Ultimate Beneficial Owner Transparency: Obligations and Responsibilities in Panama | EDTIJ
Fiscal Transparency & Compliance
Ultimate Beneficial Owner Transparency: Obligations and Responsibilities in Panama
EDTIJ — Escobar, Della Togna, Icaza & JuradoPanama · July 2026Estimated read: 5 min
The term “ultimate beneficial owner” comes up often, but it is not always clear who must report it, how frequently, or what legal responsibility comes with keeping it current. Understanding these elements precisely is now a basic condition for operating any corporate structure in Panama with confidence.
1. What a beneficial owner is and why this obligation exists
The ultimate beneficial owner is the natural person who, ultimately, owns or controls a company — whether directly or through a chain of ownership. This obligation is not designed to restrict business activity. It exists so that there is always an identifiable natural person behind every corporate structure, ensuring no entity can operate anonymously before the competent authorities.
This principle is now an international standard. Panama adopted it as part of its commitments to the Global Forum on Transparency and Exchange of Information for Tax Purposes, and in line with the OECD’s Common Reporting Standard (CRS), which governs the automatic exchange of financial information between countries.
2. Who is responsible for what, exactly
It is important for every client to understand precisely where each responsibility sits within this relationship:
Resident agent’s obligation
Identify and keep current the beneficial ownership information of every company it represents.
Keep that information available to be provided to the competent authorities upon request.
Report it through the mechanisms established under current regulations.
Client / shareholder’s obligation
Promptly inform their resident agent of any change in the company’s true ownership.
Provide truthful and complete documentation about their identity and role in the structure.
Update information whenever there are share transfers, new partners, or reorganizations.
Both responsibilities are complementary: the resident agent cannot correctly report information the client has not communicated accurately and on time.
3. What happens when this obligation is not met
Failing to meet this obligation is not a minor matter. An incomplete, outdated, or inaccurate registry can result in administrative sanctions for the company and, in some cases, direct difficulties for the client themselves: bank accounts frozen for lack of current information, due diligence processes that drag on unnecessarily, or inconsistencies that surface precisely when the information is cross-checked with another jurisdiction through automatic exchange.
Meeting this obligation is not an administrative time cost. It is what allows a corporate structure to demonstrate, at any moment, that it is exactly what it claims to be.
In practice
We recommend that clients review, at least once a year, that the beneficial ownership information filed with their resident agent matches exactly the current control structure of each company.
Conclusion
Understanding the obligations and responsibilities surrounding beneficial ownership allows every client to make informed decisions about how to manage their corporate structure: when to report a change, what documentation to keep, and why the accuracy of this registry protects both the company and the person who truly controls it. Transparency, properly understood, is not a burden — it is a tool for peace of mind and legal support.
Have questions about your obligations as a beneficial owner or the status of your corporate registry? Our team can guide you clearly.
EDTIJ — Panama’s Law 526: The Three Economic Substance Requirements
EDTIJ — Legal Analysis · International Tax Law
Panama’s Law 526: The Three Economic Substance Requirements
The law is clear in its structure. What remains to be defined is its practical interpretation — and that is precisely where companies need to prepare with information, not assumptions.
EDTIJJuly 2026Economic Substance · Law 526Reading time: ~7 min
Panama’s Law 526 of 2022 introduces a new compliance standard into the country’s legal framework for entities that generate foreign-source income: the economic substance requirement. Its central premise is that entities benefiting from Panama’s territorial principle — that is, entities receiving foreign-source income that is not subject to tax in Panama — must demonstrate that they actually operate substantively in the country.
The law sets out three cumulative requirements in Article 707-E of the Tax Code. What the law says is relatively clear. What has not yet been defined is the regulatory interpretation — how compliance will be measured, what levels of evidence will be sufficient, and what “adequate” means precisely in each case. The implementing regulation has not been issued, and its content will be decisive in understanding the real scope of these obligations.
What is available today — and what we analyze in this article — is the text of the law itself and the analytical framework that flows from it.
The law does not ask whether your company exists in Panama. It asks whether it operates here — and whether you can prove it.
Who does it apply to?
