Panama Enacts New Economic Substance Rules:

What Offshore Companies, Foundations and International Structures Need to Know.

On May 28, 2026, Panama enacted Law No. 526, introducing new economic substance requirements for certain entities earning foreign-source passive income.

The legislation represents a significant development in Panama’s international tax framework and reflects a broader global trend toward requiring offshore structures to demonstrate genuine economic activity within their jurisdiction of incorporation.

While Panama's longstanding territorial tax system remains intact, the new law creates circumstances under which certain entities may no longer automatically benefit from the traditional exemption applicable to foreign-source income. Instead, continued access to that treatment may depend upon the entity’s ability to demonstrate sufficient economic substance within Panama.

For international investors, family offices, wealth planning professionals, fiduciaries, and owners of offshore structures, understanding the scope and implications of Law No. 526 will be critical in the coming years.

Panama's Territorial Tax System Remains in Place

For decades, Panama has maintained a territorial taxation regime under which only Panama-source income is generally subject to local taxation.

As a result, income generated entirely outside Panama has historically remained outside the scope of Panamanian income tax. This principle has made Panama one of the most widely utilized jurisdictions for international holding companies, private interest foundations, cross-border wealth planning, and asset protection structures.

Importantly, Law No. 526 does not abolish Panama’s territorial tax system.

Rather, it creates a specific exception applicable to certain entities that form part of multinational groups and derive passive income from foreign sources.

In those circumstances, the continued application of Panama’s territorial tax benefits may depend upon compliance with newly established economic substance requirements.

The Global Shift Toward Economic Substance

Panama’s legislative changes should not be viewed in isolation.

Over the past several years, international regulatory bodies, including the OECD, the European Union, and various tax transparency initiatives, have encouraged jurisdictions to adopt economic substance legislation aimed at limiting the use of entities lacking genuine operational presence.

As a result, several well-known offshore jurisdictions, including the British Virgin Islands, Cayman Islands, Bermuda, and The Bahamas, have already implemented substance-based compliance frameworks.

The underlying policy objective is straightforward: entities should not be entitled to favorable tax treatment solely by virtue of their place of incorporation if they lack meaningful economic activity within that jurisdiction.

Panama's adoption of Law No. 526 reflects its alignment with this broader international regulatory trend.

What Is Economic Substance?

Although detailed regulations remain pending, economic substance generally refers to the existence of sufficient operational, managerial, and economic activity within a jurisdiction to justify an entity's legal and tax presence there.

In practice, economic substance requirements often focus on factors such as:

• Effective management and control exercised locally;

• Strategic decision-making occurring within the jurisdiction;

• Adequate personnel and qualified employees;

• Physical office facilities;

• Operational expenditures proportionate to the entity’s activities;

• Demonstrable business functions performed locally.

The precise standards applicable under Panama’s new regime will ultimately depend upon future regulatory guidance.

However, based on international precedent, entities that exist solely on paper with no meaningful local presence may face increased scrutiny.

When Do the New Rules Apply?

One of the most important aspects of Law No. 526 is that it does not apply universally to all Panamanian entities.

Based on the current statutory language, two conditions must generally be satisfied simultaneously:

First, the entity must be part of a multinational group.

Second, the entity must derive passive foreign-source income.

Only when both elements are present may the economic substance rules become relevant.

This distinction is critical because many traditional wealth planning structures may not satisfy both requirements.

Definition of a Multinational Group

The legislation defines a multinational group as two or more entities connected through ownership or control and resident in different tax jurisdictions.

This definition potentially encompasses a broad range of international planning structures, including:

• A Panamanian Private Interest Foundation owning a British Virgin Islands company;

• A Panamanian holding structure controlling entities in Cayman Islands or The Bahamas;

• Panamanian entities participating in multi-jurisdictional family office arrangements;

• Cross-border structures involving entities in Panama, the United States, Europe, or other offshore jurisdictions.

Accordingly, families and business owners utilizing multi-entity international structures should carefully evaluate whether their arrangements could fall within the definition of a multinational group.

Which Types of Income May Be Affected?

The legislation focuses primarily on passive foreign-source income.

