Private Interest Foundations and Law 526: What the Family Office Client Needs to Know | EDTIJ
Patrimonial Planning · June 2026
Private Interest Foundations and Law 526: What the Family Office Client Needs to Know
Law 526 changed Panama’s tax landscape, but it did not eliminate patrimonial planning tools. The Private Interest Foundation remains valid — when you understand its position in the new framework.
The enactment of Law No. 526 on May 28, 2026 generated an understandable reaction among many patrimonial planning clients: concern about their Panamanian structures, uncertainty about whether to restructure, and questions about Panama’s future as a jurisdiction for family wealth protection.
The concern is reasonable. But the conclusion that “we need to leave Panama” or “the Private Interest Foundation no longer works” is, in most cases, premature and incorrect.
What Law 526 does require is an honest conversation between the client and their lawyer about what the structure actually does, what income it generates, and what patrimonial objectives it serves. That conversation — not panic — is the correct response.
The Panamanian Private Interest Foundation: what it is and why it’s used
The Private Interest Foundation (Fundación de Interés Privado, or FIP) is an instrument created by Law 25 of 1995, unique to Panamanian law. It is neither a corporation nor a trust, though it shares elements with both. It is an independent legal person, without shareholders, whose assets are dedicated to the purposes the founder establishes in its constitutive charter.
The reasons family office clients use the FIP go well beyond tax treatment:
Why the FIP is used
— Asset protection: the foundation’s assets are separated from the founder’s personal assets and, in principle, from their creditors
— Succession planning: allows the founder to define beneficiaries, conditions, and timing of asset distribution
— Control: the founder can retain management powers without formal ownership of the assets
— Privacy: does not require public disclosure of beneficiaries in most circumstances
— Continuity: survives the founder’s death without the need for formal probate proceedings
These objectives — protection, succession, control, privacy, continuity — do not disappear with Law 526. What changes is the analysis of whether the FIP falls within the scope of the law, and whether that scope has tax consequences the client needs to understand.
The FIP and Law 526: three possible scenarios
How a FIP is treated under Law 526 depends on two factors: what is above it (who controls it?) and what is below it (what assets does it hold? does it own foreign entities?).
Scenario 1 · Likely Out of Scope
Natural person → Panamanian FIP → investment portfolios or foreign deposits (no foreign subsidiaries)
The FIP is a Panamanian entity. The founder is a natural person. There is no second entity in another jurisdiction controlling the FIP. If the foundation’s assets consist of direct financial investments — listed shares, bonds, bank accounts abroad — without the FIP owning foreign corporate entities, a multinational group probably does not exist.
In this scenario, Law 526 likely does not apply and the FIP retains its current position without needing to demonstrate economic substance.
Scenario 2 · Within Scope
Natural person → Panamanian FIP → shares in foreign companies → dividends and foreign income
If the FIP holds shares or equity stakes in foreign companies and receives dividends or other passive income from them, the FIP and those foreign entities configure a multinational group: two legal entities in different jurisdictions connected by ownership. Law 526 applies.
In this scenario, the lawyer must assess whether the FIP can demonstrate economic substance, or whether the structure’s architecture should be reconsidered — but that does not necessarily mean eliminating the FIP. It may mean adjusting which assets sit inside it.
Scenario 3 · Within Scope
Foreign trust → Panamanian FIP → assets and investments
When a foreign trust sits above the Panamanian FIP — a structure some international advisors recommend for privacy or cross-border succession planning purposes — the trust is a legal entity in another jurisdiction that controls the FIP. That configures a multinational group. Law 526 applies.
In this scenario, the analysis should consider whether the cost of the additional trust layer remains justified in the new tax environment, or whether the structure can be simplified.
What does not change: the patrimonial value of the FIP
Even in scenarios where Law 526 applies, the FIP does not lose its value as a patrimonial tool. What changes is the tax cost of certain income — not the utility of the structure for the purposes for which it was created.
If a FIP was established to protect family assets from potential creditors, ensure patrimonial continuity on the founder’s death, or establish a distribution order among beneficiaries across generations — those objectives remain valid. And the FIP remains one of the most effective instruments for achieving them within Panamanian law.
The decision to restructure, adjust, or maintain the FIP must be based on a complete analysis of the client’s objectives — not on an automatic reaction to the enactment of Law 526.
The questions the family office client should ask
The productive conversation with a patrimonial lawyer right now is not “does Law 526 affect me?” but a set of more precise questions:
The four questions of the patrimonial diagnostic
1
What is inside the FIP? Direct financial assets or equity stakes in foreign companies? This determines the scenario.