The law applies to entities that obtain income derived from assets generating foreign-source income — income that, under Panama’s territorial principle, is not taxable in Panama. The most common categories include:
Holding companies receiving dividends from foreign subsidiaries
Entities with real estate or financial assets outside Panama
Structures holding intellectual property rights or exploitation rights
Intra-group financing entities and international treasury vehicles
Entities with foreign-source capital gains or passive income
Not every entity with a presence in Panama is automatically within the law’s scope. The assessment must be made case by case, considering the nature of the income and the structure of the entity.
The three requirements
Requirement 1 of 3
Qualified Personnel and Physical Facilities
The entity must have adequate, qualified, and compensated personnel dedicated to the core activities under Article 707-B — the administration, management, and/or control of the assets generating foreign-source income — and maintain adequate physical facilities for carrying out those activities within Panamanian territory.
This requirement combines two elements: the human component (qualified, compensated persons with defined functions) and the physical component (adequate space in Panama). The key word is “adequate” — a standard that points to proportionality with the nature and scale of the asset’s activities, not to a formal minimum.
A question many companies are now asking is whether services provided by registered agents, nominal directors, or registered offices satisfy this requirement. The answer will depend significantly on the implementing regulation and the DGI’s interpretation, but the logic of the law — which requires personnel dedicated to the asset’s activities with real functions — suggests that purely formal or registral services will have a difficult case to make for qualifying as substance. That said, the final determination rests with the implementing regulation, which remains pending.
Requirement 2 of 3
Strategic Decisions and Risk Assumption
The entity must adopt the strategic decisions necessary for its operations within Panamanian territory and assume the corresponding risks in Panama.
This requirement targets the real governance of the entity — not formal governance (who appears in the documents), but where the decisions that actually matter are effectively made: investments, divestments, approval of material contracts, risk management.
In practice, this translates into concrete questions: where does the board of directors meet? From where is a material transaction approved? Who makes the substantive decisions and from what territory? The answers must be documentable. A structure with board minutes drafted in Panama but where real decisions are effectively made from abroad faces substantial compliance risks, even though the regulation has not yet precisely defined how this element will be evaluated.
Requirement 3 of 3
Adequate Operating Costs and Expenditures
The entity must incur adequate operating costs and expenditures in the territory of the Republic of Panama, separate from personnel compensation.
The legislature requires that operations carry a real cost in the country, separate from payroll: rent, local professional services, asset maintenance, administrative expenses. The explicit exclusion of personnel compensation signals that the three requirements are complementary layers, not redundant ones.
Proportionality is again the central criterion. How much is “adequate”? We do not know precisely until the regulation is issued. But the comparative logic of other jurisdictions that have implemented similar standards suggests that expenditures must be reasonable in relation to the volume and nature of the assets being managed — not a symbolic minimum.
What is clear and what is not
The law is structurally clear on three points. The requirements are cumulative: there is no partial compliance. Documentary evidence is the instrument of proof. And proportionality is the standard of evaluation.
What is not yet clear — and where the implementing regulation will be decisive — is the granularity of each requirement: what specific documentation will be required, how services rendered by third parties on behalf of the entity will be evaluated, and what thresholds of personnel and expenditure will be considered sufficient for different types of structures.
In that context, the recommendation is not to wait for the regulation before beginning the analysis. It is precisely the opposite: use the period before regulation is issued to review the current structure, identify evident gaps, and implement the improvements that the logic of the law already signals clearly.
Recommended next steps
Review your portfolio of entities with foreign-source income to identify which fall within the law’s scope
Map the current status of personnel, facilities, and operating expenditures against the three requirements
Audit the real governance of your entities: where decisions are made and what documentation supports that
Assess whether services contracted from third parties — agents, directors, registered offices — satisfy or complement the requirements under the law’s logic
Monitor the issuance of the implementing regulation, which will define the application criteria with greater precision
Passive foreign-source income under Law 526: which categories apply to your structure? | EDTIJ
ESCOBAR, DELLA TOGNA, ICAZA & JURADO
Law 526 · Analysis
Economic Substance · July 2026
Passive foreign-source income under Law 526: which categories apply to your structure?
The law does not apply to all income generated by a Panamanian entity. The second threshold is the type of income — and that analysis must come before the substance analysis.
