Panama’s Economic Substance Law: What Your Business Needs to Know
A fundamental reform that changes the rules for multinational groups in Panama — and that is already in force.
On May 29, 2026, President José Raúl Mulino signed Law No. 526 — known as the Economic Substance Law — into effect. Published in Panama’s Official Gazette on the same date, the Law entered into force immediately, marking a turning point in Panama’s tax framework.
This Law does not come out of nowhere. It is Panama’s response to years of international pressure — particularly from the European Union — to align its territorial tax system with global standards of transparency and fair taxation. Costa Rica, Uruguay, Hong Kong, and Singapore have already walked this path. Now it is Panama’s turn.
What matters most for businesses and structures domiciled in the country is understanding what this reform means in practice, whether it applies to them, and what they should do — and when.
The context: why Panama enacted this Law
Panama operates a territorial tax system: only income generated within the country is taxed. Foreign-source income — dividends, interest, royalties, capital gains — has historically been exempt from tax for entities domiciled in Panama.
This regime, however, has been challenged by the European Union, which views it as a potentially harmful Foreign-Source Income Exemption (FSIE) system: it allows passive income generated abroad to go untaxed both where it is generated and where it is received. The result, technically speaking, is double non-taxation.
The Economic Substance Law is Panama’s chosen solution: rather than taxing all foreign income, it requires those who benefit from the exemption to demonstrate that they have a genuine economic presence in the country. A surgical approach that preserves territoriality without surrendering to double non-taxation.
What the Law establishes
Law No. 526 applies to entities belonging to multinational groups domiciled in Panama that receive certain passive income from foreign sources, including:
Covered passive income
— Dividends from foreign sources
— Interest from foreign sources
— Royalties (use of intellectual property)
— Capital gains
— Real estate capital income
— Other movable capital income
To retain the tax exemption on this income, the entity must demonstrate to Panama’s tax authority (DGI) that it has genuine economic substance in Panama, defined as the effective presence and use of:
Economic substance requirements
— Qualified and remunerated personnel based in Panama
— Adequate physical facilities within national territory
— Strategic decision-making and risk management from Panama
— Operating expenses related to income-generating assets
The Law expressly excludes entities engaged in the commercial operation of vessels registered under Panama’s special merchant marine legislation — a sector that already has an OECD-recognized substance regime.
The consequences of non-compliance
If an entity fails to demonstrate sufficient economic substance, it will be classified as “non-qualified.” The consequences are significant:
Its passive foreign-source income will be subject to a 15% rate on net taxable income — in addition to penalties, surcharges, and interest for failure to meet reporting obligations.
Furthermore, all entities within the scope of the Law must comply with new formal obligations regardless of whether they meet the substance requirements: an annual sworn economic substance declaration, an income tax return for foreign-source income, supporting documentation maintained in Panama, and audited financial statements.
The timeline: there is time, but not much
The Law has been in force since May 29, 2026. The Executive Branch has 90 days to issue the implementing regulations that will define filing deadlines, forms, and substance evaluation criteria — placing the regulatory framework around late August 2026.
Key dates
May 29, 2026
Law No. 526 enters into force
~August 2026
Implementing regulations (90 days from enactment)
October 2026
EU list review — first opportunity for Panama’s removal
February 2027
Second EU review, if needed
This means there is a genuine window to assess the situation, plan the necessary adjustments, and carry them out in an orderly manner — before the regulations activate the formal compliance deadlines. Acting now is not rushing: it is precisely what sound corporate governance recommends.
Does it apply to you?
The answer depends on each structure, and the determination is not always straightforward. Some general considerations:
The Law applies to entities that are part of a group operating in more than one jurisdiction and that receive passive income from abroad under Panama’s territorial exemption.
The Law does not apply to purely operational companies whose income derives from commercial or service activities within Panama, nor to entities under the maritime regime, which are expressly excluded.
There are grey areas — patrimonial structures, private interest foundations, regional holding companies — whose classification under the Law requires individual analysis. And that analysis is worth carrying out sooner rather than later.
At EDTIJ
“We know our clients’ structures. That is why we can go straight to the point: determine whether the Law applies, to what extent, and what specific actions are needed.”
If you have questions about how this legislation affects you, we are available to guide you. This is exactly the kind of analysis we do — and the time to do it is now, while the window is still open.
Author
Marisel Della Togna
EDTIJ — Estudios de Derecho e Inversiones Jurídicas
mdellat@edtij.com
This article is for general informational purposes only and does not constitute legal advice. Assessing the specific impact on your structure requires individual review.
Economic Substance in Panama: What Bill 641 Means for Your Company
By EDTIJMay 2026Legislative Update
On May 21, Panama’s National Assembly Committee on Economy and Finance approved Bill 641 on first debate. The bill establishes an economic substance regime for passive income of foreign source earned by entities domiciled in Panama. The full Assembly has until June 5 to pass it into law.
If enacted, the regime takes effect in fiscal year 2027, with 90 days for the Ministry of Economy and Finance (MEF) to issue implementing regulations. For companies with Panamanian structures generating income abroad, this is not an abstract legislative development. It is a decision that must be made before the year is out.
What Does Bill 641 Establish?
The law applies to entities that are part of multinational groups domiciled in Panama and that receive passive income of foreign source. The scope covers:
→Dividends from foreign subsidiaries
→Interest on loans extended outside Panama
→Royalties of foreign origin
→Capital gains on foreign assets
→Income from real estate located outside Panama
The bill creates two categories with radically different tax consequences:
The two categories of the regime
Category A
Qualifying Entity
Demonstrates real economic substance in Panama. Retains the existing territorial exemption.
0%
Category B
Non-Qualifying Entity
Fails to demonstrate sufficient substance. Taxed on net foreign-source passive income.
15%
The shift from gross to net income as the taxable base for the 15% rate was a significant amendment introduced during the first debate. It represents a meaningful technical improvement for companies with a substantial cost structure.
What Does Demonstrating Economic Substance Require?
The law requires each entity to demonstrate, with respect to every passive income-generating asset, compliance with four requirements:
1Qualified, remunerated personnel in Panama — staff with effective functions over the activity generating the income.
2Adequate physical facilities in Panama — real physical presence proportionate to the scale of operations.
3Strategic and control decisions made from Panama — boards of directors and decision-making bodies must deliberate and resolve within the country.
4Operating expenses proportionate to the activity — the cost structure must be consistent with the volume and nature of declared income.
