admin23Corporate Law & Wealth Planning
The entry into force of Law 526 of 2026 on economic substance —which applies to fiscal periods beginning on or after January 1, 2027— prompted an understandable reaction among those who hold estate structures in Panama: has my Private Interest Foundation or my holding company been caught by a new obligation? The concern is reasonable. The conclusion that “we must leave Panama” or that “the foundation is no longer useful” is, however, usually premature and incorrect.
1. What changed and what did not
Panama retains its territoriality principle, enshrined in article 694 of the Tax Code: it does not tax foreign-source income. Law 526 did not repeal that principle. What it did was make it conditional for a narrow set of structures: to keep enjoying territorial treatment on certain foreign-source passive income, the entity that receives it must demonstrate real economic substance in Panama. The regulation came with Executive Decree 32 of 2026, which develops articles 707-A through 707-Ñ of the Tax Code and set out how that substance is proven.
Put simply: the law does not ask whether the structure exists in Panama. It asks whether it operates in Panama, and whether it can prove it.
2. The two thresholds that must both be met
Law 526 does not reach every Panamanian entity. Substance obligations arise only when two conditions are met cumulatively:
- Multinational group: two or more legal entities, in different jurisdictions, linked by ownership or control.
- Foreign-source passive income: the entity earns income in one of the six categories of article 707-C —dividends, interest, royalties, capital gains, income from real estate located outside Panama, or other movable-capital income.
If either condition is missing, the analysis closes: the law does not apply. This is the first piece of good news for the most common estate planning, and the reason the law’s real scope is considerably narrower than the noise its enactment generated.
3. The three scenarios for the foundation or the holding
A structure’s treatment depends on two things: what sits above it (who controls it) and what sits below it (what assets it holds and what income it earns). From that, three typical scenarios emerge.
| Scenario | Typical structure | Within scope? |
|---|---|---|
| Scenario 1 | Individual → Private Interest Foundation → investment portfolios or deposits abroad, with no foreign subsidiaries | Probably out (no multinational group) |
| Scenario 2 | Individual → Foundation or holding → shares in foreign companies → dividends from abroad | In (multinational group + passive income) |
| Scenario 3 | Foreign trust → Panamanian Foundation → assets | In (the foreign layer forms the group) |
Scenario 1 is the most common case in family planning —a foundation that orders succession and holds a portfolio abroad— and usually falls outside. Scenarios 2 and 3 are in, and it is worth knowing in good time.
4. The four questions of the estate diagnostic
Before deciding anything, it helps to answer four questions the holder already knows today:
- What is inside the structure? Direct financial assets, or shareholdings in foreign companies?
- What is above it? Is the founder the only individual, or is there a trust or another entity on top?
- What foreign income does it generate? Dividends, interest, royalties, capital gains, income from real estate abroad?
- What objectives does the structure meet that could not be achieved otherwise? Protection, succession, confidentiality, control.
With those answers on the table, the recommendation stops being generic and becomes specific to that structure and those objectives.
5. What substance requires, if the structure is in scope
Decree 32 established two levels, depending on the entity’s main activity.
| Level | Who it applies to | What it requires |
|---|---|---|
| Reduced substance | Holders of shares or real estate, without habitual disposals (the typical profile of an estate-holding entity) | A single requirement: adequate staff and premises. Presumed met with at least one remunerated director or administrator, resident in Panama and suitably qualified. It is not an automatic exemption. |
| Full substance | All other entities with foreign-source passive income | Three cumulative requirements: staff and premises, effective management in Panama (with a board that meets and decides in the country), and adequate operating costs. |
6. What to do: it is not eliminating, it is deciding
Being in scope does not require dismantling the structure. There are, in essence, four paths, chosen by weighing the cost of giving the entity substance, the fiscal cost of not doing so, and the estate value —protection, succession, confidentiality— the structure provides:
- Give the entity real substance (for many holders, the reduced test makes this attainable).
- Adjust what assets the structure contains.
- Simplify the layers —for example, reviewing whether the upper trust is still justified.
- Relocate the holding to the jurisdiction where substance is natural.
This article is general information only and does not constitute legal or tax advice. The analysis of each structure requires an individualized review of its assets, ownership, income and objectives, and should be confirmed against the text of Law 526 and Executive Decree 32 in the Official Gazette.
Conclusion: a diagnosis, not a reaction
Law 526 is not the end of estate planning in Panama. It is an invitation for each structure to answer, honestly, what it does, what income it generates and what objectives it pursues.
Those who run that diagnosis in 2026 will decide calmly; those who postpone it to 2027 will likely make the same decisions, but under pressure. The difference is not legal: it is one of timing.
Do you hold a Private Interest Foundation or a holding company in Panama and want to understand your position under Law 526? Our team reviews it structure by structure.