Panama has enacted Law No. 526 of 28 May 2026, introducing economic substance requirements for MNE groups earning foreign passive income from the 2027 fiscal year. Entities must show real presence in Panama or face a 15% tax on net income, alongside stricter PE rules, a GAAR, and OECD nexus-based limits on IP exemptions.
Panama has enacted Law No. 526 of 28 May 2026, significantly reforming its National Fiscal Code by introducing economic substance requirements for multinational enterprise (MNE) groups earning foreign-source passive income.
The reform is designed to strengthen tax transparency, align with international standards, and support Panama’s removal from the EU list of non-cooperative jurisdictions.
The measures apply from the 2027 fiscal year.
Scope, covered income and substance requirements
The law applies to entities that are part of an MNE group, meaning companies linked through ownership or control and included in consolidated financial statements, or that would be included if such statements were required.
It targets six categories of foreign passive income:
- Dividends and interest
- Royalties from intellectual property
- Capital gains
- Real estate-related income
- Other movable capital income (including lending of funds or leasing assets)
To retain tax exemption under Panama’s territorial tax system, entities must demonstrate real economic substance in Panama, including:
- Adequate qualified, remunerated personnel based in the country
- Sufficient physical offices or facilities
- Key strategic and management decisions made locally
- Adequate operating expenditures linked to income-generating activities
Outsourcing is allowed, but service providers must operate in Panama, and the MNE entity must retain full oversight and control.
Certain sectors are exempt from the general substance rules where they already operate under strong regulatory frameworks. These include banking, securities and investment services, insurance and reinsurance (excluding captive insurance), and maritime shipping, provided their foreign passive income is directly connected to their regulated core activities.
Non-compliance taxation and anti-avoidance measures
Entities that fail to meet substance requirements are classified as non-qualified entities. In such cases, their foreign-source passive income is no longer tax-exempt and becomes subject to a 15% income tax on net taxable income.
Net taxable income is determined by deducting documented and directly related costs and expenses from gross income. To reduce double taxation risk, entities may claim a foreign tax credit for taxes paid abroad on the same income, limited to the maximum tax that would have been payable in Panama.
The law also introduces a strong General Anti-Abuse Rule (GAAR). This empowers the Ministry of Economy and Finance to disregard or recharacterise arrangements that lack valid commercial purpose and are primarily designed to obtain tax advantages contrary to the intent of the law.
Compliance is reinforced through an annual sworn declaration, where entities must confirm their economic substance position, income classification, and supporting documentation. Failure to submit accurate declarations may result in immediate classification as non-qualified.
Permanent establishment rules, IP nexus approach and enforcement
Law 526 updates Panama’s permanent establishment (PE) framework, retaining the established 183-day threshold for construction, installation, consultancy services, and natural resource exploration activities. However, the rules are broadened through:
- Aggregation of activities carried out by related parties
- Expanded dependent agent rules
- Anti-fragmentation provisions to prevent splitting of operations to avoid PE status
Where a PE is identified, only income attributable to its activities in Panama will be subject to taxation.
For intellectual property, Panama adopts the OECD nexus approach to determine the non-taxable portion of IP income. The exemption is calculated using a formula based on qualifying local R&D expenditure, uplifted by 30%, divided by total global R&D and acquisition costs. This ratio is applied to net IP income (income minus related costs), while the remaining portion is taxed at 15%.
The framework also introduces updated reporting obligations requiring annual disclosure of foreign passive income and compliance status through income tax filings. All submitted information remains subject to strict confidentiality protections, although the Ministry retains broad authority to review and enforce compliance.
Implementation timeline
All provisions under Law No. 526 of 28 May 2026 will take effect from the 2027 fiscal year, marking a structural shift in Panama’s approach to multinational taxation, substance enforcement, and anti-avoidance regulation.