Exception for pure holding entities: Entities that solely hold equity interests in other companies or real estate without conducting direct commercial activity are only required to satisfy the first requirement: having qualified personnel in Panama. This exception may be determinative in any restructuring analysis.
Who Needs to Act Urgently?
Bill 641 is relevant to any company or structure that simultaneously meets these three conditions:
✓Is incorporated or domiciled in Panama
✓Forms part of a group with presence in more than one jurisdiction
✓Receives dividends, interest, royalties, or other passive income generated outside Panama
The treatment of private interest foundations and patrimonial trusts receiving foreign-source passive income remains subject to regulatory interpretation that the MEF must clarify during the 90-day rulemaking period. These structures require individualized analysis.
What Should Your Company Do Now?
Companies exposed to this regime have three courses of action, each with distinct implications for timing, cost, and structure:
I
Build genuine substance
Establish real presence in Panama to preserve the 0% territorial exemption. Requires operational and human resources planning.
II
Accept the rate
Assess whether 15% on net income is fiscally acceptable given the volume of passive income and existing cost structure.
III
Restructure operations
Relocate activities or structures to jurisdictions where genuine presence and verifiable substance already exist.
Key Dates
June 5, 2026
Final vote in the National Assembly. The bill could become binding law within days.
90 days post-enactment
MEF implementing regulations. This period will define the specific criteria for “sufficient substance” with immediate practical effect.
October 2026
FATF/EU evaluation — potential removal from the grey list. Bill 641 is part of the compliance package Panama is presenting to international bodies.
January 2027
New economic substance regime enters into force for entities domiciled in Panama.
The Time to Review Is Now
The regulations the MEF must issue within 90 days of enactment will set the specific criteria for what constitutes “sufficient substance” in practice. That said, the structural elements of the regime are already clear enough to begin the analysis.
Companies that initiate their review before those regulations are issued will be better positioned to make informed decisions and implement necessary adjustments within the timelines the law itself imposes.
At EDTIJ, we advise clients on the analysis of their corporate and asset structures in light of Bill 641’s new requirements.
If your company operates in Panama or through a Panamanian structure with foreign-source passive income, the analysis cannot wait for the regulations.
Panama’s Territorial Tax Principle: Origins, Current Relevance, and the Tensions of the International Debate
By: Marisel Della Togna
The legislative debate around Bill 641 exposes the structural tensions of Panama’s legal and financial model — and forces an answer to a question the country has deferred for decades.
EDTIJMay 2026Economic Substance · Bill 641Reading time: ~8 min
Panama built its international legal and financial model on a fiscal pillar that has remained intact for decades: the territorial tax principle. Under this framework, enshrined in Article 694 of the Fiscal Code, Panama taxes only income produced within its territory and excludes foreign-source income from taxation. This principle is neither a historical accident nor a regulatory gap. It is a deliberate policy decision that transformed Panama into one of Latin America’s most significant international business centers.
Today, that principle sits at the center of one of the most consequential legislative debates in recent years. Bill 641, currently under discussion in the National Assembly, introduces economic substance requirements for certain passive income of foreign source generated by entities of multinational groups domiciled in Panama.
The debate is not about eliminating territoriality — the government has been explicit on this point — but about how to modernize it without compromising it.
The Legal Foundation of the Territorial Principle
Panama’s territorial income system establishes that only income generated by economic activities carried out within national territory is subject to income tax. Income derived from operations conducted abroad — even if received by a Panamanian entity — is excluded from the tax base. This distinction between Panamanian-source income and foreign-source income is the cornerstone of the model.
The principle operates on a clear economic logic: Panama offers its legal platform, financial system, geographic position, and infrastructure as competitive advantages for attracting international investment. In exchange, companies domiciled in the country that generate income abroad do not pay local taxes on that income. The result has been the consolidation of Panama as the domicile of multinational corporate structures, regional treasury centers, investment holdings, and international distribution platforms.
The Tension with International Standards
The international environment has changed significantly over the past decade. The Organisation for Economic Co-operation and Development, through its BEPS initiative — Base Erosion and Profit Shifting — has actively promoted fiscal transparency standards aimed at eliminating what it considers abusive structures: entities that generate income in one jurisdiction but pay taxes in another with a lower tax burden, without real economic activity in either.
Under this framework, the European Union maintains a list of non-cooperative jurisdictions that includes countries whose tax rules are considered harmful from the perspective of European standards. Panama has intermittently appeared on that list, generating concrete consequences for companies operating under its jurisdiction: restrictions on financial flows, increased scrutiny of international transactions, and friction in relationships with European banking institutions.
Bill 641 is the Panamanian State’s response to that pressure. Its declared objective is to demonstrate that entities benefiting from Panama’s territorial regime have a real economic presence in the country — employment, facilities, decisions made from national territory — and are not mere paper vehicles used to defer or avoid taxes in other jurisdictions.
What the Debate Reveals
What is relevant about the ongoing legislative process is not only the content of the bill. It is the map of positions it has generated, because that map reflects with precision the structural tensions of Panama’s model.
Some defend the initiative as a necessary and intelligent evolution. The argument is that jurisdictions such as Singapore, Barbados, and Uruguay followed this path — adapting their regulatory frameworks to international standards — and emerged strengthened. That modernizing the territorial principle does not mean abandoning it, but rather shielding it with international legitimacy.
Others support it with precise technical conditions. The bill’s current text presents drafting problems that, if not corrected, may generate unintended consequences: the proposal to tax gross income rather than net income — unlike what Uruguay and Costa Rica do — may disproportionately increase the effective tax burden. The absence of gradation in the sanctions system may generate unnecessary litigation. The duplication of functions between the Ministry of Economy and Finance and the General Directorate of Revenue may fragment application criteria from the first day of the law’s effectiveness.
And there are those who warn that the process itself — the pressure of an external calendar as a conditioning factor for a sovereign fiscal policy decision — sets a precedent that Panama should evaluate carefully, regardless of the specific content of the law.
Practical Implications for Corporate Structures
For companies operating with foreign-source passive income through structures domiciled in Panama — dividends, interest, royalties, capital gains, real estate income — the debate has concrete implications that cannot be ignored while the law is in the process of approval.
The bill in its current state establishes that entities that fail to demonstrate sufficient economic substance will be classified as “non-qualified entities” and will pay a rate of 15% on their gross income. The definition of what constitutes sufficient economic substance — adequate human resources, assets, operating expenses, and effective management and control from Panamanian territory — will be determinative in assessing whether an existing structure complies or requires adjustments.
