Panama: New economic substance law for foreign-source passive income
Effective starting in 2027 fiscal year
june 10, 2026
Law No. 526, enacted on May 28, 2026, introduces new economic substance requirements for entities that are part of a multinational group and receive certain types of foreign-source passive income. The law will become effective starting in the 2027 fiscal year.
Key provisions of the new law include:
- Covered entities: The rules apply to entities in Panama that are part of a multinational group (defined as two or more related entities in different tax jurisdictions) and earn specific types of foreign-source passive income.
- Excluded sectors: The law explicitly excludes entities in the maritime (shipping) and regulated financial sectors from the new economic substance requirements.
- Passive income subject to substance rules: The requirements apply to foreign-source passive income, including dividends and profit participations, interest, royalties, capital gains, and income from real estate and other movable property.
- Economic substance requirements: To be considered a "qualified entity" and thus maintain the benefits of Panama's territorial tax regime, a company must demonstrate adequate economic substance, which includes:
- Employing an adequate number of qualified, remunerated employees in Panama
- Making strategic decisions and managing risks from within Panama
- Incurring adequate operating expenses in Panama related to the income-generating assets
- Consequences for non-compliance: Entities that fail to meet the substance requirements will lose the territoriality benefit for their foreign-source passive income, and such income will be subject to a 15% net tax.
- Reporting obligations: All covered entities must annually report their foreign-source passive income and provide the necessary information to demonstrate compliance with the substance requirements through their income tax returns.
- Anti-abuse clause: The law includes an anti-abuse clause that allows the tax authority (MEF) to disregard structures or mechanisms whose primary purpose is to obtain a tax advantage contrary to the spirit of the regime.
Read a May 2026 report (Spanish) prepared by the KPMG member firm in Panama