Panama’s National Assembly unanimously passed Law 526 this week, and President Raúl Mulino signed it into law.
The legislation imposes a 15% tax on Panamanian-registered entities that receive foreign-source passive income without demonstrating genuine economic activity in the country. It is the most significant reform to Panama’s tax code in recent years.
The law takes effect from fiscal year 2027. The executive branch has 90 days from May 28, 2026, to publish implementing regulations that will define the practical thresholds and compliance procedures in detail.
How the Law Works
Law 526 introduces a new concept to Panama’s tax code: economic substance. Under the previous framework, foreign-source income earned by a Panamanian entity was simply exempt from tax, with no requirement that the entity conduct real business in Panama.
That exemption now comes with conditions. To retain it, an entity must show that it has qualified personnel based in Panama, maintains adequate office facilities in the country, makes strategic decisions within Panama, and incurs operating expenditures connected to the income it receives.
Entities that cannot demonstrate these requirements are classified as non-qualified and face a 15% tax levied on gross income, plus potential fines, surcharges, and interest.
Holding companies benefit from a simplified compliance standard under the law, recognizing that a pure holding structure has an operational profile different from that of an active business. The law also permits entities to outsource substantive functions to qualified third-party service providers based in Panama rather than building in-house operations.
Who Is in Scope
Natalia Mulford, Partner at Mulford Abogados, cautions against reading the law too broadly. “Law 526 does not create a general tax on shell companies or on all foreign-owned Panamanian entities,” she says, explaining that it applies exclusively to entities that form part of a multinational group: two or more entities connected through ownership or control, each of which is tax resident in a different jurisdiction.
Standalone Panamanian corporations with no cross-border affiliates fall outside the regime, she adds.
The categories of foreign-source passive income covered by the law include dividends and profit distributions, interest, royalties, capital gains, income from real estate investments, and returns from movable capital.
Foreign-source active income is not affected. Panama’s territorial tax system, under which income generated outside Panama is not subject to domestic taxation, remains in place.
Implications for Investor Migrants
Individual foreign nationals holding Panamanian residency through the Qualified Investor Visa, real estate investment, or the Pensionado program are generally outside the scope of this law, explains Mulford.
She notes that “many structures commonly used by individuals and families, including standalone companies or private interest foundations that are not part of multinational groups, would generally fall outside the scope of the new rules.”
As such, Mulford doesn’t expect the law to have a significant effect on Panama’s residency programs, but rather that “the legislation is focused on tax transparency and economic substance standards rather than immigration policy.”
Yet the picture may be more complex for high-net-worth individuals who have structured their international wealth through Panama-based entities connected to related companies in other countries.
If those entities receive foreign-source passive income, as defined by the law, and cannot demonstrate economic substance in Panama, they fall within the new regime. This profile is most relevant to entrepreneurs with multi-jurisdictional businesses, international family offices, and investors who have historically used Panama as a holding jurisdiction within a broader corporate structure.
The EU Context
Panama’s new law comes amid sustained pressure from the European Union, which continues to list Panama as a non-cooperative tax jurisdiction. That designation creates friction for cross-border financial transactions and affects Panama’s standing as an international business hub.
Lawmakers indicated that the law comes as part of Panama’s efforts to demonstrate credible legislative progress on tax transparency ahead of a potential EU review in October.
Officials say that the reform followed consultations with more than 35 trade associations and approximately 150 individuals. Panama’s government has framed the law as a step toward international tax compliance standards rather than a fundamental restructuring of the country’s tax model.
Mulford echoes that framing: “This law reflects Panama’s continued efforts to align with international tax standards while preserving the core features of its territorial tax regime.”
Regulations Pending
Advisors working with clients who have Panama-based entities within multinational structures have until the 2027 fiscal year to assess compliance.
The implementing regulations, due within 90 days, will be central to understanding how the substance requirements will be measured and enforced in practice.
Mulford advises clients “to review their structures on a case-by-case basis, particularly where Panamanian entities form part of larger international groups,” and notes that some uncertainty remains until the regulations are published.