What is already clear is that not every passive structure in Panama is a tax avoidance scheme. Legitimate holdings, corporate treasury structures, family investment vehicles — all have solid legal and economic foundation. The ongoing legislative debate must produce a law that distinguishes precisely between the structures the rule seeks to regulate and those that should not fall within its scope.
We are closely monitoring the development of this legislative process and will be informing our clients about the status of the bill and its implications as it progresses toward approval.
Panama’s territorial tax principle is the backbone of the country’s legal and financial model. It has functioned for decades — not by accident, but by deliberate policy design that made Panama one of the most relevant international business hubs in Latin America.
Today, that principle is at the center of the most important legislative debate of the year. Bill 641 introduces economic substance requirements for certain foreign-source passive income. The government has been clear: territoriality is not being abandoned. What is being debated is how to modernize it.
For companies operating with corporate structures in Panama — holdings, treasury centers, international investment vehicles — understanding the legal foundation of this principle and the tensions the current debate generates is the essential first step in assessing any impact on their structures.
At EDTIJ we have published a full analysis: the origin of the territorial principle, its current standing, the positions in the legislative debate, and the practical implications for existing corporate structures.
Panama’s tax model was built on the territorial principle: Panama taxes what is generated here, not what is generated abroad. That principle is now at the center of a legislative debate with a hard deadline.
Bill 641 introduces economic substance requirements for multinational structures. What does this mean for companies operating in Panama? What remains in force — and what could change?
At EDTIJ we analyze the topic in depth. Read the full article at www.edtij.com
Instagram — EDTIJ
Caption: Panama’s territorial tax principle has held for decades. Today it is at the center of the most important legislative debate of the year.
What is it, how does it work, and what tensions does Bill 641 create? We analyze it at www.edtij.com
Image prompt (B&W): Side view of glass corporate buildings reflecting natural light, geometric facade, no people, no text. Black and white, minimalist, financial architecture.
Target SEO phrase
Panama territorial tax principle economic substance 2026
An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.
Related topics
OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income
Is your corporate structure ready for the new economic substance requirements?Contact EDTIJ →
This article is for informational purposes only and does not constitute legal advice. To assess the impact of economic substance legislation on specific corporate structures, please contact our team directly.
EDTIJ
www.edtij.com
EDTIJ — Legal Analysis · International Tax Law
Panama’s Territorial Tax Principle: Origins, Current Relevance, and the Tensions of the International Debate
By: Marisel Della Togna
The legislative debate around Bill 641 exposes the structural tensions of Panama’s legal and financial model — and forces an answer to a question the country has deferred for decades.
EDTIJMay 2026Economic Substance · Bill 641Reading time: ~8 min
Panama built its international legal and financial model on a fiscal pillar that has remained intact for decades: the territorial tax principle. Under this framework, enshrined in Article 694 of the Fiscal Code, Panama taxes only income produced within its territory and excludes foreign-source income from taxation. This principle is neither a historical accident nor a regulatory gap. It is a deliberate policy decision that transformed Panama into one of Latin America’s most significant international business centers.
Today, that principle sits at the center of one of the most consequential legislative debates in recent years. Bill 641, currently under discussion in the National Assembly, introduces economic substance requirements for certain passive income of foreign source generated by entities of multinational groups domiciled in Panama.
The debate is not about eliminating territoriality — the government has been explicit on this point — but about how to modernize it without compromising it.
The Legal Foundation of the Territorial Principle
Panama’s territorial income system establishes that only income generated by economic activities carried out within national territory is subject to income tax. Income derived from operations conducted abroad — even if received by a Panamanian entity — is excluded from the tax base. This distinction between Panamanian-source income and foreign-source income is the cornerstone of the model.
The principle operates on a clear economic logic: Panama offers its legal platform, financial system, geographic position, and infrastructure as competitive advantages for attracting international investment. In exchange, companies domiciled in the country that generate income abroad do not pay local taxes on that income. The result has been the consolidation of Panama as the domicile of multinational corporate structures, regional treasury centers, investment holdings, and international distribution platforms.
The Tension with International Standards
The international environment has changed significantly over the past decade. The Organisation for Economic Co-operation and Development, through its BEPS initiative — Base Erosion and Profit Shifting — has actively promoted fiscal transparency standards aimed at eliminating what it considers abusive structures: entities that generate income in one jurisdiction but pay taxes in another with a lower tax burden, without real economic activity in either.
Under this framework, the European Union maintains a list of non-cooperative jurisdictions that includes countries whose tax rules are considered harmful from the perspective of European standards. Panama has intermittently appeared on that list, generating concrete consequences for companies operating under its jurisdiction: restrictions on financial flows, increased scrutiny of international transactions, and friction in relationships with European banking institutions.
Bill 641 is the Panamanian State’s response to that pressure. Its declared objective is to demonstrate that entities benefiting from Panama’s territorial regime have a real economic presence in the country — employment, facilities, decisions made from national territory — and are not mere paper vehicles used to defer or avoid taxes in other jurisdictions.
What the Debate Reveals
What is relevant about the ongoing legislative process is not only the content of the bill. It is the map of positions it has generated, because that map reflects with precision the structural tensions of Panama’s model.
Some defend the initiative as a necessary and intelligent evolution. The argument is that jurisdictions such as Singapore, Barbados, and Uruguay followed this path — adapting their regulatory frameworks to international standards — and emerged strengthened. That modernizing the territorial principle does not mean abandoning it, but rather shielding it with international legitimacy.
Others support it with precise technical conditions. The bill’s current text presents drafting problems that, if not corrected, may generate unintended consequences: the proposal to tax gross income rather than net income — unlike what Uruguay and Costa Rica do — may disproportionately increase the effective tax burden. The absence of gradation in the sanctions system may generate unnecessary litigation. The duplication of functions between the Ministry of Economy and Finance and the General Directorate of Revenue may fragment application criteria from the first day of the law’s effectiveness.
And there are those who warn that the process itself — the pressure of an external calendar as a conditioning factor for a sovereign fiscal policy decision — sets a precedent that Panama should evaluate carefully, regardless of the specific content of the law.
Practical Implications for Corporate Structures
For companies operating with foreign-source passive income through structures domiciled in Panama — dividends, interest, royalties, capital gains, real estate income — the debate has concrete implications that cannot be ignored while the law is in the process of approval.
