Passive foreign-source income under Law 526: which categories apply to your structure? | EDTIJ<\/title>\n<meta name=\"description\" content=\"Law 526 does not apply to all income. Only to six specific categories of passive foreign-source income. 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The second threshold is the type of income \u2014 and that analysis must come before the substance analysis.<\/div>\n <div class=\"meta\">Escobar, Della Togna, Icaza & Jurado \u00b7 July 2026 \u00b7 Law 526 of 2026<\/div>\n\n <p>The scope analysis under Law 526 has two questions. The first \u2014 is the entity part of a multinational group? \u2014 has received considerable attention since the law was enacted. The second receives less: <strong>does that entity obtain passive foreign-source income?<\/strong><\/p>\n\n <p>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.<\/p>\n\n <h2>What constitutes passive foreign-source income<\/h2>\n\n <p>Article 707-C of Law 526 defines with precision the income categories that trigger substance obligations. There are exactly six:<\/p>\n\n <div class=\"income-grid\">\n <div class=\"income-card\">\n <div class=\"income-num\">Category 1<\/div>\n <div class=\"income-name\">Dividends and profit participations<\/div>\n <div class=\"income-desc\">Income distributed by non-Panamanian entities to the local entity that is a member of the group.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 2<\/div>\n <div class=\"income-name\">Interest<\/div>\n <div class=\"income-desc\">Returns generated by loans, deposits, or other debt instruments of foreign origin.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 3<\/div>\n <div class=\"income-name\">Royalties<\/div>\n <div class=\"income-desc\">Payments for the right to use intellectual property assets: patents, trademarks, formulas, processes, copyrights.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 4<\/div>\n <div class=\"income-name\">Capital gains<\/div>\n <div class=\"income-desc\">Returns from the disposition of assets of foreign origin.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 5<\/div>\n <div class=\"income-name\">Foreign real estate income<\/div>\n <div class=\"income-desc\">Income from property located outside Panama: leases, rights of use, assignments.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 6<\/div>\n <div class=\"income-name\">Other movable capital income<\/div>\n <div class=\"income-desc\">Any foreign-source income from assets or rights not classified as real property: assignment of own funds, lease of movable assets.<\/div>\n <\/div>\n <\/div>\n\n <p>If the Panamanian entity does not generate any of these six types of income \u2014 that is, if its activity is operational, commercial, or service-based \u2014 Law 526 does not apply to it, even if it is a member of a multinational group.<\/p>\n\n <h2>The distinction that matters most: active vs. passive income<\/h2>\n\n <p>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.<\/p>\n\n <p>The analysis becomes more complex when a single entity generates both types of income. In that case, substance obligations apply <strong>for each category of passive income<\/strong> obtained, separately. It is not a global analysis: it is an income-type-by-income-type analysis, per fiscal period.<\/p>\n\n <div class=\"intel-box\">\n <div class=\"intel-label\">Key Point<\/div>\n <p>Law 526 establishes that economic substance conditions are assessed with respect to <strong>each type of passive foreign-source income generated<\/strong> 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.<\/p>\n <\/div>\n\n <h2>Special cases the law treats differently<\/h2>\n\n <p>For certain types of entities or income, Law 526 establishes specific rules:<\/p>\n\n <ul class=\"requisito-list\">\n <li>\n <div class=\"req-num\">1<\/div>\n <div><strong>Pure holding companies.<\/strong> Entities whose primary activity is holding, acquiring, maintaining, and disposing of equity interests \u2014 without substantial commercial or investment activity in the investees \u2014 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.<\/div>\n <\/li>\n <li>\n <div class=\"req-num\">2<\/div>\n <div><strong>Intangible assets.<\/strong> 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.<\/div>\n <\/li>\n <li>\n <div class=\"req-num\">3<\/div>\n <div><strong>Merchant marine.<\/strong> 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.<\/div>\n <\/li>\n <\/ul>\n\n <h2>Entities outside the law’s scope<\/h2>\n\n <p>The law also excludes certain regulated entities from its provisions with respect to passive income directly linked to their supervised activity:<\/p>\n\n <div class=\"exclusion-box\">\n <div class=\"exclusion-label\">Excluded Entities (Art. 707-N)<\/div>\n <ul>\n <li>Financial entities supervised by the Superintendencia de Bancos de Panam\u00e1, the Superintendencia del Mercado de Valores, or the Superintendencia de Seguros, with respect to income from their regulated activity.<\/li>\n <li>Insurance and reinsurance companies, for income directly linked to their insurance activity (except captive insurers that form part of a multinational group).