2
What is above the FIP? Is the founder the only natural person, or is there a trust or other entity above it?
3
What foreign income does the FIP generate? Dividends from subsidiaries? Interest? Capital gains from a portfolio? The nature of the income determines the scope.
4
What objectives does the FIP serve that cannot be achieved otherwise? Protection, succession, privacy, control. Those objectives weigh heavily in the restructuring decision.
With those four answers on the table, the lawyer can formulate an informed recommendation — not a generic one, but one specific to that client’s structure and objectives.
The time to act is now
The implementing regulations for Law 526 — expected before the end of August 2026 — will define specific application criteria. But the patrimonial diagnostic described above does not depend on those regulations. What is inside the FIP, what is above it, and what income it generates — that the client knows today, and a lawyer can analyze today.
The client who begins this conversation now has time to make decisions calmly. The one who waits until December 2026 will make the same decisions under pressure.
At EDTIJ
“We know our clients’ structures. That is why we can go straight to the right question: is this FIP within the scope of Law 526? And what do we do if it is?”
If you have a Private Interest Foundation or other patrimonial structure in Panama and want to understand its position under Law 526, we are available for the analysis.
mdellat@edtij.com · +507-340-6324 · edtij.com
Author
Marisel Della Togna
Partner — EDTIJ · Escobar, Della Togna, Icaza & Jurado
mdellat@edtij.com
This article is for general informational purposes only and does not constitute legal advice. The specific analysis of each Private Interest Foundation requires an individualized review of its structure, assets, and patrimonial objectives. Conclusions are subject to the pending Executive regulations of Law 526, expected before the end of August 2026.
Law 526 on Economic Substance: What Multinational Groups Must Do Before Fiscal Year 2027 | EDTIJ
Tax Transparency & Economic Substance
Law 526 on Economic Substance: What Multinational Groups Must Do Before Fiscal Year 2027
EDTIJ — Escobar, Della Togna, Icaza & JuradoPanama · June 2026Estimated reading: 6 min
The enactment of Law 526 on 28 May 2026 marked a turning point for corporate planning in Panama, yet the real challenge lies not in the wording of the statute but in the time remaining before it first applies. The law introduces economic substance requirements for entities that form part of multinational groups and earn foreign-source passive income, and it takes effect from fiscal year 2027.
Between now and then there is a preparation window that, used wisely, separates the groups that will arrive in compliance from those that will arrive improvising. Treating this reform as a mere tax update would be a misreading: at its core, it is a warning about how corporate structures are designed.
1. The actual scope of the rule
The first step is to understand the actual scope. Law 526 does not apply automatically to every Panamanian company or foundation. It reaches only entities that meet two conditions at once: belonging to a multinational group, understood as two or more entities linked by ownership or control and tax-resident in different jurisdictions, and earning foreign-source passive income such as dividends, interest, royalties, capital gains or real estate income. The first task for each group, therefore, is to determine precisely which entities fall within the perimeter of the rule and which do not.
The territorial system remains in force
Panama’s territorial tax system does not change. Law 526 reaches only a narrow category of cross-border cases; companies and foundations without an international link or without foreign-source passive income remain outside its scope.
2. The comparative experience: what other jurisdictions teach
In comparative terms, Panama is not breaking new ground: it follows the path that jurisdictions such as the British Virgin Islands and the Cayman Islands traveled years ago when they adopted their own substance regimes in response to OECD and European Union requirements. The experience of those financial centers offers a clear lesson. Groups that treated substance as an exercise in architecture, with real staff, locally made decisions and actual expenditure, navigated the transition smoothly. Those that treated it as a documentary formality faced reclassifications, information requests and unexpected costs.
Panama now offers the chance to learn from that precedent rather than repeat its mistakes. Substance is not proven with a document; it is proven with a structure.
3. Advantages and disadvantages by type of structure
The assessment of advantages and disadvantages must be made case by case. For groups with genuine operations in Panama, the law is more an opportunity than a burden: demonstrating substance confirms the legitimacy of the structure and, by meeting the requirements, the entity continues without paying tax on that passive income. The disadvantage falls on purely instrumental structures, those without staff, facilities or real activity in the country, which, if not adjusted, would be exposed to a fifteen percent tax on the net taxable income derived from that passive income, with a limited credit for taxes paid abroad.