The bill in its current state establishes that entities that fail to demonstrate sufficient economic substance will be classified as “non-qualified entities” and will pay a rate of 15% on their gross income. The definition of what constitutes sufficient economic substance — adequate human resources, assets, operating expenses, and effective management and control from Panamanian territory — will be determinative in assessing whether an existing structure complies or requires adjustments.
What is already clear is that not every passive structure in Panama is a tax avoidance scheme. Legitimate holdings, corporate treasury structures, family investment vehicles — all have solid legal and economic foundation. The ongoing legislative debate must produce a law that distinguishes precisely between the structures the rule seeks to regulate and those that should not fall within its scope.
We are closely monitoring the development of this legislative process and will be informing our clients about the status of the bill and its implications as it progresses toward approval.
Panama’s territorial tax principle is the backbone of the country’s legal and financial model. It has functioned for decades — not by accident, but by deliberate policy design that made Panama one of the most relevant international business hubs in Latin America.
Today, that principle is at the center of the most important legislative debate of the year. Bill 641 introduces economic substance requirements for certain foreign-source passive income. The government has been clear: territoriality is not being abandoned. What is being debated is how to modernize it.
For companies operating with corporate structures in Panama — holdings, treasury centers, international investment vehicles — understanding the legal foundation of this principle and the tensions the current debate generates is the essential first step in assessing any impact on their structures.
At EDTIJ we have published a full analysis: the origin of the territorial principle, its current standing, the positions in the legislative debate, and the practical implications for existing corporate structures.
Panama’s tax model was built on the territorial principle: Panama taxes what is generated here, not what is generated abroad. That principle is now at the center of a legislative debate with a hard deadline.
Bill 641 introduces economic substance requirements for multinational structures. What does this mean for companies operating in Panama? What remains in force — and what could change?
At EDTIJ we analyze the topic in depth. Read the full article at www.edtij.com
Instagram — EDTIJ
Caption: Panama’s territorial tax principle has held for decades. Today it is at the center of the most important legislative debate of the year.
What is it, how does it work, and what tensions does Bill 641 create? We analyze it at www.edtij.com
Image prompt (B&W): Side view of glass corporate buildings reflecting natural light, geometric facade, no people, no text. Black and white, minimalist, financial architecture.
Target SEO phrase
Panama territorial tax principle economic substance 2026
An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.
Related topics
OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income
Is your corporate structure ready for the new economic substance requirements?Contact EDTIJ →
This article is for informational purposes only and does not constitute legal advice. To assess the impact of economic substance legislation on specific corporate structures, please contact our team directly.
EDTIJ
www.edtij.com
EDTIJ — Legal Analysis · International Tax Law
Panama’s Territorial Tax Principle: Origins, Current Relevance, and the Tensions of the International Debate
By: Marisel Della Togna
The legislative debate around Bill 641 exposes the structural tensions of Panama’s legal and financial model — and forces an answer to a question the country has deferred for decades.
EDTIJMay 2026Economic Substance · Bill 641Reading time: ~8 min
Panama built its international legal and financial model on a fiscal pillar that has remained intact for decades: the territorial tax principle. Under this framework, enshrined in Article 694 of the Fiscal Code, Panama taxes only income produced within its territory and excludes foreign-source income from taxation. This principle is neither a historical accident nor a regulatory gap. It is a deliberate policy decision that transformed Panama into one of Latin America’s most significant international business centers.
Today, that principle sits at the center of one of the most consequential legislative debates in recent years. Bill 641, currently under discussion in the National Assembly, introduces economic substance requirements for certain passive income of foreign source generated by entities of multinational groups domiciled in Panama.
The debate is not about eliminating territoriality — the government has been explicit on this point — but about how to modernize it without compromising it.
The Legal Foundation of the Territorial Principle
Panama’s territorial income system establishes that only income generated by economic activities carried out within national territory is subject to income tax. Income derived from operations conducted abroad — even if received by a Panamanian entity — is excluded from the tax base. This distinction between Panamanian-source income and foreign-source income is the cornerstone of the model.
The principle operates on a clear economic logic: Panama offers its legal platform, financial system, geographic position, and infrastructure as competitive advantages for attracting international investment. In exchange, companies domiciled in the country that generate income abroad do not pay local taxes on that income. The result has been the consolidation of Panama as the domicile of multinational corporate structures, regional treasury centers, investment holdings, and international distribution platforms.
The Tension with International Standards
The international environment has changed significantly over the past decade. The Organisation for Economic Co-operation and Development, through its BEPS initiative — Base Erosion and Profit Shifting — has actively promoted fiscal transparency standards aimed at eliminating what it considers abusive structures: entities that generate income in one jurisdiction but pay taxes in another with a lower tax burden, without real economic activity in either.
Under this framework, the European Union maintains a list of non-cooperative jurisdictions that includes countries whose tax rules are considered harmful from the perspective of European standards. Panama has intermittently appeared on that list, generating concrete consequences for companies operating under its jurisdiction: restrictions on financial flows, increased scrutiny of international transactions, and friction in relationships with European banking institutions.
Bill 641 is the Panamanian State’s response to that pressure. Its declared objective is to demonstrate that entities benefiting from Panama’s territorial regime have a real economic presence in the country — employment, facilities, decisions made from national territory — and are not mere paper vehicles used to defer or avoid taxes in other jurisdictions.
What the Debate Reveals
What is relevant about the ongoing legislative process is not only the content of the bill. It is the map of positions it has generated, because that map reflects with precision the structural tensions of Panama’s model.
Some defend the initiative as a necessary and intelligent evolution. The argument is that jurisdictions such as Singapore, Barbados, and Uruguay followed this path — adapting their regulatory frameworks to international standards — and emerged strengthened. That modernizing the territorial principle does not mean abandoning it, but rather shielding it with international legitimacy.
Others support it with precise technical conditions. The bill’s current text presents drafting problems that, if not corrected, may generate unintended consequences: the proposal to tax gross income rather than net income — unlike what Uruguay and Costa Rica do — may disproportionately increase the effective tax burden. The absence of gradation in the sanctions system may generate unnecessary litigation. The duplication of functions between the Ministry of Economy and Finance and the General Directorate of Revenue may fragment application criteria from the first day of the law’s effectiveness.
And there are those who warn that the process itself — the pressure of an external calendar as a conditioning factor for a sovereign fiscal policy decision — sets a precedent that Panama should evaluate carefully, regardless of the specific content of the law.