Escobar, Della Togna, Icaza & Jurado · July 2026 · Law 526 of 2026
The scope analysis under Law 526 has two questions. The first — is the entity part of a multinational group? — has received considerable attention since the law was enacted. The second receives less: does that entity obtain passive foreign-source income?
Both questions must be answered affirmatively for the economic substance obligations to apply. A negative answer to either one closes the analysis. And the second question, in many cases, yields a result that surprises clients.
What constitutes passive foreign-source income
Article 707-C of Law 526 defines with precision the income categories that trigger substance obligations. There are exactly six:
Category 1
Dividends and profit participations
Income distributed by non-Panamanian entities to the local entity that is a member of the group.
Category 2
Interest
Returns generated by loans, deposits, or other debt instruments of foreign origin.
Category 3
Royalties
Payments for the right to use intellectual property assets: patents, trademarks, formulas, processes, copyrights.
Category 4
Capital gains
Returns from the disposition of assets of foreign origin.
Category 5
Foreign real estate income
Income from property located outside Panama: leases, rights of use, assignments.
Category 6
Other movable capital income
Any foreign-source income from assets or rights not classified as real property: assignment of own funds, lease of movable assets.
If the Panamanian entity does not generate any of these six types of income — that is, if its activity is operational, commercial, or service-based — Law 526 does not apply to it, even if it is a member of a multinational group.
The distinction that matters most: active vs. passive income
The distinction between active and passive income is central, and not always obvious. A Panamanian company that provides management services to other group entities, that operates a commercial platform, or that acts as a regional coordinator generates active income. That income is not covered by Law 526.
The analysis becomes more complex when a single entity generates both types of income. In that case, substance obligations apply for each category of passive income obtained, separately. It is not a global analysis: it is an income-type-by-income-type analysis, per fiscal period.
Key Point
Law 526 establishes that economic substance conditions are assessed with respect to each type of passive foreign-source income generated during a given fiscal period. An entity may be a qualified entity with respect to one income category and a non-qualified entity with respect to another.
Special cases the law treats differently
For certain types of entities or income, Law 526 establishes specific rules:
1
Pure holding companies. Entities whose primary activity is holding, acquiring, maintaining, and disposing of equity interests — without substantial commercial or investment activity in the investees — have reduced substance requirements. They only need to demonstrate adequate human resources and facilities in Panama. They are not required to show that strategic decisions are made locally or to demonstrate operating costs in the country.
2
Intangible assets. Income from the assignment or exploitation of intangible assets registered in Panama has a special treatment. A nexus ratio is applied that weighs how much of the asset’s development was carried out in Panamanian territory, and only that proportion of the income qualifies as non-taxable for the qualified entity.
3
Merchant marine. Entities engaged in the operation of vessels registered in Panamanian registries follow their own rules, recognizing the inherently mobile nature of the maritime business. Their substance accreditation follows different parameters from those of the general regime.
Entities outside the law’s scope
The law also excludes certain regulated entities from its provisions with respect to passive income directly linked to their supervised activity:
Excluded Entities (Art. 707-N)
Financial entities supervised by the Superintendencia de Bancos de Panamá, the Superintendencia del Mercado de Valores, or the Superintendencia de Seguros, with respect to income from their regulated activity.
Insurance and reinsurance companies, for income directly linked to their insurance activity (except captive insurers that form part of a multinational group).
Securities market intermediaries supervised by the SMV, with respect to income from their regulated activity.
Managers and administrators of investment funds and pension funds authorized in Panama, with respect to income generated in the context of the funds they manage.
These exclusions are not automatic. The entity must demonstrate that it is duly licensed, that the passive income is effectively linked to its regulated activity, and that it maintains effective management, administration, and adequate resources in Panama.
What this means for the analysis of your structure
Before entering the economic substance analysis — human resources, facilities, strategic decisions, operating costs — the review of the structure must answer precisely what type of income each Panamanian entity in the group generates.
That classification determines whether the law applies, to what extent it applies, and what specific substance requirements correspond to each income flow. Without that map, the substance analysis has no verifiable starting point.
With the executive regulation expected in August 2026, some points of application will be clarified. But the classification of income type is an analysis that can and should be done now, based on the current text of the law.
Need to analyze the income type of your structure?