Type of entity
Applicable test
What must be demonstrated
Operating entity
Full test
Adequate staff and facilities, strategic decisions and risks assumed in Panama, local operating expenditure, plus reporting and supporting documentation.
Holding entity (equity interests or real estate)
Reduced test
Adequate resources and facilities plus the corresponding reporting. Relieved from demonstrating local strategic decisions and operating costs.
Entity without substance
Not applicable
15% tax on the net taxable income from passive income, with a limited credit for taxes paid abroad.
On outsourcing
Outsourcing is permitted, but only where the work is actually performed in Panama. Functions carried out outside the country do not evidence substance, even when contracted through a provider within the same group.
4. The pending regulation is no reason to wait
Several operational aspects, including the forms, the precise deadlines and the evidentiary standards, will be defined in the regulation that the Executive must issue within ninety days of the law’s enactment. That pending regulation is no reason to wait. Building real substance takes time: hiring or relocating staff, formalizing where decisions are made, organizing expenditure and preparing supporting documentation are processes that cannot be improvised in the weeks before a filing.
5. How to make the right decision
The right decision depends on each group’s specific needs. There is no single answer. What does exist is a method: identify the entities within scope, classify the nature of their income, assess the current level of staff and facilities in Panama, anticipate the outcome of the applicable test, and document everything in advance.
Groups that begin this analysis now, rather than waiting for the regulation or the close of the period, will reach 2027 with certainty instead of exposure. In matters of economic substance, early preparation is not a formality: it is the difference between a solid structure and a contingency waiting to happen.
At EDTIJ we advise multinational groups, family holdings and investment vehicles on assessing their exposure to Law 526 and designing structures with real substance.
Panama’s Law 526 of 2026 is now in force. For corporate lawyers, its enactment is not the end of a legislative process — it is the beginning of a concrete work agenda with every client holding Panamanian structures that generate foreign-source passive income. This article outlines the diagnostic that must begin now, the consequences of inaction, and the structural options available before January 2027.
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
Panama holds a distinctive position on the map of international investment in Latin America. Its territorial tax system, financial infrastructure, network of double taxation treaties, and the solidity of its corporate legal framework make it a reference jurisdiction for investors seeking to establish structures with regional reach.
The effectiveness of an investment structure in Panama, however, does not depend solely on the jurisdiction itself. It depends on whether the legal vehicles selected are appropriate for the type of activity, the investor’s profile, and the medium- and long-term objectives. A legally sound structure is not necessarily the simplest or the least expensive in the short term. It is the one that can withstand regulatory scrutiny, resist changes in the normative environment, and protect assets effectively over time.
This article analyzes the main legal vehicles available to the foreign investor in Panama, their advantages and limitations from a legal and tax perspective, and the elements that must be considered when designing a wealth structure with international components.
The Legal Framework for Foreign Investment in Panama
Panama imposes no general restrictions on foreign investment. The principle of national treatment ensures that foreign investors have, in general terms, the same rights as local investors to incorporate companies, acquire assets, and carry out economic activities in Panamanian territory.
Specific sectoral exceptions exist — such as retail trade, certain agricultural activities, and some professional services — where foreign participation is limited or conditioned. Outside those sectors, the legal framework offers broad freedom to structure investments of diverse nature.
Foreign investment may be channeled through different legal vehicles, each with its own characteristics, advantages, and obligations.
Primary Legal Vehicles
The Panamanian corporation (sociedad anónima) is the most widely used vehicle for foreign investment in Panama. Its corporate flexibility, the possibility of share issuance under the current custody regime, and the capacity to operate internationally make it a versatile option. For structures involving active investment in the local market, the corporation meeting the economic substance requirements under Executive Decree No. 100 of 2021 offers the level of regulatory soundness required.
The Panamanian private interest foundation (fundación de interés privado), regulated by Law 25 of 1995, is the ideal instrument for wealth management and succession planning. Unlike the corporation, the foundation does not pursue direct commercial purposes, making it particularly useful for separating personal and corporate assets, establishing governance rules for asset transmission, and protecting assets from external contingencies.
The Panamanian trust (fideicomiso), regulated by Law 1 of 1984, complements the foregoing for structures with specific objectives of asset management, succession planning, or collateral. Its combined use with a corporation or a private interest foundation allows for the design of sophisticated wealth structures with high levels of flexibility and protection.
Tax Considerations for the Foreign Investor
Panama’s tax system operates under the principle of territoriality: only income from Panamanian source is subject to income tax. Income generated outside Panamanian territory, even when received by an entity incorporated in Panama, is not subject to local taxation.