Practical Implications for Corporate Structures
For companies operating with foreign-source passive income through structures domiciled in Panama — dividends, interest, royalties, capital gains, real estate income — the debate has concrete implications that cannot be ignored while the law is in the process of approval.
The bill in its current state establishes that entities that fail to demonstrate sufficient economic substance will be classified as “non-qualified entities” and will pay a rate of 15% on their gross income. The definition of what constitutes sufficient economic substance — adequate human resources, assets, operating expenses, and effective management and control from Panamanian territory — will be determinative in assessing whether an existing structure complies or requires adjustments.
What is already clear is that not every passive structure in Panama is a tax avoidance scheme. Legitimate holdings, corporate treasury structures, family investment vehicles — all have solid legal and economic foundation. The ongoing legislative debate must produce a law that distinguishes precisely between the structures the rule seeks to regulate and those that should not fall within its scope.
We are closely monitoring the development of this legislative process and will be informing our clients about the status of the bill and its implications as it progresses toward approval.
Panama’s territorial tax principle is the backbone of the country’s legal and financial model. It has functioned for decades — not by accident, but by deliberate policy design that made Panama one of the most relevant international business hubs in Latin America.
Today, that principle is at the center of the most important legislative debate of the year. Bill 641 introduces economic substance requirements for certain foreign-source passive income. The government has been clear: territoriality is not being abandoned. What is being debated is how to modernize it.
For companies operating with corporate structures in Panama — holdings, treasury centers, international investment vehicles — understanding the legal foundation of this principle and the tensions the current debate generates is the essential first step in assessing any impact on their structures.
At EDTIJ we have published a full analysis: the origin of the territorial principle, its current standing, the positions in the legislative debate, and the practical implications for existing corporate structures.
Panama’s tax model was built on the territorial principle: Panama taxes what is generated here, not what is generated abroad. That principle is now at the center of a legislative debate with a hard deadline.
Bill 641 introduces economic substance requirements for multinational structures. What does this mean for companies operating in Panama? What remains in force — and what could change?
At EDTIJ we analyze the topic in depth. Read the full article at www.edtij.com
Instagram — EDTIJ
Caption: Panama’s territorial tax principle has held for decades. Today it is at the center of the most important legislative debate of the year.
What is it, how does it work, and what tensions does Bill 641 create? We analyze it at www.edtij.com
Image prompt (B&W): Side view of glass corporate buildings reflecting natural light, geometric facade, no people, no text. Black and white, minimalist, financial architecture.
Target SEO phrase
Panama territorial tax principle economic substance 2026
An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.
Related topics
OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income
Is your corporate structure ready for the new economic substance requirements?Contact EDTIJ →
This article is for informational purposes only and does not constitute legal advice. To assess the impact of economic substance legislation on specific corporate structures, please contact our team directly.
EDTIJ
www.edtij.com
EDTIJ — Legal Analysis · International Tax Law
Panama’s Territorial Tax Principle: Origins, Current Relevance, and the Tensions of the International Debate
By: Marisel Della Togna
The legislative debate around Bill 641 exposes the structural tensions of Panama’s legal and financial model — and forces an answer to a question the country has deferred for decades.
EDTIJMay 2026Economic Substance · Bill 641Reading time: ~8 min
Panama built its international legal and financial model on a fiscal pillar that has remained intact for decades: the territorial tax principle. Under this framework, enshrined in Article 694 of the Fiscal Code, Panama taxes only income produced within its territory and excludes foreign-source income from taxation. This principle is neither a historical accident nor a regulatory gap. It is a deliberate policy decision that transformed Panama into one of Latin America’s most significant international business centers.
Today, that principle sits at the center of one of the most consequential legislative debates in recent years. Bill 641, currently under discussion in the National Assembly, introduces economic substance requirements for certain passive income of foreign source generated by entities of multinational groups domiciled in Panama.
The debate is not about eliminating territoriality — the government has been explicit on this point — but about how to modernize it without compromising it.
The Legal Foundation of the Territorial Principle
Panama’s territorial income system establishes that only income generated by economic activities carried out within national territory is subject to income tax. Income derived from operations conducted abroad — even if received by a Panamanian entity — is excluded from the tax base. This distinction between Panamanian-source income and foreign-source income is the cornerstone of the model.
The principle operates on a clear economic logic: Panama offers its legal platform, financial system, geographic position, and infrastructure as competitive advantages for attracting international investment. In exchange, companies domiciled in the country that generate income abroad do not pay local taxes on that income. The result has been the consolidation of Panama as the domicile of multinational corporate structures, regional treasury centers, investment holdings, and international distribution platforms.
The Tension with International Standards
The international environment has changed significantly over the past decade. The Organisation for Economic Co-operation and Development, through its BEPS initiative — Base Erosion and Profit Shifting — has actively promoted fiscal transparency standards aimed at eliminating what it considers abusive structures: entities that generate income in one jurisdiction but pay taxes in another with a lower tax burden, without real economic activity in either.
Under this framework, the European Union maintains a list of non-cooperative jurisdictions that includes countries whose tax rules are considered harmful from the perspective of European standards. Panama has intermittently appeared on that list, generating concrete consequences for companies operating under its jurisdiction: restrictions on financial flows, increased scrutiny of international transactions, and friction in relationships with European banking institutions.
Bill 641 is the Panamanian State’s response to that pressure. Its declared objective is to demonstrate that entities benefiting from Panama’s territorial regime have a real economic presence in the country — employment, facilities, decisions made from national territory — and are not mere paper vehicles used to defer or avoid taxes in other jurisdictions.
What the Debate Reveals
What is relevant about the ongoing legislative process is not only the content of the bill. It is the map of positions it has generated, because that map reflects with precision the structural tensions of Panama’s model.
Some defend the initiative as a necessary and intelligent evolution. The argument is that jurisdictions such as Singapore, Barbados, and Uruguay followed this path — adapting their regulatory frameworks to international standards — and emerged strengthened. That modernizing the territorial principle does not mean abandoning it, but rather shielding it with international legitimacy.
Others support it with precise technical conditions. The bill’s current text presents drafting problems that, if not corrected, may generate unintended consequences: the proposal to tax gross income rather than net income — unlike what Uruguay and Costa Rica do — may disproportionately increase the effective tax burden. The absence of gradation in the sanctions system may generate unnecessary litigation. The duplication of functions between the Ministry of Economy and Finance and the General Directorate of Revenue may fragment application criteria from the first day of the law’s effectiveness.
