Economic Substance Requirements for Panama Offshore Companies

Panama has enacted Law 926 of 2026, introducing new economic substance requirements for certain Panamanian entities that earn foreign-source passive income.

Panama continues to operate under a territorial tax system, meaning that foreign-source income generally remains exempt from Panamanian income tax. However, Law 926 creates a new exception for certain multinational groups that receive passive foreign-source income through Panamanian entities.

For companies that fall within the scope of the new rules, demonstrating adequate economic substance in Panama will become essential to preserve the exemption.

The new provisions will first apply to the 2027 tax year.

Why Did Panama Introduce These Rules?

Like many other international financial centers, Panama has been updating its tax legislation to align with international standards developed by the OECD and the European Union.

Over the last several years, jurisdictions such as the Cayman Islands, the British Virgin Islands, Bermuda, and the United Arab Emirates have introduced economic substance legislation designed to ensure that companies earning certain types of income maintain a genuine business presence in the jurisdiction where they are established.

Law 926 follows the same approach. Rather than changing Panama's territorial tax system, the legislation introduces additional requirements for multinational groups receiving foreign-source passive income through Panamanian entities.

Does Panama Still Have a Territorial Tax System?

Yes. The territorial tax system remains unchanged.

As a general rule, income generated outside Panama continues to be exempt from Panamanian income tax.

The new law simply creates an exception for certain multinational groups that receive foreign-source passive income but do not satisfy the economic substance requirements established by Law 926.

For most Panamanian companies, the territorial tax system continues to operate in the same manner as before.

Who Is Affected?

The legislation applies only to companies that meet all of the following conditions:

• They are incorporated or domiciled in Panama.

• They form part of a multinational group.

• They receive foreign-source passive income.

Companies that do not meet all three requirements generally fall outside the scope of the new legislation.

What Is Considered Foreign Passive Income?

The law applies to several categories of foreign-source passive income, including:

• Dividends.

• Interest.

• Royalties.

• Capital gains.

• Rental income derived from foreign real estate.

• Other passive investment income.

These are the categories of income that international tax authorities have traditionally considered to present a greater risk of profit shifting.

Economic Substance Requirements

Companies that fall within the scope of the legislation must demonstrate that they have sufficient economic substance in Panama.

Although the specific requirements will ultimately depend on the company's activities, the law generally requires companies to maintain adequate personnel, suitable facilities, management functions, and operational expenses in Panama that are proportionate to the income-generating activities being performed.

In addition, companies must maintain supporting documentation demonstrating that these requirements have been satisfied.

Merely maintaining a registered office or appointing a resident agent will not, by itself, be sufficient.

Reduced Economic Substance Requirements for Holding Companies

One of the most practical features of the new legislation is that it establishes simplified economic substance requirements for certain holding companies.

The reduced requirements apply to companies whose activities are limited to:

• Holding ownership interests in local or foreign companies and occasionally acquiring or disposing of those interests; or

• Acquiring, holding, or occasionally transferring real estate.

Instead of complying with the full economic substance requirements, these companies are generally only required to:

• File the annual economic substance information together with their Panamanian income tax return.

• Maintain qualified personnel in Panama responsible for administering and managing the assets.

• Maintain suitable facilities in Panama for carrying out those activities.

This provision recognizes that passive holding companies do not require the same level of personnel and operational activities as companies engaged in active business operations.

For many international holding structures, this will likely become one of the most relevant provisions of Law 926.

What Happens If the Requirements Are Not Met?

Companies that fail to satisfy the economic substance requirements may be classified as Non-Qualified Entities.

In that case, the foreign-source passive income covered by the legislation becomes subject to Panamanian income tax at a rate of 15% on the corresponding net taxable income.

Additional penalties and interest may also apply where companies fail to comply with the reporting requirements or provide inaccurate information.

Annual Reporting Requirements

Affected companies must submit an annual economic substance report together with their Panamanian income tax return.

The report must include sufficient information to demonstrate compliance with the economic substance requirements, together with any supporting documentation requested by the Panamanian tax authorities.

The burden of proving compliance rests with the taxpayer.

Outsourcing Is Permitted—but Only in Panama

The legislation allows companies to outsource certain activities used to satisfy the economic substance requirements.

However, those activities must be performed by service providers located in Panama.

The service provider must also maintain adequate personnel and facilities, while the Panamanian company remains responsible for supervising the outsourced activities.

Activities outsourced outside Panama do not satisfy the economic substance requirements.

Foreign Tax Credits

The legislation also introduces a foreign tax credit for taxes paid abroad on the same foreign-source passive income.

The available credit cannot exceed the amount of Panamanian tax due on that income, and any excess foreign taxes cannot be refunded or carried forward to future tax years.

Intellectual Property

Law 926 introduces special rules for income derived from intellectual property.

These provisions follow the OECD's "nexus approach," meaning that the tax treatment depends on the extent to which the research and development activities relating to the intellectual property were carried out in Panama.

Companies relying on patents, trademarks, software, or similar intangible assets should maintain detailed accounting records for each qualifying asset.

Anti-Abuse Rules

The law also authorizes the Panamanian tax authorities to disregard arrangements that lack commercial substance or that were established primarily to obtain a tax advantage.

This provision is consistent with similar anti-abuse rules that have been adopted by many other jurisdictions in recent years.

Excluded Activities

The legislation excludes certain regulated industries from these economic substance rules, including banks, securities firms, investment fund managers, insurance companies, reinsurance companies, and certain maritime businesses operating under Panama's special shipping regime.

These entities remain subject to their own regulatory requirements and supervision.

Permanent Establishment Rules

In addition to the new economic substance provisions, Law 926 also updates Panama's permanent establishment rules.

Among other changes, the legislation expands the definition of permanent establishment for certain service activities, introduces a 183-day threshold in specific cases, broadens the dependent agent rules, and narrows the exceptions for preparatory and auxiliary activities.

These amendments generally align Panama's rules with internationally accepted tax standards.

Final Thoughts

Law 926 represents an important development in Panama's international tax framework, but it should not be interpreted as the end of Panama's territorial tax system.

Instead, the legislation introduces economic substance requirements for certain multinational groups earning foreign-source passive income while preserving the territorial tax principles that have long characterized Panama's tax system.

For multinational groups with Panamanian holding companies, reviewing existing structures before the 2027 tax year will be advisable to determine whether additional personnel, facilities, or reporting procedures may be required.

At the same time, the legislation provides simplified compliance requirements for traditional holding companies whose activities are limited to holding shares or real estate, recognizing that these entities generally require a different level of economic substance than companies carrying on active business operations.