Panama took a decisive step in tax transparency with the approval of Law 526 of May 28, 2026, which reforms the Tax Code and introduces economic substance requirements in Panama for certain companies. The central objective is clear: to align the country with international standards and achieve its removal from the tax-haven lists, especially that of the European Union. This reform has concrete implications for multinational groups with a presence in the country.
What is Law 526 on Economic Substance?
Law 526 of 2026 adds new rules to the Tax Code that condition a historic benefit of the Panamanian system. Panama maintains its territorial income regime —only income generated within the country is taxed— but from now on that favorable treatment depends on the company demonstrating real activity within Panamanian territory. The law takes effect as of the 2027 tax period and its regulations are still pending issuance.
What does the reform of Panama's Tax Code seek?
The reform pursues three main objectives:
- Prevent Panamanian structures from being used solely so that income generated abroad is not taxed anywhere (what the European Union calls “double non-taxation”).
- Require the companies covered to demonstrate real economic substance, that is, genuine operations in the country.
- Apply a 15% tax to the foreign-source passive income of those entities that cannot prove such substance.
What is economic substance?
Economic substance is the existence and effective use, within Panama, of the means necessary to generate and manage income. In practice, a company proves substance when it has within the country:
- Qualified human resources dedicated to that activity.
- Adequate facilities to operate.
- Effective management and decision-making within Panamanian territory.
- Operating expenses consistent with the activity it carries out.
In other words, being registered is no longer enough: you have to be operating. With this requirement, Panama aligns with the international principle that taxation should correspond to the place where economic value is actually generated.
Which companies does the new law apply to?
This is the most important point and the one that generates the most confusion. Law 526 does not apply to all companies or to all Panamanian corporations. It applies only when two conditions are met at the same time:
- The entity is part of a multinational group (two or more entities linked by ownership or control, resident in different jurisdictions).
- The entity obtains foreign-source passive income: dividends, interest, royalties, capital gains and real estate income from abroad.
Generally excluded from the regime are purely operating companies whose income comes from commercial or service activities within Panama, maritime-regime entities (expressly excluded) and the simple personal estate structures of natural persons. Individual private interest foundations are usually excluded; however, certain structures —regional holdings or foundations that form part of a multinational group and receive passive income— fall into gray areas that require an individualized analysis.
The 15% tax: when does it apply?
The law classifies the entities covered into two categories:
- Qualified entity: proves economic substance. Its foreign-source passive income keeps the territorial treatment and is not taxed in Panama.
- Non-qualified entity: fails to prove substance. Its foreign-source passive income becomes subject to a single, definitive rate of 15% on the net taxable income.
It should be clarified that the 15% is not a new general tax on foreign-source income, but rather an exceptional consequence for those who are within the regime and do not meet the requirements. In addition, the tax paid abroad on that same income may be credited in Panama, up to the amount that would correspond to be paid locally.
Removal from the European Union's tax-haven lists
The underlying purpose of the reform is for Panama to be able to leave the European Union's list of non-cooperative jurisdictions, where it remains in Annex I (the “blacklist”). The EU questioned the Panamanian regime of exemption for foreign-source income for allowing, in its view, double non-taxation. Being on these lists affects the country's reputation, raises the cost of operations, limits access to certain international markets and financial services and can even exclude companies from European public tenders. With this law, Panama adopts the economic substance criterion that the EU requires as a decisive step toward its removal.
How does it affect your company and what should you do?
If your company is part of a multinational group and receives passive income from abroad through a Panamanian structure, now is the time to review your situation before the 2027 tax period. The key actions are: assess whether the entity falls within the scope of the law, determine whether it meets the economic substance requirements and, if not, adjust the structure to prove substance or plan for the impact of the 15%. The entities covered must also file an annual sworn declaration reporting this income and supporting compliance.
At Lima y Asociados we advise national and international companies on adapting their structures to Law 526: we analyze whether your case falls within the regime, we help you document economic substance and we design the strategy that protects your tax compliance.
Want to know how this reform affects you? Message us on WhatsApp at +507 6742-0999 and let's talk about your case.
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