And there are those who warn that the process itself — the pressure of an external calendar as a conditioning factor for a sovereign fiscal policy decision — sets a precedent that Panama should evaluate carefully, regardless of the specific content of the law.
Practical Implications for Corporate Structures
For companies operating with foreign-source passive income through structures domiciled in Panama — dividends, interest, royalties, capital gains, real estate income — the debate has concrete implications that cannot be ignored while the law is in the process of approval.
The bill in its current state establishes that entities that fail to demonstrate sufficient economic substance will be classified as “non-qualified entities” and will pay a rate of 15% on their gross income. The definition of what constitutes sufficient economic substance — adequate human resources, assets, operating expenses, and effective management and control from Panamanian territory — will be determinative in assessing whether an existing structure complies or requires adjustments.
What is already clear is that not every passive structure in Panama is a tax avoidance scheme. Legitimate holdings, corporate treasury structures, family investment vehicles — all have solid legal and economic foundation. The ongoing legislative debate must produce a law that distinguishes precisely between the structures the rule seeks to regulate and those that should not fall within its scope.
We are closely monitoring the development of this legislative process and will be informing our clients about the status of the bill and its implications as it progresses toward approval.
Panama’s territorial tax principle is the backbone of the country’s legal and financial model. It has functioned for decades — not by accident, but by deliberate policy design that made Panama one of the most relevant international business hubs in Latin America.
Today, that principle is at the center of the most important legislative debate of the year. Bill 641 introduces economic substance requirements for certain foreign-source passive income. The government has been clear: territoriality is not being abandoned. What is being debated is how to modernize it.
For companies operating with corporate structures in Panama — holdings, treasury centers, international investment vehicles — understanding the legal foundation of this principle and the tensions the current debate generates is the essential first step in assessing any impact on their structures.
At EDTIJ we have published a full analysis: the origin of the territorial principle, its current standing, the positions in the legislative debate, and the practical implications for existing corporate structures.
Panama’s tax model was built on the territorial principle: Panama taxes what is generated here, not what is generated abroad. That principle is now at the center of a legislative debate with a hard deadline.
Bill 641 introduces economic substance requirements for multinational structures. What does this mean for companies operating in Panama? What remains in force — and what could change?
At EDTIJ we analyze the topic in depth. Read the full article at www.edtij.com
Instagram — EDTIJ
Caption: Panama’s territorial tax principle has held for decades. Today it is at the center of the most important legislative debate of the year.
What is it, how does it work, and what tensions does Bill 641 create? We analyze it at www.edtij.com
Image prompt (B&W): Side view of glass corporate buildings reflecting natural light, geometric facade, no people, no text. Black and white, minimalist, financial architecture.
Target SEO phrase
Panama territorial tax principle economic substance 2026
An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.
Related topics
OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income
Is your corporate structure ready for the new economic substance requirements?Contact EDTIJ →
This article is for informational purposes only and does not constitute legal advice. To assess the impact of economic substance legislation on specific corporate structures, please contact our team directly.
EDTIJ
www.edtij.com
EDTIJ — Panama’s Territorial Tax Principle
EDTIJ — Legal Analysis · International Tax Law
Panama’s Territorial Tax Principle: Origins, Current Relevance, and the Tensions of the International Debate
By: Marisel Della Togna
The legislative debate around Bill 641 exposes the structural tensions of Panama’s legal and financial model — and forces an answer to a question the country has deferred for decades.
EDTIJMay 2026Economic Substance · Bill 641Reading time: ~8 min
Panama built its international legal and financial model on a fiscal pillar that has remained intact for decades: the territorial tax principle. Under this framework, enshrined in Article 694 of the Fiscal Code, Panama taxes only income produced within its territory and excludes foreign-source income from taxation. This principle is neither a historical accident nor a regulatory gap. It is a deliberate policy decision that transformed Panama into one of Latin America’s most significant international business centers.
Today, that principle sits at the center of one of the most consequential legislative debates in recent years. Bill 641, currently under discussion in the National Assembly, introduces economic substance requirements for certain passive income of foreign source generated by entities of multinational groups domiciled in Panama.
The debate is not about eliminating territoriality — the government has been explicit on this point — but about how to modernize it without compromising it.
The Legal Foundation of the Territorial Principle
Panama’s territorial income system establishes that only income generated by economic activities carried out within national territory is subject to income tax. Income derived from operations conducted abroad — even if received by a Panamanian entity — is excluded from the tax base. This distinction between Panamanian-source income and foreign-source income is the cornerstone of the model.
The principle operates on a clear economic logic: Panama offers its legal platform, financial system, geographic position, and infrastructure as competitive advantages for attracting international investment. In exchange, companies domiciled in the country that generate income abroad do not pay local taxes on that income. The result has been the consolidation of Panama as the domicile of multinational corporate structures, regional treasury centers, investment holdings, and international distribution platforms.
The Tension with International Standards
The international environment has changed significantly over the past decade. The Organisation for Economic Co-operation and Development, through its BEPS initiative — Base Erosion and Profit Shifting — has actively promoted fiscal transparency standards aimed at eliminating what it considers abusive structures: entities that generate income in one jurisdiction but pay taxes in another with a lower tax burden, without real economic activity in either.
Under this framework, the European Union maintains a list of non-cooperative jurisdictions that includes countries whose tax rules are considered harmful from the perspective of European standards. Panama has intermittently appeared on that list, generating concrete consequences for companies operating under its jurisdiction: restrictions on financial flows, increased scrutiny of international transactions, and friction in relationships with European banking institutions.
Bill 641 is the Panamanian State’s response to that pressure. Its declared objective is to demonstrate that entities benefiting from Panama’s territorial regime have a real economic presence in the country — employment, facilities, decisions made from national territory — and are not mere paper vehicles used to defer or avoid taxes in other jurisdictions.
What the Debate Reveals
What is relevant about the ongoing legislative process is not only the content of the bill. It is the map of positions it has generated, because that map reflects with precision the structural tensions of Panama’s model.
Some defend the initiative as a necessary and intelligent evolution. The argument is that jurisdictions such as Singapore, Barbados, and Uruguay followed this path — adapting their regulatory frameworks to international standards — and emerged strengthened. That modernizing the territorial principle does not mean abandoning it, but rather shielding it with international legitimacy.
