Executive summary. On May 28, 2026, Panama enacted Law 526 of 2026, published in Official Gazette No. 30534-B, introducing economic substance rules for entities of multinational groups that earn foreign-source passive income. Entities that demonstrate substance remain non-taxed. Entities that fail to demonstrate it pay 15% on net taxable income. The law applies from fiscal year 2027 onwards and affects only structures with international links: Panama’s territorial regime remains intact for everything else.
The passage of Law 526 is the most relevant Panamanian tax change for offshore wealth planning in the last fifteen years. It is not a new general tax and it is not the end of territoriality: it is a narrowly tailored exception that requires a specific group of taxpayers to demonstrate that their Panamanian entity does something real in Panama. This guide explains, in plain language and based on the official text published in the Gazette, how the law works, who is in and out of scope, and what each type of structure should do before fiscal year 2026 closes.
What is Panama’s Law 526 of 2026?
Law 526 of May 28, 2026 amends Panama’s Tax Code and adds a new chapter (articles 707-A through 707-Ñ) introducing economic substance rules for entities of multinational groups incorporated or domiciled in Panama that receive certain foreign-source passive income. The bill was approved on third debate by the National Assembly with 70 votes in favor and zero against, was signed by the President the next day, and published in Official Gazette No. 30534-B on May 28, 2026.
The stated purpose is to align Panama’s tax regime with international standards and advance the country’s removal from the European Union’s list of non-cooperative jurisdictions for tax purposes, whose next review is scheduled for October 2026. Local commentators have dubbed it “territoriality 2.0” because it preserves the territorial principle but conditions the non-taxation of certain foreign passive income on real substance.
Why was this law passed?
Panama remained on the EU list because its foreign-source income exemption (FSIE) regime was seen as lacking a substance requirement. The European Commission requires that jurisdictions maintaining FSIE regimes condition the exemption on demonstrating real local activity. Law 526 is Panama’s answer to that requirement.
The core idea in one sentence
A foreign source is no longer enough. If an entity of a multinational group earns passive income from abroad, it must now demonstrate real economic activity in Panama for that income to remain untaxed. If it does, it is a qualified entity and the income is not taxed. If it does not, it is a non-qualified entity and the income is taxed at 15% on net income.
How Law 526 works: three questions
The entire mechanism reduces to three sequential questions. If the answer to question 1 or 2 is “no,” the law does not apply and the income remains exempt as before. Only at question 3 is there a tax risk.
Question 1 — Does the entity earn foreign-source passive income?
Article 707-C lists, on a closed basis, six categories of passive income in scope:
- Dividends or profit distributions.
- Interest.
- Royalties (payments for use of patents, trademarks, formulas, processes and other intellectual property).
- Capital gains.
- Real estate income (rent and assignment of rights over foreign real estate).
- Other movable-capital income (a catch-all for any other non-real-estate capital yield).
Foreign income that does not fit any of these categories is outside the regime.
Question 2 — Does the entity belong to a multinational group?
This is the most consequential concept in the law. A multinational group, under article 707-B.4, is a group of two or more entities, linked by ownership or control, resident for tax purposes in different jurisdictions, including parent, subsidiaries and permanent establishments.
There is no size threshold. Unlike international transfer-pricing rules or the OECD’s Pillar Two (which apply from €750 million in revenue), Law 526 reaches small structures: two related entities in different countries are enough. A Panamanian company owning a single Colombian subsidiary, a private foundation holding a foreign company, or a Panamanian company owned by a non-resident entity with assets in another country can all qualify as a multinational group under this definition.
Question 3 — Does the entity meet and report the economic substance test?
If the answer to questions 1 and 2 is “yes,” the captured entity must evidence economic substance (article 707-E) and report it in its annual tax return. The three conditions of the full test are:
- Adequate human resources and premises in Panama — qualified, paid personnel dedicated to the principal activities.
- Strategic decisions taken and risks assumed in Panama with respect to the income-generating assets.
- Adequate local operating expenses other than personnel and premises, directly related to the assets.
Adequacy is judged on proportionality: the law does not impose a fixed yardstick. It looks at the nature, scale and complexity of the activity, the type and amount of the income, the number of income-generating assets and the degree of risk assumed.
The reduced test: pure holdings and real estate holding entities
Here lies the most important relief in Law 526 for offshore wealth and family planning. Two types of entity are exempt from conditions 2 and 3 (strategic decisions and local operating costs):
- The pure holding. An entity whose principal activity is holding equity participations in other entities (local or foreign), with non-habitual acquisition, holding and disposal, provided it does not carry on commercial activity or substantial investment management over those participations.
