PANAMA Trends and Developments Contributed by: Mariano Oteiza Díaz and Estefanía Alemán, Icaza, González-Ruiz & Alemán
Panama’s Economic Substance Framework: The Final Regulatory Building Block The final piece of the puzzle Panama has occupied a central position in the global corporate services landscape for decades. Its terri - torial tax system, sophisticated legal infrastructure, favourable location at the crossroads of the Ameri - cas, and well-established corporate law tradition have made it a preferred platform for international holding structures, family wealth vehicles, and multinational group entities across Latin America and beyond. Under Panama’s territorial tax system, Panamani - an entities are subject to income tax exclusively on income derived from Panamanian sources; foreign- source income, including dividends, interest, capital gains, royalties, and other returns generated by assets held or activities conducted abroad, falls entirely outside the scope of Panamanian income tax. This principle, enshrined in the Fiscal Code, has histori - cally made Panama a particularly efficient platform for structures designed to hold, manage, or transfer inter - national assets, as foreign returns generated through a Panamanian entity do not give rise to Panamanian tax exposure. Yet for all its strengths, Panama’s competitive position has been complicated in recent years by the absence of a feature that had become standard across virtu - ally every comparable jurisdiction: economic sub - stance requirements. The British Virgin Islands (BVI), the Cayman Islands, the Bahamas, Bermuda, the Seychelles, Singapore, and Uruguay all introduced economic substance frameworks beginning in 2019. Panama did not follow, and that omission drew sus- tained criticism from international organisations, in particular the OECD, placing Panamanian structures under reputational and practical pressure in banking, regulatory and tax contexts. This will change with the enactment of Law 526 of 28 May 2026, which intro - duces economic substance requirements for Pana - manian entities that form part of multinational groups and receive passive income from foreign sources. The law enters into force with effect from fiscal year 2027, and the Executive Branch has 90 calendar days from promulgation to issue the corresponding regulations that, as of the date of this article (August 2026), have not yet been published.
The enactment of Law 526 does not mark a depar - ture from Panama’s strengths as a corporate services jurisdiction, but rather their consolidation. This article examines the law’s principal features, places them in the context of Panama’s broader regulatory evolu - tion over the past decade and critically identifies the open questions that the forthcoming regulations must resolve, including the treatment of pure equity hold - ing structures and the permissible scope of outsourc - ing arrangements. The answers to these unresolved questions will define the practical impact of the new regime for a significant number of international struc - tures. The BEPS imperative: why economic substance legislation exists Economic substance requirements are one of the cen - tral outputs of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which has reshaped inter - national tax policy since its launch in 2013. BEPS Action 5, which targets harmful tax practices, requires jurisdictions offering preferential or no-tax regimes to ensure that entities benefiting from those regimes conduct genuine economic activity in the territory where they are incorporated or managed. The organ - ising principle is straightforward: if a company claims a tax benefit on account of its presence in a particu - lar jurisdiction, it should actually be present there in a meaningful sense, employing people, making real decisions, bearing genuine risks, and incurring real costs. The motivation behind these rules goes beyond tax collection. Multinational groups that locate passive income streams in low-tax jurisdictions without cor - responding operational activity have long been criti - cised for eroding the effective tax base in higher-tax countries where their genuine business activity is con - ducted. Economic substance legislation addresses this concern directly, by requiring a demonstrable and verifiable link between the income attributed to a jurisdiction and the economic activity that actually takes place there. For jurisdictions in the international corporate ser - vices industry, compliance with BEPS Action 5 has become a condition of regulatory respectability and, increasingly, of market access. The EU’s list of non-
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