LAW 526 OF 2026
ECONOMIC SUBSTANCE REQUIREMENTS FOR FOREIGN-SOURCE PASSIVE INCOME
Economic Substance Requirements for Foreign-Source Passive Income
The Republic of Panama has enacted Law 526 of 2026 (“Law 526”), which introduces economic substance requirements for certain Panamanian entities that form part of multinational groups and derive foreign-source passive income.
Law 526 will become effective as of fiscal year 2027, and its implementing regulation is expected to be issued soon by the Executive Branch.
Below, we present a practical guide in a question-and-answer format addressing the key aspects of Law 526, to wit:
1. What is Law 526 of 2026?
Law 526 introduces economic substance requirements for certain Panamanian entities seeking to continue benefiting from Panama’s territorial tax system with respect to certain categories of passive income derived from sources outside Panama.
2. Does the Law apply to all Panamanian entities?
No. The Law does not automatically apply to all entities organized in Panama.
3. To whom could the Law apply?
Generally speaking, the Law could apply to entities organized or domiciled in Panama that form part of a multinational group and which derive foreign-source passive income.
4. What is meant by a multinational group?
A multinational group is a group composed of two or more entities linked through ownership or control that are tax residents outside of Panama.
5. What is foreign-source passive income?
Foreign-source passive income includes dividends, interest, royalties, capital gains, foreign real estate income, and other income derived from foreign investment assets.
6. Does the Law apply to an entity that only owns assets located in Panama?
Not necessarily. It becomes imperative to analyze the nature of the income generated and the structure of the group.
7. Does the Law apply if the entity does not generate income?
This will depend on the particular circumstances of each entity.
8. What is the purpose of demonstrating economic substance?
The objective is to demonstrate that the entity has a genuine economic presence in Panama in connection with the activities related to the assets generating foreign-source passive income.
9. What factors may be considered when demonstrating economic substance?
Relevant factors may include adequate human resources, appropriate facilities, strategic decision-making carried out in Panama, and operating expenditures commensurate with the activities conducted.
10. Is it possible to outsource activities in Panama?
Yes, provided that the entity maintains adequate supervision and control over the outsourced activities.
11. Are any entities excluded from this regime?
Yes. The Law provides that certain regulated entities are excluded from the economic substance regime, provided they comply with the conditions established by the Law and the regulations applicable to their activities.
The principal excluded entities include:
- Banks and other financial institutions.
- Insurance and reinsurance companies.
- Securities market intermediaries.
- Investment fund managers.
- Pension fund administrators.
- Entities engaged in the commercial operation of Panamanian-flagged vessels, including:
- Shipowners.
- Vessel operators.
- Vessel managers.
These exclusions are based on the fact that such activities are already subject to specialized supervision and specific regulatory requirements within their respective sectors.
However, determining whether an entity qualifies for any of the exclusions provided under the Law requires a case-by-case analysis, taking into account the activities effectively carried out by the entity and its compliance with the applicable legal requirements.
12. Are companies holding real estate in Panama automatically excluded?
No. The mere ownership of real estate located in Panama does not constitute one of the exclusions provided under the Law.
The applicability of the regime will depend on factors such as:
- Whether the entity derives foreign-source passive income.
- Whether the entity forms part of a multinational group.
- The nature of the activities carried out by the entity.
Accordingly, each structure should be assessed individually before determining whether the regime applies.
13. What happens if an entity covered by Law fails to comply?
The Law establishes a series of consequences for entities that are subject to the regime, but fail to demonstrate compliance with the applicable economic substance requirements.
Generally, such entity may be classified as a “non-qualified entity,” which could result in the loss of certain benefits available under Panama’s tax regime with respect to foreign-source passive income.
In addition, the Law contemplates the possibility of tax liabilities, penalties, surcharges, or other consequences arising from non-compliance with the applicable legal provisions.
It is important to note that the determination of such consequences will depend on the specific circumstances of each entity and should be evaluated in consultation with tax and accounting advisors.
For this reason, entities that may potentially fall within the scope of the Law should conduct a timely review of their structure, activities, and sources of income before the Law becomes effective.
14. Will entities be required to submit information to the authorities?
Yes. Certain entities will be subject to reporting and filing obligations.
15. Does the Law modify Panama’s territorial tax system?
Not generally. However, it establishes additional requirements for certain entities seeking to benefit from Panama’s territorial tax system with respect to foreign-source passive income.
16. What should Panamanian companies and foundations do at this time?
Entities should review their corporate structure, determine whether they form part of a multinational group, analyze the source of their income, maintain updated due diligence documentation, and consult with their legal and tax advisors regarding the potential applicability of the Law.
17. How can ANORCO assist?
In its capacity as legal advisor, ANORCO can assist with updating due diligence records, verifying corporate information, identifying ultimate beneficial owners, reviewing corporate and foundation structures, and, more generally, providing support in regulatory compliance matters.
Important Notice
Please note that this guide is provided solely for informational purposes and does not constitute legal, tax, accounting, or audit advice of any kind.