- The real estate holding entity. An entity whose principal activity is exclusively acquiring, holding or transferring, on a non-habitual basis, real estate.
Both remain subject to condition 1 (adequate personnel and facilities) and to annual reporting. The reduced test is NOT an automatic exemption: a private interest foundation or a holding company still needs adequate minimum local presence in Panama.
Who is out: sectoral carve-outs (articles 707-M and 707-N)
Law 526 expressly excludes sectors where substance is already evidenced by prudential regulation:
- Merchant marine (article 707-M). Ship-owners, operators and managers of Panama-flagged vessels evidence substance through registration and supervision by the Panama Maritime Authority.
- Regulated financial entities (article 707-N). Banks, securities firms, insurers and reinsurers, investment fund and pension fund managers, supervised by the Superintendency of Banks, the Securities Market Superintendency or the Superintendency of Insurance and Reinsurance, are out of scope for passive income tied to their regulated activity. Important note: insurance or reinsurance captives within multinational groups do NOT enjoy the exclusion.
The exclusion is not automatic: article 707-Ñ requires the entity to evidence before the Ministry of Economy and Finance its current license, the link between the passive income and its regulated activity, and effective management in Panama.
The consequence: 15% on net income
If the MEF declares the entity non-qualified, its foreign-source passive income is taxed at a single, definitive 15% rate on net taxable income. The details matter:
- Net, not gross. Costs and expenses necessary to obtain, preserve and maintain the income — properly documented and directly related — are deducted from gross income. This is an improvement over earlier drafts of the bill, which taxed gross income.
- Foreign tax credit available (article 707-H). If the income has already paid an analogous tax abroad, that amount can be credited against the Panamanian tax, with a cap (cannot exceed the local liability). The credit is personal, non-refundable, non-transferable and may not be carried forward.
- Procedural safeguards. The determination of “non-qualified” follows the procedure and guarantees of the Tax Procedure Code (article 707-F, last paragraph).
Anti-abuse clause
Article 707-K empowers the Ministry of Economy and Finance, by reasoned resolution, to disregard arrangements whose principal purpose is to obtain a tax advantage without a valid commercial reason reflecting economic reality. The practical implication: structures must have a genuine business rationale, not merely a tax design.
Structure traffic light: is my structure in scope?
Structure Status Comment Domestic-only Panamanian company with no related foreign entities 🟢 Out of scope No multinational group. Law does not apply. Private foundation or company with no second related entity abroad 🟢 Out of scope Verify the full ownership chain. Pure holding owning foreign subsidiaries (non-habitual) 🟡 Reduced test In scope but exempt from conditions 2 and 3. Private foundation holding a foreign property (family vehicle) 🟡 Reduced test Exempt from conditions 2 and 3; must meet condition 1 and report. Holding with operating subsidiary and substantial management/investment 🔴 Full test Loses reduced test due to substantial activity. M&A acquisition SPV with debt financing and dividends 🔴 High risk Build with substance from the start or change jurisdiction. Regional treasury center (foreign interest income) 🔴 Full test Active financial activity. Absent a license, full test applies. Bank, securities firm, fund manager ⚪ Excluded Art. 707-N, must evidence 707-Ñ. Insurer or reinsurer (non-captive) ⚪ Excluded Captives do NOT enjoy the exclusion. Shipping company with Panama-flagged vessels ⚪ Excluded Art. 707-M, AMP oversight.
Practical cases
Case 1 — Family foundation holding a Miami apartment
A Panamanian private interest foundation owns a Miami apartment which it leases out. The foundation also owns a US company that holds the property.
The foundation earns foreign real-estate income and belongs to a multinational group (a related entity exists in another jurisdiction). However, since its principal activity is non-habitual real estate holding, it accesses the reduced test. It must meet condition 1 (adequate human resources and premises, which can be outsourced in Panama) and report. With a proper management structure, the income is not taxed.
Case 2 — Regional family holding
A Panamanian company owns 100% of three operating subsidiaries in Central America and receives annual dividends. It carries on no commercial activity; it simply holds the participations.
It earns foreign-source dividends and belongs to a multinational group. If it limits itself to holding the participations without substantial investment management or commercial activity, it qualifies as a pure holding and accesses the reduced test. If it actively manages the investments, it falls under the full test. In both scenarios it must evidence condition 1 and report.
Case 3 — M&A acquisition SPV
To acquire a Colombian company, a fund creates a Panamanian SPV that takes on debt and receives dividends from the target. The SPV earns foreign-source dividends and interest and is part of a multinational group. Its activity exceeds mere passive holding, so it faces the full test. Since closing occurs under the new regime, the SPV should be designed from day one with substance in Panama or an alternative holding jurisdiction should be considered.
