Panama Has a New Law: What Law 526 Means for Your Structure

Panama’s National Assembly enacted the new Economic Substance Law 526, reforming the Fiscal Code. Without forfeiting Panama’s advantageous territorial tax regime, whilst elevating its tax transparency, the Ministry of Finance is striving to meet international standards by penalising multinational corporations with a flat 15% tax rate on their passive foreign income – unless they prove genuine economic substance in the Republic. Here’s what you need to know.

What the Law Does

Law 526 targets entities of multinational groups, constituted or domiciled in Panama, that derive foreign-source passive income: dividends or shares in profits, interest, royalties, capital gains, income from immovable capital and income from movable capital.

Panama’s longstanding territorial tax system, under which foreign-source income has historically been exempt, will no longer apply without condition, as that exemption is now contingent upon demonstrating physical operations and real activity, beyond incorporation for tax advantages.

The Executive Branch have 90 days to issue implementing regulations and the new requirements take effect by fiscal year 2027. 

Who Does This Affect?

Individual residents and purely domestic entities remain unaffected by the new economic substance requirements, however, multinational groups – defined as a group of two or more entities linked by ownership or control, tax residents in different jurisdictions, and that receive foreign-source passive income – are wholly subject.

If your structure involves a Panamanian holding company or subsidiary that sits within a wider international group and receives dividends, interests, royalties or capital gains from abroad, this law applies to you.

Also excluded are supervised financial institutions, merchant marine entities and regulated investment fund services and managers. Additionally, holding companies benefit from simplified compliance requirements that reflect the more limited nature of their activities, and there is special treatment for intangible assets developed in Panama, e.g., patents, trademarks, and copyrights.

What Does Economic Substance Really Require?

To satisfy economic substance under Law 526, a Panamanian entity must demonstrate four things:

1. 1. Qualified Personnel – real people with the expertise appropriate to the entity’s activity, present in Panama.

1. 1. Adequate Facilities – genuine physical presence, not just a registered address without operational depth.

1. 1. Strategic Decision Making – board and governance decisions made in Panama, by directors who have read the documents, engaged with the issues, and exercised independent judgement.

1. 1. Real Operating Expenses – expenditure proportionate to the entity’s activities, incurred in Panama.

Of the four, strategic decision making is often the most underestimated and most frequently challenged by regulators. The quality and documentation of governance is what makes the difference between a defensible substance position, and a vulnerable one.

The Arithmetic is Clear

The strategy is already paying off. On 9 October 2026, EU finance ministers removed Panama from EU’s list of non-cooperative tax jurisdictions (the blacklist it had sat on since 2020), citing reforms including Law 526. Panama now moves to the grey list, pending a further OECD Global Forum review in 2027.

That’s the clearest signal that these measures are being taken seriously, by regulators in Panama and abroad. Structures that build genuine substance now, ahead of the 2027 fiscal year, will be positioned for whatever scrutiny follows.

What Affected Entities Should Do Now

1. Assess your scope. Determine whether your structure falls within the bounds of Law 526. Not every entity is affected, so the analysis should be done carefully against the enacted text, not assumptions.

2. Review your governance honestly. Are there genuine decisions being made in Panama by meaningfully engaged directors? Are the decisions documented to a standard that would withstand regulatory scrutiny?

3. Review the implementing regulations. Executive Decree No. 32 sets out the detailed criteria against which substance will be assessed – see our compliance guide to Decree 32 for the specifics. Structural decisions should now be made against this.

4. Engage the right advisors. Substance is not just adding a name to the register. It requires real, active, documented governance by qualified people in Panama.

How We Can Help

Tivoli Green designs and documents the governance architecture Law 526 requires, but real decision-making infrastructure that withstands scrutiny. We start with a Governance Health Audit to test where your structure stands today, build out a Governance Architecture Blueprint where gaps exist, and keep it defensible year-round through Substance-as-a-Service. Every deliverable is documented to the standard a regulator, or an auditor, would expect to see.