Others support it with precise technical conditions. The bill’s current text presents drafting problems that, if not corrected, may generate unintended consequences: the proposal to tax gross income rather than net income — unlike what Uruguay and Costa Rica do — may disproportionately increase the effective tax burden. The absence of gradation in the sanctions system may generate unnecessary litigation. The duplication of functions between the Ministry of Economy and Finance and the General Directorate of Revenue may fragment application criteria from the first day of the law’s effectiveness.
And there are those who warn that the process itself — the pressure of an external calendar as a conditioning factor for a sovereign fiscal policy decision — sets a precedent that Panama should evaluate carefully, regardless of the specific content of the law.
Practical Implications for Corporate Structures
For companies operating with foreign-source passive income through structures domiciled in Panama — dividends, interest, royalties, capital gains, real estate income — the debate has concrete implications that cannot be ignored while the law is in the process of approval.
The bill in its current state establishes that entities that fail to demonstrate sufficient economic substance will be classified as “non-qualified entities” and will pay a rate of 15% on their gross income. The definition of what constitutes sufficient economic substance — adequate human resources, assets, operating expenses, and effective management and control from Panamanian territory — will be determinative in assessing whether an existing structure complies or requires adjustments.
What is already clear is that not every passive structure in Panama is a tax avoidance scheme. Legitimate holdings, corporate treasury structures, family investment vehicles — all have solid legal and economic foundation. The ongoing legislative debate must produce a law that distinguishes precisely between the structures the rule seeks to regulate and those that should not fall within its scope.
We are closely monitoring the development of this legislative process and will be informing our clients about the status of the bill and its implications as it progresses toward approval.
Panama’s territorial tax principle is the backbone of the country’s legal and financial model. It has functioned for decades — not by accident, but by deliberate policy design that made Panama one of the most relevant international business hubs in Latin America.
Today, that principle is at the center of the most important legislative debate of the year. Bill 641 introduces economic substance requirements for certain foreign-source passive income. The government has been clear: territoriality is not being abandoned. What is being debated is how to modernize it.
For companies operating with corporate structures in Panama — holdings, treasury centers, international investment vehicles — understanding the legal foundation of this principle and the tensions the current debate generates is the essential first step in assessing any impact on their structures.
At EDTIJ we have published a full analysis: the origin of the territorial principle, its current standing, the positions in the legislative debate, and the practical implications for existing corporate structures.
Panama’s tax model was built on the territorial principle: Panama taxes what is generated here, not what is generated abroad. That principle is now at the center of a legislative debate with a hard deadline.
Bill 641 introduces economic substance requirements for multinational structures. What does this mean for companies operating in Panama? What remains in force — and what could change?
At EDTIJ we analyze the topic in depth. Read the full article at www.edtij.com
Instagram — EDTIJ
Caption: Panama’s territorial tax principle has held for decades. Today it is at the center of the most important legislative debate of the year.
What is it, how does it work, and what tensions does Bill 641 create? We analyze it at www.edtij.com
Image prompt (B&W): Side view of glass corporate buildings reflecting natural light, geometric facade, no people, no text. Black and white, minimalist, financial architecture.
Target SEO phrase
Panama territorial tax principle economic substance 2026
An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.
Related topics
OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income
Is your corporate structure ready for the new economic substance requirements?Contact EDTIJ →
This article is for informational purposes only and does not constitute legal advice. To assess the impact of economic substance legislation on specific corporate structures, please contact our team directly.
The fiscal and regulatory environment in Panama is undergoing a structural transformation that goes beyond ordinary tax reform cycles. The convergence of three factors—the adoption of technological tools in tax administration, the advancement of international transparency standards, and the growing requirement for genuine economic substance—is redefining the conditions under which legal entities incorporated in the Republic operate.
For legal and tax advisors, for companies with cross-border operations, and for investors with structures in the jurisdiction, understanding these trends is not an academic exercise. It is a professional planning imperative.
This article analyzes the most relevant changes shaping Panama’s fiscal landscape in 2026 and provides criteria for anticipating their impact on corporate structures.
1. Technology in Tax Administration: The New Audit Standard
The Dirección General de Ingresos has intensified the use of data analysis tools to cross-reference information between declarations, financial statements, and withholding agent records. This process, advancing alongside the progressive digitalization of tax procedures, qualitatively transforms the State’s audit capacity.
What previously required manual review and discretionary selection of taxpayers can today be executed through algorithms that compare profiles, identify anomalies, and generate automatic alerts. The practical result is that the probability of detecting inconsistencies increases significantly, regardless of the taxpayer’s size or visibility.
Structures that maintain coherence between their declared activity and actual operations face no additional risk from this change. Those presenting discrepancies—income inconsistent with activity levels, expenses without adequate documentary support, or structures without genuine substance—are exposed to a level of scrutiny significantly greater than what they faced five years ago.
2. International Transparency Standards and Information Exchange
Panama operates within an international fiscal transparency framework that has deepened steadily in recent years. Compliance with the OECD’s Common Reporting Standard (CRS), the implementation of tax information exchange agreements, and the commitments derived from the process of removal from non-cooperative jurisdiction lists have created an environment where financial information flows between tax administrations with a fluidity that had no precedent a decade ago.
This has direct consequences for corporate planning. The separation between the jurisdiction of registration of an entity and the jurisdiction of residence of its beneficial owners no longer creates operational opacity. International tax planning must be designed assuming full visibility, because in materially relevant cases, that visibility is an effective reality.
For Panamanian structures with beneficiaries in other jurisdictions—or for foreign entities with assets or income sourced from Panama—this translates into a need to review substance documentation, beneficial ownership registries, and the coherence of financial flows with the declared structure.
3. Corporate Governance as a Compliance Factor
A trend of particular relevance to Panamanian corporate practice is the growing connection between the quality of a company’s internal governance and its standing before supervisory bodies. Entities with deficient governance structures—without active directors, without updated board minutes, without effective separation between shareholder and corporate assets—present an elevated regulatory risk profile.
This principle applies in both the fiscal and financial spheres. Correspondent banks, securities agents, and financial service providers incorporate governance criteria into their due diligence processes. A company that cannot demonstrate a functional governance structure faces growing difficulties in accessing the services it needs to operate.
Updating governance instruments—bylaws, minutes, shareholder agreements, and internal policies—is not an administrative formality. It is a component of the entity’s compliance profile.
4. Implications for Corporate Planning
The changes described do not operate in isolation. They reinforce one another and configure an environment in which corporate structures must be evaluated against criteria different from those that were sufficient five years ago.
