Law 526 of 28 May 2026 – Economic Substance Rules for Passive Foreign-Source Income; amendments to articles 710 and 762-M of the Tax Code

I. EXECUTIVE SUMMARY

On 28 May 2026, the National Assembly of the Republic of Panama enacted Law 526 of 2026 (Gaceta Oficial Digital No. 30534-B), originating in Bill 641 of 2026. The Law adds a new Chapter II – articles 707-A through 707-Ñ – to Title I of Book IV of the Tax Code, introducing economic substance and reporting obligations for entities of multinational groups constituted or domiciled in Panama that obtain passive foreign-source income. The Law also adds a new paragraph 7 to article 710 (annual reporting) and substantively modifies article 762-M (permanent establishments).

Under the new chapter, passive foreign-source income falling within six specified categories continues, as a default rule, to be subject to taxation; territorial non-taxable treatment applies, exceptionally, only where the recipient entity demonstrates adequate substance in Panama on a category-by-category and period-by-period basis. Non-compliant income is subject to a single and definitive 15% rate. The Executive Branch must issue implementing regulations within 90 calendar days. The Law enters into force as of the fiscal period of 2027.

The Law responds to commitments before the OECD Forum on Harmful Tax Practices (FHTP) and the European Union Code of Conduct Group, and is broadly modeled on comparable foreign-sourced income exemption regimes recently adopted by Hong Kong, Singapore, the British Virgin Islands, and the Cayman Islands.

II. SCOPE

The substance regime applies, cumulatively, to entities that (i) are constituted in Panama or domiciled in Panama (article 707-A), (ii) form part of a multinational group within the meaning of article 707-B.4 – two or more entities, linked by ownership or control, tax-resident in different jurisdictions, including parent, subsidiaries, and permanent establishments – and (iii) receive, during the fiscal period under review, one or more of the six categories of passive foreign-source income listed in article 707-C: dividends or profit participations, interest, royalties, capital gains, immovable capital income, and other movable capital income. The list is closed.

An entity is deemed to form part of a multinational group when it is included (or, hypothetically, should be included) in the group’s consolidated financial statements under the parent’s accounting principles, or when it is excluded only on grounds of size or materiality. Permanent establishments are deemed members of the group in all cases.

The regime is period-specific and category-specific: an entity may fall within scope in one fiscal year and outside scope in the next, and may be a qualified entity for one category of income while being non-qualified for another in the same period. Standalone Panamanian companies, entities owned exclusively by individuals without related corporate entities abroad, and purely domestic Panamanian groups remain outside scope.

III. SUBSTANCE CONDITIONS (ARTICLE 707-E)

Entities within scope must satisfy three cumulative conditions to be deemed a qualified entity and preserve the territorial exemption:

1. Adequate human resources and facilities in Panama – duly remunerated and qualified personnel dedicated to the principal activities (including administration, direction, and/or control of the income-generating assets), together with adequate facilities in Panama.
2. Strategic decisions and risk-bearing in Panama.
3. Adequate operational costs in Panama, other than personnel remuneration and facilities, directly related to the income-generating assets.

The sufficiency of resources is evaluated under a proportionality principle – by reference to the nature, scale, and complexity of the activity; the type and amount of passive income; the number of income-generating assets; the degree of risk assumed; and the operational structure of the multinational group in Panama.

Reduced regime. Article 707-E waives conditions 2 and 3 for two parallel categories of entities: (i) those whose principal activity is the holding of equity interests in other entities, local or foreign, with non-habitual acquisition, conservation, and disposal of such interests, provided that they do not carry out commercial activity or substantial investment activity in respect of the investees; and (ii) those whose principal activity consists exclusively of acquiring, holding, or transferring real estate on a non-habitual basis. These entities must still satisfy condition 1, all reporting obligations of the chapter, and the corporate and tax registration requirements applicable to their incorporation in Panama. This carve-out aligns Panama’s treatment of holding entities with comparable regimes in the BVI and the Cayman Islands.

Outsourcing (article 707-G). Activities corresponding to conditions 1 and 3 may be outsourced to third-party providers, provided that the activities are carried out in Panama. The provider must have adequate human resources and facilities in terms of number, qualifications, and remuneration. Resources used by the provider may not give rise to an overlap of hours when the provider serves multiple recipients. The contracting entity must supervise the activities and retain supporting documentation. Outsourcing carried out outside Panama is disregarded for substance purposes.

IV. CONSEQUENCES OF NON-COMPLIANCE

An entity becomes a non-qualified entity if it incurs in any of the grounds listed in article 707-F: failure to comply with the disclosure duty in the income tax declaration; failure to satisfy the substance conditions; failure to provide, or partial provision of, the required information; or submission of information evidently inconsistent with the declared facts. The passive foreign-source income of a non-qualified entity is subject to a single and definitive 15% rate on net taxable income for the relevant fiscal period (article 707-D), with net taxable income computed by deducting the duly documented costs and expenses necessary for the generation, conservation, and maintenance of such income. Reclassification follows the procedure and guarantees of the Tax Procedure Code, and triggers fines, surcharges, and interest under the general regime. Foreign tax paid on the same income may be credited against the Panamanian liability up to (but not exceeding) the Panamanian amount; such credits are personal, non-refundable, non-transferable, and may not be carried forward (article 707-H).

The anti-abuse clause of article 707-K empowers the Ministry of Economy and Finance (MEF), by reasoned resolution, to disregard forms or mechanisms whose principal purpose is to obtain a tax advantage that distorts the object of the chapter and that lack valid commercial reasons reflecting the economic reality of the operation.

