on its substance, activities, income and compliance with reporting obligations.

What Happens If an Entity Does Not Comply?

An entity within the scope of Law 526 that fails to satisfy the applicable economic substance requirements or reporting obligations for a given fiscal period may be classified as a non-qualified entity. The consequence is that the covered net taxable income attributable to foreign-source passive income for that fiscal period may be subject to a single and final income tax at the rate of 15%.

Beyond the 15% tax, non-compliance may also trigger additional consequences under the Tax Code, including fines, surcharges and interest applicable to late or incomplete filings. The applicable procedure and formal administrative steps would depend on the specific circumstances and determinations made by the relevant tax authorities.

The 15% tax applies to net taxable income related to the covered passive income — not to the gross amount — for the relevant fiscal period. The exact computation methodology may be further clarified by implementing regulations. Entities should work with qualified tax advisers to understand the calculation and the applicable tax base.

Economic Substance Requirements in Panama

Economic substance, in the context of Law 526, refers to the presence of genuine, adequate and demonstrable economic activity in Panama that is connected to the entity’s income-generating operations. It is not merely a matter of formal corporate structure — it requires real indicators of activity, management and resources in the Panamanian jurisdiction.

No single element is automatically sufficient on its own. The assessment of economic substance is holistic and depends on the facts, the nature of the relevant income and the scale of the entity’s activities. Future implementing regulations may provide additional guidance.

Can Economic Substance Be Outsourced?

The law contemplates the possibility that certain core activities may be performed by qualified third-party service providers located in Panama, rather than being carried out by the entity’s own employees. However, outsourcing does not eliminate the entity’s responsibility. For outsourcing to be considered adequate, the following conditions must generally be met:

• The core activities must be effectively carried out in Panama by the service provider.
• The entity must exercise genuine supervision and control over the outsourced activities.
• The entity must document the supervision, control and connection of the outsourced activities to the income-generating asset or function.
• The outsourcing arrangement must not be used to create an artificial appearance of substance without genuine economic reality.

Entities considering an outsourcing approach should work with qualified legal and compliance professionals to structure, document and monitor these arrangements properly. Purely nominal or paper-only service agreements that lack genuine oversight are unlikely to satisfy the substance requirements.

How to Create or Improve Substance in Panama

For entities within the scope of Law 526, the following practical legal and compliance steps are commonly relevant. No single step automatically satisfies all requirements, and the appropriate approach depends on the entity’s specific activities, income, size and structure.

• Review the group structure: Understand the full ownership and control chain, including all related entities in different jurisdictions.
• Identify passive income streams: Map all foreign-source income received by the Panama entity and assess whether each category is covered.
• Determine multinational group status: Conduct a careful analysis of whether the entity forms part of a multinational group as defined.
• Define the Panama entity’s purpose: Ensure the entity’s legal and commercial purpose is clearly documented and reflects its actual activities.
• Document decision-making in Panama: Ensure that strategic and operational decisions relevant to income-generating activities are made and documented in Panama.
• Hold board or management meetings in Panama: Where appropriate, conduct formal governance meetings in Panama and maintain proper minutes and resolutions.
• Maintain proper corporate records: Keep all corporate books, registers, resolutions and minutes up to date in Panama.
• Engage qualified local professionals: Where appropriate, engage Panama-based legal, accounting, administrative or compliance professionals to support genuine substance activities.
• Maintain adequate office or business presence: Where needed and proportionate to activities, maintain a verifiable physical or administrative presence in Panama.
• Document service agreements: Ensure all outsourcing or service arrangements are supported by formal written agreements and that supervision is documented.
• Document operational expenses in Panama: Maintain financial records of all Panama-based expenses proportionate to the entity’s activities.
• Prepare annual tax and substance reporting: Coordinate with a qualified CPA or tax adviser to meet annual reporting obligations related to covered income and substance.
• Review beneficial ownership and corporate records: Ensure all required disclosures and corporate records are current and accurate.
• Avoid purely artificial structures: Substance must reflect genuine economic activity, not only formal or paper arrangements designed without real commercial justification.

What Panama Holding Companies Should Review

Panama holding companies — entities organized primarily to own shares in subsidiaries, manage investment portfolios, hold intellectual property or other assets — are among the structures most likely to receive foreign-source passive income covered by Law 526, including dividends from foreign subsidiaries, capital gains on the disposal of shares, interest on intercompany loans and royalties from intellectual property licensed abroad.

If a Panama holding company forms part of a multinational group and receives any of these income categories from foreign sources, it should be reviewed under the Law 526 framework. Key considerations include:

• Whether the holding company is part of a multinational group (ownership chain, related entities, jurisdictions involved).
• Whether dividends, capital gains, interest or royalties received are from foreign sources and fall within the covered income categories.
• Whether the holding company has adequate substance in Panama proportionate to its activities (decision-making, personnel, expenses, documentation).
• Whether the holding company’s purpose and activities are supported by genuine commercial reasons.
• Whether annual reporting obligations can be met with the current structure and records.

For more on Panama holding company structures, see our Panama Holding Company Guide. Related resources: Panama Corporation Incorporation | International Corporate Services.

What Panama Private Interest Foundations Should Review

Panama private interest foundations are legal structures used for asset organization, estate planning and family wealth management. In many cases, foundations hold foreign assets or receive passive income from foreign sources. If a foundation is part of a multinational group and receives covered foreign-source passive income, it may fall within the scope of Law 526.

