New economic substance rules in Panama: who do they really affect?

Over the last few years, I have advised family businesses, family offices, and international investors on structuring assets and business operations with components in Latin America, Europe, and the United Arab Emirates.

Since the approval of Law 526 of 2026, I have received numerous inquiries from clients concerned about the impact this reform could have on their Panamanian structures. In many cases, the concern has been greater than the actual risk.

The good news is that the new law does not affect all Panamanian companies. The less good news is that many structures will need to be carefully reviewed before 2027 to determine whether they are indeed part of a multinational group and whether they meet the economic substance requirements established by the new regulations.
Let’s take a look:


Why did Panama approve this law?  

Panama recently approved Law 526 of 2026, a reform that introduces new economic substance requirements for certain foreign-source passive income.
The reform responds to international efforts to require greater economic substance from structures that receive passive income from abroad.
Panama maintains its traditional territorial tax system. However, certain entities belonging to multinational groups will have to demonstrate that they have real economic activity in Panama in order to continue benefiting from the exclusion of certain foreign-source passive income.

Who does the new law apply to?

The law applies only when three elements are present:

1. There is an entity incorporated or domiciled in Panama.
2. The entity is part of a multinational group.
3. The entity earns passive income from foreign sources.

What is meant by a multinational group?

In simple terms, it is a structure made up of two or more entities, linked through ownership or control, located in different countries, that are part of the same economic group and that are included, or should be included, in consolidated financial statements.
The law indicates that permanent establishments are considered members of the multinational group in all cases.
Not all Panamanian companies are part of a multinational group.

What income is covered?

Foreign-source passive income, specifically: dividends, interest, royalties, capital gains, real estate income, and other income from movable capital.

What happens if the law applies to me?

The entity must demonstrate that it has economic substance in Panama. In practical terms, it must prove the existence and effective use in the Republic of Panama of human resources, assets, facilities, direction, management, control, risks, and operating expenses appropriate to the nature, proportionality, complexity, and type of foreign-source passive income earned by the Panamanian entity.
Some of these activities may be outsourced, provided that they are carried out in Panama and that the third-party provider has the material and human resources necessary to demonstrate substance.

What happens if there is no economic substance?

The entity could be considered a "non-qualified entity." In that case, passive foreign-source income would be subject to a 15% tax on net taxable income.

LATIN COUNSEL: Are there exceptions? 

Yes. 
The law establishes more flexible rules for certain entities whose main activity consists of holding interests in other companies (pure holding companies) or holding real estate, provided they meet certain conditions. 
In addition, some regulated sectors, such as banking, insurance, securities, and certain investment vehicles, have special rules or specific exclusions.

What should companies and families with structures in Panama do?

The approval of the reform has generated significant uncertainty among investors, business families, and wealth advisors. However, in my opinion, many of the initial concerns stem from an incomplete reading of the law. It is not a time for alarm, but it is a time for review.
Most Panamanian companies used by individuals, families, or small business groups will likely not be affected if they are not part of a multinational group under the legal definition.

During 2026, it is advisable to analyze whether the structure truly forms part of a multinational group, identify the passive income earned, and assess whether there is sufficient economic substance in Panama to comply with the new requirements that will come into force starting in 2027.
The main conclusion is simple: the reform does not affect all Panamanian companies. It affects only certain entities of multinational groups that earn foreign-source passive income and cannot demonstrate a real economic presence in Panama.

blplegal.com