Periodic review of existing structures—with specific attention to economic substance, beneficiary documentation, internal governance status, and the coherence between form and actual operations—has become a standard component of quality corporate legal advice.
The goal is not to redesign structures without substantive reason. It is to verify that existing ones meet the standards the current environment demands, and that their documentation can withstand the level of scrutiny that technological tools and information exchange frameworks now make possible.
Conclusion
Panama’s fiscal landscape in 2026 demands a level of structural rigor that goes beyond formal compliance. Companies and structures that arrive well-positioned in this environment are those that have built coherence between legal form and actual operations, maintain updated documentation, and work with specialized advisors who allow them to anticipate rather than merely react.
At EDTIJ, we accompany our clients in the evaluation, updating, and structuring of their corporate and tax positions with technical expertise and long-term strategic vision.
Economic Substance in Panama: What Multinational Groups Must Know Before the Law Takes Effect
The Fiscal Code reform bill introduces, for the first time, a condition on Panama’s territoriality principle. Its impact on holdings, licensing platforms, and investment vehicles is immediate.
Panama is facing a structural transformation in its corporate taxation model. The Fiscal Code reform bill submitted by the Ministry of Economy and Finance introduces, for the first time in the country’s legislative history, economic substance requirements for entities generating passive income from foreign sources.
This reform is not a minor technical amendment. It introduces a new condition that Panama’s tax system imposes on structures that have historically operated with full legitimacy under the territoriality principle. Understanding its scope, implications, and timeline is essential for any multinational group with a presence in Panama.
Panama’s territoriality principle does not disappear under this reform. But it becomes conditional. And that distinction has a direct impact on thousands of currently active structures.
II
What Does the Bill Propose?
The bill introduces a new Chapter I-A into the Fiscal Code under which entities receiving certain types of passive income from foreign sources must demonstrate genuine economic substance in Panama to maintain the favorable tax treatment currently applicable to that income.
The income categories covered include dividends, interest, royalties and other intellectual property rights, capital gains, and income from real estate. Entities that fail to demonstrate sufficient economic substance will be classified as non-qualified entities and will be subject to a 15% tax on gross income.
III
What Constitutes Economic Substance?
The bill establishes that a qualified entity must concurrently demonstrate the following elements:
Element
Description
Qualified personnel
Employees or directors with adequate knowledge and compensation commensurate with their functions in Panama.
Physical facilities
Offices or physical spaces appropriate for the type of activity carried out.
Strategic decision-making
Key management decisions must be made within Panamanian territory.
Linked operating costs
Operating expenses must bear a reasonable relationship to the income generated.
Annual reporting
Entities must submit an annual economic substance report to the competent authorities.
Technical Note
The rule does not establish fixed numerical thresholds. The assessment will be qualitative and proportional to the nature and volume of each entity’s activity. This margin of discretion makes preventive legal counsel particularly relevant.
IV
Who Is Affected and Who Is Not?
The bill directly affects legal entities incorporated in Panama or with Panamanian tax residence that receive passive income from foreign sources without demonstrating sufficient economic substance. Among the structures that warrant particular attention:
Structure Type
Exposure Level
Family holdings receiving dividends from foreign subsidiaries
High
Companies holding intellectual property licensed to regional group
Multinational groups with headquarters or co-headquarters in Panama
Medium-high
SEM and EMMA entities with mixed activities (operational + passive)
Medium
Entities with operational activities already reported to supervisory bodies
Low — subject to analysis
Existing special regimes — SEM, Colon Free Zone, Panama Pacifico — have their own economic presence requirements. It is necessary to analyze whether these requirements also satisfy the new economic substance test or whether additional documentation will be required.
V
Concrete Tax Implications
For entities classified as non-qualified, the most immediate impact is the application of a 15% tax on gross passive income. This rate is consistent with the global minimum tax established under Pillar Two of the OECD/G20 framework.
However, its application to gross rather than net income may be significantly more burdensome for structures with low net margins, such as certain intercompany financing vehicles or pass-through investment funds.
Additionally, the bill expands the criteria for determining when a foreign company has a permanent establishment in Panama, which may create additional tax obligations for groups currently operating through dependent representatives or employees authorized to conclude contracts.
VI
The Time Factor: Why Act Now
The Government of Panama has communicated that June 2026 is the critical deadline for this law to be enacted. The objective is for Panama to receive a favorable assessment from the European Union in October 2026 and be removed from its list of non-cooperative jurisdictions.
This means the window for preventive planning is limited. Structures that need to be reinforced, reorganized, or documented require time to implement changes in a genuine and sustainable manner.
1
Legal Diagnosis
Identify which entities in Panama receive passive income from foreign sources and under which category.
2
Existing Substance Assessment
Review which substance elements your structure already has and identify specific gaps.
3
Reinforcement Plan Design
Define what needs to be implemented: personnel, office space, board minutes protocol, operating cost policy.
4
Documented Implementation
Execute changes and document them from day one. All evidence counts in a future inspection.
5
Annual Report Preparation
Anticipate the new reporting obligation and be ready from the first applicable fiscal period.
VII
Questions the Legislative Debate Must Still Answer
At the time of writing, the bill remains under discussion in the National Assembly. Several points require clarification in the final text:
Legal Certainty Questions
How does the new rule interact with existing regulated special regimes — SEM, EMMA — that already have their own substance requirements and report to their regulatory bodies? Will dual compliance burdens arise?
Is the 15% on gross income the final and only tax, or can it accumulate with dividend taxes and other levies?
What will the qualified personnel threshold be for a holding structure that, by its nature, does not require intensive operations?
What will the mechanism and recipient authority for the annual substance report be?
Will there be a transition or grace period for adapting existing structures before the rule takes full effect?
These are not obstructionist questions. They are questions of legal certainty. The difference between a well-executed reform and one that generates more uncertainty than clarity lies precisely in how they are answered.
Conclusion
The economic substance reform under debate in Panama is necessary, technically consistent with international standards, and broadly positive for the reputation of Panama’s tax system.
But its impact on currently legitimate and active structures is real. Ignoring it is not a responsible option for any multinational group with a presence in Panama.
At EDTIJ, we are closely monitoring the legislative process. If your structures in Panama generate passive income from foreign sources, we recommend initiating a preventive review with our team before the rule takes effect.
The time to act is not after the rule imposes a tax you did not anticipate.
Marisel Della Togna
Partner — Escobar, Della Togna, Icaza & Jurado · www.edtij.com