Foundations should assess:

• Whether the foundation, together with related entities under common ownership or control, constitutes a multinational group.
• Whether the foundation receives dividends, interest, royalties, capital gains or other covered passive income from foreign sources.
• Whether the foundation’s governance documents and records support a substance analysis.
• Whether the foundation’s protector, council or other governance bodies take decisions in Panama.
• Whether the overall structure reflects genuine purposes beyond tax considerations.

For more information, see our guide: Panama Private Interest Foundation.

Excluded or Specially Treated Entities

Law 526 includes provisions that may exclude or provide special treatment to certain categories of entities or activities, subject to applicable conditions. These generally relate to entities that are already subject to specific regulatory oversight in Panama or that carry out activities treated differently under the law.

Categories that may be subject to exclusion or different treatment include:

• Banking and financial entities supervised and regulated under Panamanian banking law.
• Insurance and reinsurance entities regulated under Panamanian insurance law.
• Securities market intermediaries and regulated capital market participants.
• Investment fund and pension fund administrators operating under applicable regulatory frameworks.
• Activities related to the commercial exploitation of vessels registered in Panama under the Panamanian ship registry, including shipowners, operators or administrators, where applicable conditions are met.

Annual Reporting and Tax Return Considerations

Entities within the scope of Law 526 may be required to report relevant information about their foreign-source passive income and economic substance compliance through the annual income tax return or through a separate applicable reporting mechanism. The precise reporting format, timing and required information may be further defined by implementing regulations from the MEF or DGI.

General annual compliance considerations for in-scope entities include:

• Identifying all covered foreign-source passive income received during the fiscal year.
• Documenting economic substance indicators for the fiscal year.
• Coordinating with a qualified Panamanian CPA or tax adviser for the annual income tax return.
• Ensuring that DGI filings are complete, accurate and timely.
• Maintaining documentation supporting the substance analysis for at least the minimum applicable retention period.
• Monitoring for future regulatory guidance that may clarify reporting requirements, deadlines or formats.

Given that the regime generally begins with fiscal year 2027, entities should act proactively to ensure their structures, records and reporting mechanisms are in order. See also: Panama Corporate Guide | Legal Fees.

Anti-Abuse Rule

Law 526 incorporates anti-abuse principles consistent with international tax standards. These provisions allow the competent tax authorities to disregard or recharacterize transactions, arrangements or structures whose principal purpose — or one of whose principal purposes — is to obtain a tax advantage that would be incompatible with the object and purpose of the law, and that lack valid, genuine commercial reasons that reflect economic reality.

Structures that are designed primarily or exclusively to produce a formal appearance of substance — without real personnel, real decisions, real expenses or real commercial purpose — are at risk of being challenged under the anti-abuse provisions. Arrangements that have legitimate commercial justifications, that involve real activity in Panama, that are properly documented and that do not have tax advantage as their principal purpose are more likely to be considered consistent with the law’s intent. However, the application of anti-abuse rules is inherently fact-specific. Every structure should be reviewed by qualified legal and tax professionals.

Practical Checklist: Does Law 526 Apply to My Panama Entity?

How Díaz & Asociados Can Help

Díaz & Asociados is a Panamanian law firm with extensive experience in corporate law, international structures and regulatory compliance. Our team can assist with the legal and corporate dimensions of Law 526 compliance planning. Where specialized tax advice is required, we coordinate closely with qualified CPA and tax advisers.

Our services in this area include:

• Legal review of your Panama corporation or private interest foundation in light of Law 526 scope criteria.
• Multinational group analysis: reviewing ownership and control structures to assess whether the entity is part of a multinational group.
• Foreign-source passive income identification: reviewing income streams to assess whether covered passive income is present.
• Corporate structure review and documentation assessment.
• Holding company structure review, including dividend flows, capital gains and intercompany arrangements.
• Private interest foundation review: governance, assets, passive income and structure.
• Economic substance implementation planning: legal steps to create or improve demonstrable substance in Panama.
• Corporate governance documentation: board resolutions, meeting minutes, management agreements and related records.
• Resident agent services and corporate maintenance.
• Coordination with qualified CPA or tax advisers for the substance and reporting aspects requiring accounting or tax expertise.
• Organization and review of document files and corporate records.
• Support with local service provider arrangements and outsourcing documentation.
• Legal review before any restructuring, reorganization or change in group structure.
• Annual compliance planning and structure review ahead of fiscal year 2027.

Díaz & Asociados provides legal and corporate advisory services. For matters requiring tax computation, income tax return filing or detailed tax analysis, we work with qualified external tax professionals. See also: International Corporate Services | Panama Banking Guide.

What We Cannot Guarantee

Key Summary of Panama Law 526

• Panama Law No. 526 of May 28, 2026 (Gaceta Oficial No. 30534-B) introduces economic substance requirements for certain Panama entities.
• It generally applies to entities that form part of multinational groups and receive covered foreign-source passive income.
• Covered passive income may include dividends, interest, royalties, capital gains, foreign real estate income and other capital income from foreign sources.
• The law does not automatically apply to every Panama corporation or private interest foundation.
• Entities within scope may need to demonstrate personnel, facilities, decision-making, expenses, documentation and/or properly supervised outsourcing in Panama.
• Non-compliant entities may be subject to a final 15% tax on covered net taxable income for the applicable fiscal period.
• The regime generally applies from fiscal year 2027.
• Panama structures should be reviewed on a case-by-case basis by qualified legal and tax professionals.

Frequently Asked Questions