Although detailed regulatory guidance remains forthcoming, the categories potentially affected may include:

• Dividends;

• Interest income;

• Royalties;

• Rental income;

• Investment income;

• Other passive returns derived from foreign assets.

Where applicable, failure to satisfy the substance requirements could result in such income becoming subject to Panamanian taxation.

Potential 15% Tax Exposure

One of the most notable consequences of non-compliance involves the potential imposition of a 15% tax on taxable net income.

Historically, foreign-source passive income held through Panamanian entities often benefited from the jurisdiction’s territorial tax framework.

Under the new regime, entities falling within the scope of Law No. 526 may be required to demonstrate adequate substance in order to preserve those benefits.

Failure to do so may result in the loss of favorable treatment and exposure to local taxation.

No Minimum Asset or Revenue Threshold

A noteworthy aspect of Law No. 526 is the apparent absence of a minimum asset value, income threshold, or net worth requirement.

At least based on the current statutory language, applicability appears to depend primarily on:

• The structure of the ownership group; and

• The nature of the income earned.

Consequently, smaller private structures may face similar analytical considerations as larger international organizations.

This feature further emphasizes the importance of reviewing existing structures before the law becomes effective.

Will Traditional Family Wealth Structures Be Impacted?

Many private wealth structures commonly used for succession planning and asset protection may ultimately remain outside the scope of the legislation.

In numerous cases, a family-owned foundation or offshore entity may not constitute part of a multinational group as contemplated by the statute.

Where one of the required elements is absent, the new substance rules may not apply.

Nevertheless, no blanket conclusion should be reached without a detailed review of the structure, ownership chain, governing documents, and future regulations.

Each arrangement must be evaluated on its own facts and circumstances.

Structures Involving Multiple Jurisdictions Require Immediate Review

Particular attention should be given to structures combining entities across multiple jurisdictions.

Examples may include:

• Panama Foundation + BVI Company;

• Panama Foundation + Delaware LLC;

• Panama Holding Company + Cayman Entity;

• Multi-layered family wealth structures spanning several countries.

While such structures have historically served legitimate succession planning, asset protection, and governance objectives, the introduction of economic substance requirements may alter the risk profile of certain arrangements.

A comprehensive review by qualified international advisors is strongly recommended.

Alternative Wealth Planning Structures

The enactment of Law No. 526 may also prompt renewed interest in alternative planning vehicles.

In particular, U.S.-based trusts established in jurisdictions with robust trust legislation have gained increasing attention among international families.

States such as South Dakota, Nevada, and Wyoming have developed sophisticated trust frameworks offering:

• Asset protection;

• Wealth preservation;

• Succession planning;

• Privacy protections;

• Long-term governance mechanisms;

• Strong legal certainty.

Unlike many traditional offshore jurisdictions, U.S. trust jurisdictions benefit from highly developed legal systems, established fiduciary industries, and substantial international credibility.

While trusts are not a universal solution, they have become an increasingly important component of modern international wealth planning.

Looking Ahead

Although Law No. 526 will not take effect until 2027 and further regulations remain pending, the direction of international policy is unmistakable.

Jurisdictions around the world are moving away from purely formal structures and toward frameworks that emphasize economic substance, governance, operational legitimacy, and regulatory transparency.

For owners of Panamanian Private Interest Foundations, offshore companies, international holding structures, and cross-border wealth planning arrangements, this period presents an opportunity to reassess existing structures before the new rules become effective.

Early planning may help identify risks, preserve flexibility, and avoid unintended tax consequences once the legislation enters into force.

As with any significant regulatory development, proactive analysis is substantially more effective than reactive restructuring.

If you currently maintain a Panamanian entity or international structure and would like to evaluate the potential impact of Law No. 526 on your wealth planning, succession strategy, or international tax position, professional advice should be obtained before implementation of the new regime.

Vanessa Evangelista

Risk & Compliance Officer

Americas & Caribbean

Phone Florida: +1 (689) 269-8784

Phone New York: +1 (332) 228-0737

Phone Brazil: +55 (11) 3230-2101

FAX: +1 (407) 536-4393

E-mail: vanessa@egfinancialgroup.com