<\/li>\n <li>Securities market intermediaries supervised by the SMV, with respect to income from their regulated activity.<\/li>\n <li>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.<\/li>\n <\/ul>\n <\/div>\n\n <p>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.<\/p>\n\n <h2>What this means for the analysis of your structure<\/h2>\n\n <p>Before entering the economic substance analysis \u2014 human resources, facilities, strategic decisions, operating costs \u2014 the review of the structure must answer precisely what type of income each Panamanian entity in the group generates.<\/p>\n\n <p>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.<\/p>\n\n <p>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.<\/p>\n\n <div class=\"cta-box\">\n <h3>Need to analyze the income type of your structure?<\/h3>\n <p>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.<\/p>\n <p>Contact us at <a href=\"mailto:info@edtij.com\">info@edtij.com<\/a><\/p>\n <\/div>\n<\/div>\n\n<div class=\"footer-bar\">\n <div class=\"brand\">ESCOBAR, DELLA TOGNA, ICAZA & <span>JURADO<\/span><\/div>\n <div class=\"footer-note\">edtij.com \u00b7 Panama<\/div>\n<\/div>\n\n<\/body>\n<\/html>\n\n","protected":false},"excerpt":{"rendered":"<p>Passive foreign-source income under Law 526: which categories apply to your structure? | EDTIJ ESCOBAR, DELLA TOGNA,ICAZA & JURADO Law 526 \u00b7 Analysis Economic Substance \u00b7 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 […]<\/p>\n","protected":false},"author":2,"featured_media":3289,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,7],"tags":[17,10,12,13,19],"class_list":["post-3297","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-article","category-laws","tag-exemptions","tag-offshore","tag-panama","tag-panama-lawyers","tag-sustanciaeconomica"],"yoast_head":"\n<title>Passive foreign-source income under Law 526: which categories apply to your structure? -<\/title>\n<meta name=\"description\" content=\"Law 526 does not apply to all income. Only to six specific categories of passive foreign-source income. 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font-size: 0.93rem; margin-bottom: 12px; }\n .cta-box p:last-child { margin-bottom: 0; }\n .cta-box a { color: #B8976A; }\n .footer-bar { background-color: #3A3330; padding: 22px 40px; display: flex; align-items: center; justify-content: space-between; }\n .footer-bar .brand { font-family: Arial, sans-serif; font-size: 14px; font-weight: 800; color: #FFFFFF; }\n .footer-bar .brand span { color: #B8976A; }\n .footer-bar .footer-note { font-family: Arial, sans-serif; font-size: 10px; color: #9A8A7A; letter-spacing: 0.5px; }\n @media (max-width: 600px) {\n .article-wrapper { padding: 36px 22px 48px; }\n h1 { font-size: 1.5rem; }\n .income-grid { grid-template-columns: 1fr; }\n .header-bar, .footer-bar { padding: 20px 22px; }\n }\n<\/style>\n<\/head>\n<body>\n\n<div class=\"header-bar\">\n <div class=\"brand\">ESCOBAR, DELLA TOGNA,<br>ICAZA & <span>JURADO<\/span><\/div>\n <div class=\"section-tag\">Law 526 \u00b7 Analysis<\/div>\n<\/div>\n\n<div class=\"article-wrapper\">\n <div class=\"article-category\">Economic Substance \u00b7 July 2026<\/div>\n <h1>Passive foreign-source income under Law 526: which categories apply to your structure?<\/h1>\n <div class=\"subtitle\">The law does not apply to all income generated by a Panamanian entity. The second threshold is the type of income \u2014 and that analysis must come before the substance analysis.<\/div>\n <div class=\"meta\">Escobar, Della Togna, Icaza & Jurado \u00b7 July 2026 \u00b7 Law 526 of 2026<\/div>\n\n <p>The scope analysis under Law 526 has two questions. The first \u2014 is the entity part of a multinational group? \u2014 has received considerable attention since the law was enacted. The second receives less: <strong>does that entity obtain passive foreign-source income?<\/strong><\/p>\n\n <p>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.<\/p>\n\n <h2>What constitutes passive foreign-source income<\/h2>\n\n <p>Article 707-C of Law 526 defines with precision the income categories that trigger substance obligations. There are exactly six:<\/p>\n\n <div class=\"income-grid\">\n <div class=\"income-card\">\n <div class=\"income-num\">Category 1<\/div>\n <div class=\"income-name\">Dividends and profit participations<\/div>\n <div class=\"income-desc\">Income distributed by non-Panamanian entities to the local entity that is a member of the group.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 2<\/div>\n <div class=\"income-name\">Interest<\/div>\n <div class=\"income-desc\">Returns generated by loans, deposits, or other debt instruments of foreign origin.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 3<\/div>\n <div class=\"income-name\">Royalties<\/div>\n <div class=\"income-desc\">Payments for the right to use intellectual property assets: patents, trademarks, formulas, processes, copyrights.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 4<\/div>\n <div class=\"income-name\">Capital gains<\/div>\n <div class=\"income-desc\">Returns from the disposition of assets of foreign origin.