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.

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641#BEPS#Panama

Social media posts

LinkedIn — EDTIJ

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.

Read the full article at www.edtij.com

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641

Facebook — EDTIJ

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

Slug

/panama-territorial-tax-principle-economic-substance-2026

Meta description

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.

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641#BEPS#Panama

Social media posts

LinkedIn — EDTIJ

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.

Read the full article at www.edtij.com

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641

Facebook — EDTIJ

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

Slug

/panama-territorial-tax-principle-economic-substance-2026

Meta description

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.

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641#BEPS#Panama

Social media posts

LinkedIn — EDTIJ

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.

Read the full article at www.edtij.com

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641

Facebook — EDTIJ

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

Slug

/panama-territorial-tax-principle-economic-substance-2026

Meta description

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.

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641#BEPS#Panama

Social media posts

LinkedIn — EDTIJ

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.

Read the full article at www.edtij.com

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641

Facebook — EDTIJ

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

Slug

/panama-territorial-tax-principle-economic-substance-2026

Meta description

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.

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641#BEPS#Panama

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LinkedIn — EDTIJ

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.

Read the full article at www.edtij.com

#TerritorialTax#EconomicSubstance#PanamaCorporate#TaxLaw#EDTIJ#Bill641

Facebook — EDTIJ

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

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An analysis of Panama’s territorial tax system, its legal foundations, and the tensions arising from the international economic substance debate. EDTIJ Law Firm.

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OECD / BEPSBill 641Art. 694Fiscal CodeHoldingsPassive income

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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.

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