What It Means for Expats and Offshore Corporations
Panama’s National Assembly approved Law 526 on May 28, 2026, introducing Economic Substance Rules for passive income earned from foreign sources. The law amends the Fiscal Code and takes effect starting fiscal year 2027. Given the volume of questions we’ve received from clients who hold Panama corporations, this article breaks down what the law actually says — and just as importantly, what it does not say — as it relates to two common client profiles: expats using Panama corporations as asset protection vehicles, and clients with simple offshore holding structures.
What Is This Law About?
Law 526 introduces a new concept into Panamanian tax law: economic substance. Panama has long operated under a territorial tax system, meaning that income generated outside Panama is not subject to Panamanian income tax. Law 526 creates a conditional layer on top of that principle: certain entities that earn foreign-source passive income must now demonstrate that they have real economic substance in Panama — genuine human resources, facilities, decision-making, and operational costs — or else that income becomes taxable at a flat 15% rate.
The types of passive income covered include dividends, interest, royalties, capital gains, real estate income, and other capital income — but only when those are earned from foreign (non-Panamanian) sources.
Who Does the Law Actually Target?
This is the most critical point, and one that has generated significant confusion in the market. The law only applies when both of the following conditions are met simultaneously:
- The entity is a member of a multinational group — defined as two or more entities linked by ownership or control, resident in different jurisdictions, and included in consolidated financial statements; and
- The entity earns foreign-source passive income of the types listed above.
This is not a law aimed at every Panamanian corporation. It is specifically designed to address multinational corporate structures that park passive income in Panama without any genuine economic activity here — a concern driven by Panama’s ongoing engagement with the OECD’s BEPS (Base Erosion and Profit Shifting) framework and international pressure to prevent the use of Panama as a pure tax conduit.
Scenario 1: Expats Using Panama Corporations for Local Asset Protection
The typical profile: A foreign national living in Panama (or abroad) holds a Panamanian corporation (S.A. or S.R.L.) that owns a local bank account, a residential property, a rental property, or undeveloped land in Panama. The corporation may have a single shareholder or a small family group.
The good news: Law 526 almost certainly does not apply to you.
On the “multinational group” requirement: A simple holding corporation owned by an individual — even a foreign individual — is not a multinational group. The law’s definition requires a group of entities (not individuals) linked by ownership or control across jurisdictions, with consolidated financial statements. A personal holding company does not meet this definition.
On the “foreign-source passive income” requirement: Income from a Panamanian bank account, rental income from Panamanian property, or capital gains from the sale of Panamanian real estate are all Panamanian-source income, not foreign-source income. They are entirely outside the scope of Law 526.
What about non-income-generating property? If your corporation simply holds land in Panama that generates no income at all, there is no passive income of any kind to subject to this law.
Practical conclusion: For the vast majority of expats using a Panama corporation as an asset protection vehicle for local bank accounts or property holdings — whether income-generating or not — Law 526 introduces no new obligations, no new reporting requirements, and no new tax exposure.
Your existing obligations (annual corporate fees, property taxes where applicable, income tax declarations if you have Panamanian-source rental income) remain unchanged.
Scenario 2: Simple Offshore Corporations Holding Foreign Assets
The typical profile: A client holds a Panamanian corporation that owns foreign bank accounts, foreign investment portfolios, foreign real estate, intellectual property rights, or other non-Panamanian assets. The corporation may be owned by a single individual or a small group of individuals.
This scenario requires more careful analysis — but most simple structures are still likely outside the law’s scope.
The decisive question is whether the corporation qualifies as part of a multinational group under the law’s definition. For a single offshore corporation owned entirely by one individual (or even several individuals), the answer is almost certainly no: there is no group of entities spanning jurisdictions with consolidated financial statements.
However, if a client owns multiple corporations across different jurisdictions — for example, a Panama S.A. that owns shares in a BVI company, which in turn holds investment accounts — that structure could begin to resemble a multinational group, and the analysis becomes more fact-specific.
For the straightforward single-corporation structure:
- A Panama corporation owned by an individual, holding a foreign bank account that earns interest: likely outside the law’s scope (no multinational group)
- A Panama corporation holding intellectual property registered abroad and earning royalties: likely outside the law’s scope (no multinational group)
- A Panama corporation that is one of several entities in a multi-jurisdictional corporate structure with consolidated accounts: warrants a closer review
Important note on intellectual property: Law 526 includes a special and somewhat favorable regime for intangible assets (Art. 707-I). For entities that do fall within scope, income from IP assets registered in Panama and exploited abroad can benefit from a proportional exemption based on how much development spending occurred in Panama. This is a meaningful incentive for clients considering formalizing IP holding structures through Panama.
What About the “CPA Audit” Requirement?
We have heard claims circulating in the market that Law 526 requires all companies to be audited by a Panamanian CPA to confirm economic substance compliance. This is not accurate based on the law’s text.
The law requires annual reporting within the income tax return and retention of supporting documentation. It does not mandate independent audits or third-party professional certifications as a legal condition of compliance. Verification authority rests with the Ministry of Economy and Finance itself.
That said, the Executive Branch has 90 days to issue implementing regulations, and those regulations could introduce additional procedural requirements. We will update clients as those regulations are published.
What Should You Do Now?
If you hold a simple Panama corporation for local asset protection (bank accounts, property in Panama): No immediate action required. Your structure is outside this law’s scope.
If you hold a Panama corporation as part of a larger multi-entity, multi-jurisdiction structure: Review the structure with your legal advisor to confirm whether it constitutes a multinational group under the law’s definition. If it does, and if it earns foreign-source passive income, you will need to assess substance requirements ahead of fiscal year 2027.
If you are planning a new structure involving IP or foreign investment assets: The new law is actually worth reading carefully for planning opportunities — particularly the IP regime under Art. 707-I and the existing exclusions for regulated financial entities.
For everyone: Watch for the implementing regulations, which must be issued within 90 days of the law’s enactment. These will clarify procedural details, reporting formats, and any additional compliance steps.
Summary Table
| Client Profile | Multinational Group? | Foreign-Source Passive Income? | Law 526 Applies? |
| Individual holding Panama corp with local bank account | No | No (Panamanian source) | No |
| Individual holding Panama corp with Panama property (rental) | No | No (Panamanian source) | No |
| Individual holding Panama corp with non-income land in Panama | No | None | No |
| Individual holding single Panama corp with foreign bank account | No | Potentially yes | Likely No (no multinational group) |
| Multi-entity structure across 2+ jurisdictions earning foreign passive income | Possibly yes | Possibly yes | Review needed |
A Note on Panama’s Broader Tax Context
Law 526 is part of Panama’s continuing effort to align with international tax standards and address longstanding concerns from the OECD and the EU regarding the use of Panama as a zero-tax conduit for passive income. The law is carefully scoped — it does not dismantle the territorial tax system, and it does not impose substance requirements on ordinary holding structures owned by individuals. What it does is ensure that multinational groups cannot book passive income through Panama without any genuine economic footprint here.
For most of our individual and family clients, this law changes nothing. For clients with more complex, multi-entity international structures, it is a timely reminder to review those structures with qualified counsel. If you are considering forming a Panama corporation or have questions about an existing one, visit Corporation Package Offer or contact our office.
This article is for informational purposes only and does not constitute legal or tax advice. For guidance specific to your situation, please contact our office.