V. SPECIAL REGIMES

Intangible assets (article 707-I). A modified nexus approach applies to income from the assignment or exploitation of intangible assets registered in Panama and used economically abroad, including royalties and capital gains. The non-taxable portion is determined by applying a quotient: the numerator comprises direct development expenses incurred in Panama (with a 30% uplift, capped by the denominator); the denominator comprises total acquisition and development expenses. The entity must maintain dedicated accounting and non-accounting records in Panama on an asset-by-asset basis. Non-compliance triggers application of the 15% rate.

Preferential tax regimes (article 707-J). Entities under preferential regimes that already require a substance sworn declaration must additionally report under this chapter through the income tax declaration. Entities under preferential regimes without such an obligation must nevertheless demonstrate qualified-entity status before the MEF in the terms of the chapter.

Merchant marine (article 707-M). Entities engaged in the commercial exploitation of vessels registered in Panama under the maritime regime (Law 57 of 2008 and Decree-Law 7 of 10 February 1998) are subject to tailored substance conditions recognizing the inherently mobile nature of the activity: registration with the competent authority or the Panama Maritime Authority; supervision by the Panama Maritime Authority; and a direct and effective link between the foreign-source income and the regulated maritime activity (including returns from treasury, reserves, or guarantees related to vessel operations).

Regulated financial entities (articles 707-N and 707-Ñ). The chapter does not apply to (i) financial entities supervised by the Superintendency of Banks, the Superintendency of the Securities Market, or other competent financial regulators; (ii) insurance and reinsurance entities, excluding captive insurance or reinsurance entities of multinational groups, which remain in scope; (iii) regulated securities-market intermediaries; and (iv) managers of investment funds, pension funds, and collective investment vehicles regulated under Decree-Law 1 of 1999 and Law 10 of 1993. The exclusion applies only to passive foreign-source income directly and effectively derived from the regulated activity. Article 707-Ñ requires ongoing prudential compliance, a direct link between the income and the regulated activity, and effective direction and administration in Panama.

VI. REPORTING, REGISTRY, AND OVERSIGHT

All entities within scope must report annually, in the income tax sworn declaration, both the passive foreign-source income obtained and the information necessary to accredit the substance conditions. The new paragraph 7 of article 710 expressly extends the filing obligation to entities that obtain only and exclusively passive foreign-source income – a meaningful expansion of the universe of Panamanian filers, capturing entities that historically had no Panamanian tax return obligation.
Supporting documentation must be retained in Panama and made available to the MEF on request. The MEF will maintain a registry of entities subject to the regime and is empowered to verify compliance at any time. Information is confidential and may be shared with foreign authorities only under treaties or international agreements ratified by Panama (article 707-L).

VII. PERMANENT ESTABLISHMENT – AMENDMENT TO ARTICLE 762-M

Article 3 of the Law substantively modernizes the definition of permanent establishment along OECD lines:

• Construction PE when construction, installation, assembly, inspection, or supervision activities exceed 183 days in any twelve-month period.
• Service PE when the service provider or its personnel remain in Panama for the execution of the same or a connected project for more than 183 days in any twelve-month period.
• Natural-resources PE when structures, drilling platforms, vessels, or similar equipment are used for the exploration or exploitation of natural resources for more than 183 days in any twelve-month period.
• Anti-fragmentation rule aggregating the periods of related-party activities and treating complementary activities forming part of a cohesive economic operation as a single permanent establishment.
• Dependent-agent PE triggered when a person habitually concludes contracts (or plays the principal role leading to their conclusion) in the name of the entity, for the transmission of property owned by the entity, or for the rendering of services by the entity. The independent-agent carve-out is denied where the agent acts exclusively or almost exclusively for closely related entities.
  These changes expand Panama’s tax jurisdiction over foreign enterprises operating in or through Panama and warrant a structured review of intra-group service, construction, leasing, and agency arrangements with a Panamanian nexus – independent of the substance regime.

VIII. KEY TAKEAWAYS AND PRACTICAL TIMELINE

For most Panamanian companies, the Law will have no direct application: standalone domestic companies, individually owned entities without foreign affiliates, and purely domestic Panamanian groups remain unaffected. For entities of multinational groups receiving passive foreign-source income, however, the Law introduces meaningful obligations that warrant structured assessment well in advance of fiscal year 2027. Stakeholders should use the implementation window to:

1. Assess scope on an entity-by-entity and income-category-by-category basis, applying the period-specific test to each fiscal year under consideration.
2. Evaluate eligibility for the reduced regime (pure equity-holding and non-habitual real estate) and for the regulated-entity exclusions under articles 707-N and 707-Ñ.
3. Identify and remediate substance gaps in dedicated personnel, facilities, documented strategic decision-making, and operational costs in Panama.
4. Map outsourcing arrangements for compliance with the in-Panama and no-hour-overlap requirements of article 707-G.
5. Review intra-group structures in light of the modernized permanent establishment definition of article 762-M.
6. Prepare for the expanded filing obligation under new paragraph 7 of article 710, particularly for entities that currently do not file income tax returns in Panama.
7. Monitor the implementing regulations within 90 calendar days of enactment, which are expected to specify operational parameters not addressed in the Law itself.

CHANIS Legal is available to advise on the application of the Law to specific structures and the preparation of the documentation required to support qualified-entity status.

This memorandum has been prepared for general informational purposes only and does not constitute legal or tax advice. It is based on the text of Law 526 of 28 May 2026 as published in Gaceta Oficial Digital No. 30534-B. The implementing regulations may modify or supplement several of the matters addressed herein. Specific advice should be obtained in respect of particular circumstances.