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 5<\/div>\n <div class=\"income-name\">Foreign real estate income<\/div>\n <div class=\"income-desc\">Income from property located outside Panama: leases, rights of use, assignments.<\/div>\n <\/div>\n <div class=\"income-card\">\n <div class=\"income-num\">Category 6<\/div>\n <div class=\"income-name\">Other movable capital income<\/div>\n <div class=\"income-desc\">Any foreign-source income from assets or rights not classified as real property: assignment of own funds, lease of movable assets.<\/div>\n <\/div>\n <\/div>\n\n <p>If the Panamanian entity does not generate any of these six types of income \u2014 that is, if its activity is operational, commercial, or service-based \u2014 Law 526 does not apply to it, even if it is a member of a multinational group.<\/p>\n\n <h2>The distinction that matters most: active vs. passive income<\/h2>\n\n <p>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.<\/p>\n\n <p>The analysis becomes more complex when a single entity generates both types of income. In that case, substance obligations apply <strong>for each category of passive income<\/strong> obtained, separately. It is not a global analysis: it is an income-type-by-income-type analysis, per fiscal period.<\/p>\n\n <div class=\"intel-box\">\n <div class=\"intel-label\">Key Point<\/div>\n <p>Law 526 establishes that economic substance conditions are assessed with respect to <strong>each type of passive foreign-source income generated<\/strong> 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.<\/p>\n <\/div>\n\n <h2>Special cases the law treats differently<\/h2>\n\n <p>For certain types of entities or income, Law 526 establishes specific rules:<\/p>\n\n <ul class=\"requisito-list\">\n <li>\n <div class=\"req-num\">1<\/div>\n <div><strong>Pure holding companies.<\/strong> Entities whose primary activity is holding, acquiring, maintaining, and disposing of equity interests \u2014 without substantial commercial or investment activity in the investees \u2014 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.<\/div>\n <\/li>\n <li>\n <div class=\"req-num\">2<\/div>\n <div><strong>Intangible assets.<\/strong> 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.<\/div>\n <\/li>\n <li>\n <div class=\"req-num\">3<\/div>\n <div><strong>Merchant marine.<\/strong> 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.<\/div>\n <\/li>\n <\/ul>\n\n <h2>Entities outside the law’s scope<\/h2>\n\n <p>The law also excludes certain regulated entities from its provisions with respect to passive income directly linked to their supervised activity:<\/p>\n\n <div class=\"exclusion-box\">\n <div class=\"exclusion-label\">Excluded Entities (Art. 707-N)<\/div>\n <ul>\n <li>Financial entities supervised by the Superintendencia de Bancos de Panam\u00e1, the Superintendencia del Mercado de Valores, or the Superintendencia de Seguros, with respect to income from their regulated activity.<\/li>\n <li>Insurance and reinsurance companies, for income directly linked to their insurance activity (except captive insurers that form part of a multinational group).<\/li>\n <li>Securities market intermediaries supervised by the SMV, with respect to income from their regulated activity.<\/li>\n <li>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.<\/li>\n <\/ul>\n <\/div>\n\n <p>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.<\/p>\n\n <h2>What this means for the analysis of your structure<\/h2>\n\n <p>Before entering the economic substance analysis \u2014 human resources, facilities, strategic decisions, operating costs \u2014 the review of the structure must answer precisely what type of income each Panamanian entity in the group generates.<\/p>\n\n <p>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.<\/p>\n\n <p>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.<\/p>\n\n <div class=\"cta-box\">\n <h3>Need to analyze the income type of your structure?<\/h3>\n <p>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.<\/p>\n <p>Contact us at <a href=\"mailto:info@edtij.com\">info@edtij.com<\/a><\/p>\n <\/div>\n<\/div>\n\n<div class=\"footer-bar\">\n <div class=\"brand\">ESCOBAR, DELLA TOGNA, ICAZA & <span>JURADO<\/span><\/div>\n <div class=\"footer-note\">edtij.com \u00b7 Panama<\/div>\n<\/div>\n\n<\/body>\n<\/html>\n\n","protected":false},"excerpt":{"rendered":"<p>Passive foreign-source income under Law 526: which categories apply to your structure? | EDTIJ ESCOBAR, DELLA TOGNA,ICAZA & JURADO Law 526 \u00b7 Analysis Economic Substance \u00b7 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 […]<\/p>\n","protected":false},"author":2,"featured_media":3289,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,7],"tags":[17,10,12,13,19],"class_list":["post-3297","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-article","category-laws","tag-exemptions","tag-offshore","tag-panama","tag-panama-lawyers","tag-sustanciaeconomica"],"yoast_head":"\n<title>Passive foreign-source income under Law 526: which categories apply to your structure? -<\/title>\n<meta name=\"description\" content=\"Law 526 does not apply to all income. Only to six specific categories of passive foreign-source income. 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