What to do before fiscal year 2027
The work happens during 2026. The law applies from fiscal year 2027 and substance cannot be improvised at filing: it must exist during the period. Three available routes:
Route A — Exit the regime
Eliminate the trigger: simplify the structure so no second related entity exists in another jurisdiction, or relocate the asset that generates the passive income. This route requires analyzing transfer costs, capital gains and business rationale (to avoid the anti-abuse clause).
Route B — Build substance
Build the substance required by the applicable test (reduced or full): qualified and paid personnel, adequate facilities, documented decision-making in Panama, local operating costs. Outsourcing is permitted (article 707-G), provided the provider operates in Panama and the entity retains supervision and control. Outsourcing outside the country does not count.
Route C — Claim a sectoral exclusion
For regulated entities (banking, securities, non-captive insurance and reinsurance, funds) and shipping, prepare the file evidencing before the MEF the conditions of article 707-Ñ (or 707-M for merchant marine): current license, link between passive income and regulated activity, and effective management in Panama.
Implementation timeline
Time Action H2 2026 Diagnostic and classification of each entity. Decide the route. After MEF regulations issue Adjust the plan to the implementing regulations (90 days from enactment). Before December 31, 2026 Implement substance. It must exist during 2027, not only at filing. Fiscal year 2027 Operate with real substance. Keep an evidentiary file. FY 2027 return (filed in 2028) Report foreign passive income and substance information.
Common mistakes to avoid
- Assuming territoriality still protects automatically. Not for foreign passive income of multinational groups.
- Believing one is “too small.” There is no size threshold in the definition of multinational group.
- Confusing the reduced test with an exemption. Pure holdings and real estate holding entities still owe condition 1 and reporting.
- Building artificial last-minute substance. Article 707-K allows the MEF to disregard arrangements lacking valid commercial reason.
- Outsourcing outside Panama. Extra-territorial outsourcing does not count toward substance.
Frequently asked questions
Who exactly is subject to Law 526?
Entities incorporated or domiciled in Panama that (a) form part of a multinational group — defined as two or more entities linked by ownership or control in different jurisdictions — and (b) receive foreign-source passive income (dividends, interest, royalties, capital gains, real estate income or other movable-capital income).
When does the law take effect?
It applies from fiscal year 2027. It was signed on May 28, 2026 and published in Official Gazette No. 30534-B. The Executive, through the Ministry of Economy and Finance, must issue implementing regulations within 90 calendar days.
What is the tax cost of non-compliance?
15% on net taxable income from foreign-source passive income, with a foreign tax credit available (capped) under article 707-H.
Do pure holdings and real estate holdings face the full test?
No. They access the reduced test: exempt from condition 2 (local strategic decisions) and condition 3 (local operating costs), but still subject to condition 1 (adequate personnel and premises in Panama) and annual reporting.
Is a Panamanian foundation holding a foreign property in scope?
It may be, if a second related entity exists in another jurisdiction (for example, a US LLC). In that case it accesses the reduced test and must evidence minimum local presence and file the annual return.
Who is excluded from the law?
Banks, securities firms, insurers and reinsurers (other than captives of multinational groups), investment and pension fund managers, and Panama-flagged shipping entities, provided they evidence the conditions of articles 707-N, 707-Ñ and 707-M.
Can substance be outsourced?
Yes. Article 707-G allows outsourcing conditions 1 and 3 to a provider operating in Panama. The provider must have real human and physical resources, without overlap of hours across clients, and the entity must retain effective supervision. Outsourcing abroad does not count.
How LAC Legal can help
LAC Legal advises domestic and international clients on adapting offshore structures to the new economic substance regime. Our tax team, led by partner Raúl González, performs the diagnostic, classifies entities, designs the appropriate route and implements operationally, in coordination with local auditors and service providers.
Do you operate a Panamanian holding, a private interest foundation, an SPV or another offshore vehicle that may be in scope of Law 526? Contact us for an initial diagnostic before fiscal year 2026 closes.
This article is a technical analysis of a general nature and does not constitute legal or tax advice for any specific case. Final interpretation will depend on the implementing regulations to be issued by the Executive and on the particular facts of each structure. For a tailored analysis, please contact us.
Last updated: May 29, 2026. Official text: Law 526 of May 28, 2026, published in Official Gazette No. 30534-B. Author: Diego Lacayo Krupnik, Managing Partner, LAC Legal.