Panama’s New Economic Substance Regime: What Multinational Groups Need to Know

Panama has introduced a new economic substance regime under Law 526 of 28 May 2026, bringing the country’s tax and transparency framework further into line with international standards.

The legislation will apply from fiscal year 2027 and is particularly relevant to multinational groups using Panamanian entities to receive passive foreign-source income.

The new regime forms part of Panama’s broader response to international initiatives addressing harmful tax practices, including the OECD’s BEPS Action 5 framework. It follows a series of reforms introduced over recent years covering areas such as accounting records, automatic exchange of financial information and beneficial ownership reporting.

Which entities are affected?

Law 526 does not impose economic substance requirements on every Panamanian entity.

The regime applies specifically to Panamanian entities forming part of a multinational group that receive passive foreign-source income.

This may include income such as:

• dividends;
• interest;
• royalties;
• capital gains; and
• income derived from real estate.

Private interest foundations and family holding structures without relevant cross-border ownership links will generally fall outside the scope of the regime.

Entities that are caught by the legislation will need to demonstrate that they maintain sufficient economic substance in Panama.

Depending on the activities involved, this may include having appropriately qualified personnel, adequate premises and genuine strategic decision-making taking place within Panama.

Where an entity fails to meet the required economic substance conditions, it may be treated as a non-qualifying entity and become subject to a 15% tax on passive foreign-source income, together with any applicable penalties and interest under Panama’s Fiscal Code.

What does economic substance mean in practice?

The underlying principle is that entities benefiting from Panama’s tax framework should have a level of genuine economic activity within the jurisdiction that reflects the functions they perform.

For multinational groups, this means that simply incorporating or maintaining a legal entity in Panama may no longer be sufficient where that entity receives relevant passive foreign income.

Groups may therefore need to review whether their Panamanian entities have appropriate local management, resources, personnel and operational arrangements in place.

Particular attention should also be given to where strategic decisions are made and whether the entity’s activities are genuinely directed from Panama.

Further clarification under Executive Decree No. 32

When Law 526 was initially enacted, a number of important questions remained subject to implementing regulations. These included the treatment of tax residency, the requirements applying to pure equity holding companies and the extent to which activities could be outsourced to local service providers.

Panama has since issued Executive Decree No. 32, providing further detail on the operation of the new regime.

Businesses with Panamanian structures should therefore consider the requirements of Law 526 together with the implementing regulations when reviewing their arrangements ahead of the 2027 financial year.

Preparing for 2027

For international families, family offices and multinational groups using Panamanian entities, the introduction of the economic substance regime makes early review important.

Organisations should consider whether their structures fall within the scope of the legislation, whether existing local operations satisfy the required substance tests and whether any changes may be needed before the regime becomes effective.

For groups operating across several jurisdictions, Panama’s reforms also reflect a wider international trend towards requiring greater alignment between the location of corporate structures and the location in which genuine economic activity takes place.

For further detail on the subsequent regulations, see:

Economic Substance Regulations: Executive Decree No. 32

By Icaza, González-Ruiz & Alemán, Panama, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact panama@transatlanticlaw.com

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