At Escobar, Della Togna, Icaza & Jurado we guide the Law 526 scope analysis from income type identification through the assessment of the substance conditions applicable to each category.
<Does Law 526 Apply to Your Structure? The Analysis to Complete Before August | EDTIJ
EDTIJ Panama
Law 526 · Scope Analysis
Law 526 of 2026 · Economic Substance · Scope Analysis
Does Law 526 apply to your structure? The analysis to complete before August
Law 526 has a specific applicability threshold. Before analyzing any pillar of economic substance, there is a prior question that determines whether everything else applies.
July 2026 · By Marisel Della Togna, EDTIJ Panama
The executive regulation of Law 526 is expected in August 2026. Many clients arrive at the firm with a certainty that may be premature: “I know the law applies to me — help me comply.”
Before analyzing whether a structure has qualified personnel, physical facilities, or documented strategic decisions made from Panama, there is a prior question that conditions everything else: does this structure constitute a multinational group under Law 526?
If the answer is no, the substance analysis may be unnecessary. If the answer is yes, the substance analysis is the next step. If the answer is not immediate, documenting why is exactly the work for this week.
What defines a multinational group under Law 526
Law 526 does not apply to every structure with assets abroad or a presence in more than one country. It applies to entities that form part of a multinational group.
The law defines a multinational group as a group of two or more entities, linked by ownership or control, that are tax residents in different jurisdictions, including the parent company, its subsidiaries, and its permanent establishments.
Three elements must be present:
1
Two or more entities — not natural persons, but legal entities. A natural person with assets abroad does not by itself constitute a multinational group under this criterion.
2
Linked by ownership or control — the entities must be related to each other. A Panamanian company and a US LLC owned by the same person are candidates; two unrelated companies are not.
3
Tax residents in different jurisdictions — each entity in the group must have tax residency in a jurisdiction, and those jurisdictions must be different from one another.
If any of the three elements is not clearly met, the analysis requires additional detail before concluding that the law applies.
Cases where the analysis is more straightforward
More clearly within scope
A Panamanian company that controls subsidiaries in Colombia, Mexico, Costa Rica, or other countries in the region, with related-party transactions
A holding company in Panama with operating entities in different jurisdictions
A structure with a permanent establishment in Panama and affiliated entities abroad
A family business group with entities in multiple countries under common control
Requires additional analysis
A structure with a single Panamanian entity and foreign assets but no formally established affiliated entities in other jurisdictions
Investment funds, private foundations, and trusts with holdings in foreign entities
Structures with entities in jurisdictions where the concept of tax residency has particular characteristics
Wealth vehicles where the ownership or control link is not evident in the documentation
A note on definitions still being developed
Practice Point · Regulation Pending
The concept of tax residency for entities, as drafted in Law 526, raises technical questions that the executive regulation will need to clarify. There are types of structures and vehicles for which the determination of tax residency in any given jurisdiction is not immediate.
The prudent approach, until the regulation resolves those points, is not to assume that the law does not apply without having documented the analysis that leads to that conclusion. The cost of having conducted a preventive analysis is lower than the cost of having assumed it was unnecessary when it turns out that it was not.
The scope analysis as a first engagement
For structures where the applicability of Law 526 is not immediate, the first engagement should be the scope analysis: a document that maps the structure, identifies the entities that could constitute the group, evaluates the ownership and control links, and concludes whether the law applies — with the documentation to support that conclusion.
That analysis is the starting point for any subsequent work. And it is what protects both the client and the attorney if the application of the law is questioned in the future.
With the executive regulation expected in August 2026, the time available to complete this analysis before the full regulatory framework is in place is shrinking each week.
EDTIJ · Law 526 Scope Analysis
Before beginning an economic substance analysis, confirm whether Law 526 applies to your structure. Our team conducts the scope analysis as a standalone service, with a document that maps your structure, evaluates the three multinational group criteria, and documents the conclusion.
This article is informational in nature and does not constitute legal advice. Law 526 of 2026 is subject to executive regulation expected in August 2026. Specific compliance analyses must be conducted based on the circumstances of each structure and the regulations in force at the time of consultation. For advice on your specific situation, contact a licensed attorney in Panama directly.
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.
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
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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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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.
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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.
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.
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.