This characteristic is frequently the most attractive element for the international investor. It must, however, be analyzed with precision, because not all income received by a Panamanian entity qualifies as foreign-source income. The DGI (General Revenue Directorate) may question the source qualification when the activities generating the income have effective links to Panamanian territory.
For passive investment structures — such as the holding of interests in foreign companies, receipt of dividends from foreign sources, or administration of international financial investments — the tax treatment in Panama is generally favorable. For active investment structures with operations in Panama, the analysis must include compliance with economic substance requirements and the correct determination of income source.
Dividends paid by Panamanian entities to foreign beneficiaries are subject to withholding at 10% on Panamanian-source dividends and 5% on foreign-source dividends.
Panama’s Comparative Advantages vs. Other Regional Jurisdictions
Compared to other jurisdictions frequently used to structure investments in Latin America, Panama offers concrete advantages: a consolidated financial and legal infrastructure, a judicial system with a tradition in international corporate law, a de facto currency linked to the US dollar, access to an active international banking network, and a central geographic position that facilitates management of regional operations.
Unlike purely offshore jurisdictions, Panama is a real economy with a regulatory system that, while requiring adaptations to meet OECD and FATF international standards, offers a legitimacy base that purely offshore structures cannot replicate.
Limitations must also be understood: international scrutiny of Panama is higher than in other regional jurisdictions, which means structures must be designed with greater documentary and compliance rigor. Transparency, in this context, is not an obstacle — it is the element that allows the structure to function in the long term.
Conclusion
Panama offers a favorable legal and tax framework for foreign investment and international wealth structuring. The advantages of this framework materialize, however, only when the structure is designed with rigor, correctly documented, and maintained in accordance with current compliance standards.
The decision to structure an investment in Panama should not be made based on tax rates or simplicity of incorporation. It should be made following a comprehensive analysis of the investor’s profile, the structure’s objectives, and the compliance obligations applicable across all relevant jurisdictions.
At EDTIJ we accompany that process from initial analysis through implementation and ongoing maintenance of the structure.
Tax contingencies in corporate structures are rarely the result of deliberately incorrect decisions. More often, they are the accumulated consequence of structures designed for a regulatory context that has since changed, of operations that evolved without updating the legal and tax framework, or of decisions made with incomplete information about the tax implications across multiple jurisdictions.
Panama’s tax system has undergone significant transformation over the past decade. The implementation of international standards for automatic exchange of information, the consolidation of the transfer pricing regime, economic substance requirements for structures accessing special tax benefits, and the improved technical capacity of the Dirección General de Ingresos (DGI) have created a qualitatively different audit environment compared to prior years.
A structure that functioned correctly in 2015 may today be accumulating significant contingencies —not because its operations have changed, but because the framework within which those operations are evaluated has changed. Identifying those contingencies before they materialize, quantifying them accurately, and deciding on the correct response —prevention, voluntary correction, or defense in an audit— is the subject of this article.
1. What is a tax contingency and how is it quantified
A tax contingency is the possibility that a tax position adopted by the taxpayer will be reviewed and adjusted by the tax authority, generating an additional payment obligation —tax, interest, or penalty— not contemplated in the financial statements or in the company’s original planning.
In accounting terms, tax contingencies are classified into three categories based on the likelihood that the risk will materialize. This classification reflects an international accounting criterion —consistent with IAS 37 and IFRS— and is not a legal category defined by Panama’s Fiscal Code: probable (more likely than not to occur, requiring mandatory accounting provision and immediate legal action); possible (may occur but is not probable, requiring disclosure in notes and evaluation of voluntary correction); and remote (very low probability, monitored but not provisioned).
The DGI determines the basis for a tax adjustment from the difference between the declared taxable base and the taxable base the authority considers correct under applicable rules. On that difference, the corresponding tax rate is applied, plus interest —currently calculated on the default rate established by the Fiscal Code— and, where applicable, penalties for formal or substantive non-compliance.
It is important to emphasize that quantifying a contingency is not a purely mathematical exercise. It depends on the interpretive criteria the DGI applies to the relevant rule, the degree of documentation available to support the taxpayer’s position, and existing administrative and judicial precedents. A contingency that appears significant may be manageable with the correct defense; one that seems minor may become a larger problem if supporting documentation is insufficient.
