Panama: New Substantive Economic Activity Law
If your company has a holding company, subsidiary or other entity in Panama, this law may affect you directly.
What has changed?
The law does not create a new tax. Panama retains its territorial income tax system, but now requires certain entities to demonstrate a genuine, rather than merely formal, presence in the country so that their passive income from abroad (dividends, interest, royalties, capital gains) remains untaxed in Panama.
If an entity fails to demonstrate such a genuine presence, its passive income from foreign sources will be taxed at 15%.
Who does it apply to?
The law applies only to Panamanian entities that meet two conditions: (i) being part of a multinational group (two or more entities linked by ownership or control, resident for tax purposes in different jurisdictions), and (ii) deriving passive income from foreign sources (dividends, interest, royalties, capital gains, amongst others).
It does not apply to Panamanian companies in general. If, for example, your Panamanian entity has a natural person as its sole shareholder, or is not part of a group with a tax presence in more than one jurisdiction, it falls outside the scope of the regime.
What must the entity demonstrate?
For its foreign passive income to remain untaxed in Panama, the entity must demonstrate a genuine presence in Panama by meeting three conditions:
1. Staff and premises in Panama. It must have qualified employees and offices or physical premises dedicated to the management of the assets generating the income.
2. Decision-making in Panama. Strategic businessdecisions must be taken within Panamanian territory.
3. Operating expenses in Panama. The entity mustincur actual expenses in the country that are linked to the income-generating activity.
The law allows these conditions to be met through subcontracting with local suppliers in Panama, which facilitates implementation for groups that do not wish to set up their own large-scale operation.
Simplified regime for holding companies
If your Panamanian entity is primarily engaged in holding shares in other companies (pure holding company) or passively holding real estate, the law provides for a simplified regime: only the first condition (staff and premises) is required, without the need to meet conditions 2 and 3. This applies provided that the holding is non-recurring, i.e. without recurring trading or active investment management.
Reporting obligations
Eligible entities must submit an annual statutory declaration detailing their passive income from foreign sources and the information proving compliance with the substance requirements. All supporting documentation must be retained for possible verification by the Ministry of Economy and Finance. The first return under this new regime will be filed in 2028 (relating to the 2027 tax year).
Exclusions
Merchant shipping entities, regulated financial institutions (banks, insurers, securities intermediaries) and authorised investment fund managers are excluded from the regime, provided they hold valid licences and maintain effective management in Panama.
How does this affect your Panamanian company operated from Costa Rica?
If your group uses a Panamanian company as a holding company to hold shares in Central American subsidiaries, or channels dividends, interest or royalties through Panama, this law affects you directly.
The risk is twofold: non-compliance entails a 15% tax in Panama, but the Panamanian authorities could also exchange information with the Costa Rican tax authorities, creating tax liabilities in Costa Rica as well.
The law includes an anti-abuse clause: any reorganisation without a sound commercial justification could be challenged.
Key dates
- May 2026: Publication of Law 526.
- Next 90 days: Regulations setting out the implementation details will be issued.
- 1 January 2027: Entry into force.
- 2028: First tax return under the new regime.
What do we recommend you do now?
Review your structures. Identify whether your Panamanian entities fall within the scope of the law and which category they fall into.
Plan ahead. Building economic substance retrospectively is more complex and costly than designing it from now. The remainder of 2026 is the time to prepare.
Be cautious about structural changes during 2026. Any reorganisation (refinancing, acquisitions, new entities) may alter your classification under the law.
ECIJA has its own office in Panama. Our team is available to assist you in a coordinated manner across both jurisdictions.
This newsletter is for information purposes only and does not constitute legal advice.