The Republic of Panama enacted Law No. 526 of May 28, 2026, which establishes economic substance rules applicable to certain foreign-source passive income earned by multinational enterprises. Below is a summary of the most relevant points following the issuance of its regulations:
To whom does it apply?
The Law applies to entities incorporated or domiciled in Panama that are members of a Multinational Group and earn foreign-source passive income. A “Multinational Group” refers to a group of two or more entities linked by ownership or control, (i) whose constituent entities are tax residents in two or more jurisdictions and (ii) are, or should be, included in the group’s consolidated financial statements.
What are the general economic substance requirements?
If your corporate structure fits within the definition of a Multinational Group, the implementing regulations specify that it must evidence, among other, the following elements:
- Adequate, qualified and remunerated personnel, together with appropriate premises in Panama. This includes that the director designated in Panama cannot be just any individual or perform a merely nominal role: they must have the actual capacity to make strategic decisions relating to the assets that generate the passive income;
- Strategic decisions made and risks assumed in Panama in connection with the assets that generate the income;
- Operating expenses incurred locally and directly related to such activity; and
- Annual reporting and supporting documentation evidencing compliance with these elements, as a condition to continue to benefit from Panama’s territorial tax system.
For entities whose sole activity is the holding of shares or real estate, the regulations provide for less stringent proof, focused mainly on the first requirement and on reporting.
If the aforementioned requirements are not met, the entity must pay tax on its net foreign-source passive income at a rate of 15% for the relevant fiscal period.
How will GALA support you in this process?
For those entities that do form part of a Multinational Group and fall within the scope of this regime, GALA, through its affiliates, will coordinate directly with interested parties on all matters related to compliance with the law, including the provision of the services required to prove the necessary economic substance, in order to avoid the obligation to pay tax.