2. Early warning signs
Most tax contingencies are detectable before the DGI initiates a formal audit. The most frequent warning signs in Panamanian corporate structures fall into three areas:
In the financial area: inconsistencies between declared income and movements in local or foreign bank accounts; expenses deducted without sufficient supporting documentation or without demonstrable connection to taxable activity; and dividend distributions without correct beneficial owner declaration or without the applicable withholding.
In the corporate area: transactions with related parties without a technical transfer pricing study or with an outdated study; payments to non-residents for services without tax withholding or with withholding below the legally applicable rate; and holding or ownership structures that do not reflect the post-2021 regulatory changes on economic substance.
In the regulatory area: changes in double taxation treaties or in the administrative interpretation of their provisions not incorporated into the structure; reporting obligations before the Global Forum or under BEPS standards not met within established deadlines; and failure to update the beneficial owner registry with the resident agent when ownership changes have occurred.
The presence of one or more of these signals does not automatically imply a probable contingency. But it does imply that the structure warrants a technical review before the DGI conducts one instead.
3. The audit process in Panama
Panama’s tax audit process is governed by the Fiscal Code and the DGI’s administrative regulations. It comprises several stages with specific rights and deadlines for the taxpayer.
Selection and notification. The DGI selects taxpayers for audit through risk analysis, information cross-referencing, or sectoral audits. The formal notification of the audit’s commencement triggers the process’s deadlines.
Information request. The DGI may request documents, accounting records, contracts, prior period returns, and any information relevant to verifying the accuracy of filed returns. The taxpayer has the right to know the audit’s scope and to submit information within established deadlines.
Proposed adjustment. If the DGI identifies differences, it issues a proposed adjustment detailing the proposed changes to the taxable base and the amount of additional tax, interest, and penalties. The taxpayer has the right to file a response within the legal deadline.
Response and hearing. The response stage is the taxpayer’s central opportunity for defense. The quality and completeness of the documentation submitted at this stage is determinative for the final outcome of the process.
Resolution and appeals. The DGI issues an administrative resolution. If the taxpayer disagrees, they may appeal through a reconsideration motion before the DGI itself, and subsequently through an appeal before the Tax Administrative Tribunal.
Statutes of limitation for tax obligations in Panama vary by tax type: for ITBMS (Panama’s VAT equivalent), Article 1057-V, paragraph 18 of the Fiscal Code establishes a five-year period; for other taxes and tax credits, Articles 737 and 1073 of the Fiscal Code provide for periods of seven or fifteen years depending on the specific applicable rule. These deadlines must be considered when evaluating the temporal scope of a contingency.
4. Voluntary correction vs. audit: when to act and how
One of the most important decisions in tax contingency management is determining whether to proactively correct or wait for a formal audit to be initiated. This decision depends on several factors.
Voluntary correction reduces applicable penalties for formal non-compliance, allows the taxpayer to control the narrative and the documentation presented, and eliminates the risk of penalties for resistance or contumacy. It is recommended when the contingency is probable and quantifiable.
Defense in an audit becomes necessary when the contingency has already been detected by the DGI and requires a solid defense strategy from the outset. The outcome is uncertain and depends heavily on the quality of the administrative record. It is appropriate when the taxpayer’s position is substantively defensible.
Voluntary correction in Panama can be accomplished through the filing of amended returns, voluntary payment of tax differences with corresponding default interest, or the request for payment agreements when the amount to be regularized is significant. In all cases, submitting the correction before a formal audit is initiated has favorable effects on applicable penalties.
It is important to note that not every questionable tax position warrants voluntary correction. When the taxpayer’s position has reasonable regulatory support —even if debated— it may be more efficient to document it adequately and defend it in the event of an audit. The key is not to confuse interpretive uncertainty with genuine risk of adjustment.
5. Conclusion: the cost of prevention vs. the cost of contingency
Preventing tax contingencies has a measurable cost: the time and resources required to review the structure, update documentation, correct tax positions that warrant it, and maintain compliance current against an evolving regulatory framework.
The cost of an unmanaged contingency is, in most cases, unpredictable. It includes the adjusted tax, accumulated default interest, formal or substantive non-compliance penalties, the cost of defense in the administrative process, and, in extreme cases, the reputational impact on relationships with financial institutions or commercial counterparties.
In the current audit environment —where the DGI has greater technical capacity, greater access to information from international sources, and more sophisticated risk analysis tools— the probability that an accumulated contingency will go undetected for years is significantly lower than it was a decade ago.
Well-designed corporate structures, with updated documentation and active tax compliance management, have nothing to fear from an audit. Those that have accumulated unmanaged risks have nothing to gain by waiting for one.
