On May 27, 2026, Panama’s National Assembly enacted Law 641 of 2026, introducing economic substance rules for certain entities that are part of multinational groups and receive passive foreign income. Specifically, the reform is a significant step in Panama’s effort to align its territorial tax system with international transparency standards, including OECD and BEPS principles.
Although the law does not take effect until fiscal year 2027, the transition period should not be mistaken for breathing room. Consequently, many structures will need to assess their exposure, operational footprint, and governance model well before the effective date.
Panama law-641 compliance scope
Why the Reform and Economic Substance Rules Matter
Panama’s territorial tax regime has long been a central feature of its appeal as a corporate jurisdiction. Law 641 preserves that model, but adds a substance-based exception for certain passive foreign income earned by multinational groups. In practical terms, the new framework aims to ensure that entities benefiting from territorial treatment can show a real presence and genuine activity in Panama.
This move reflects broader international pressure on jurisdictions to limit the use of shell entities with no meaningful commercial footprint. Therefore, Panama is responding by tightening the rules while keeping its core territorial framework intact.
Who is in Scope of the New Legislation?
The law applies to Panama-domiciled entities that form part of a multinational group and earn foreign-source passive income. Furthermore, the income categories in scope include dividends, interest, royalties, capital gains, and income from real estate located outside Panama.
This is likely to be relevant for holding companies, patrimonial structures, and other entities controlled by foreign shareholders. Consequently, for many groups, the key question will be whether the entity is within scope at all, and if so, how to comply with the updated economic substance rules.
What Economic Substance Rules Mean in Practice
To keep foreign passive income outside the 15% tax charge, an entity must demonstrate that its core activities are genuinely directed from Panama. Specifically, the law points to several indicators of substance, including resident employees, office space or infrastructure, real operating expenses, and board meetings or strategic decisions taking place in Panama.
Outsourcing is allowed, but only if the activity is performed in Panama and remains under the effective supervision of the entity. In other words, the economic substance rules are not just looking for formal paperwork; they require a real operational presence.
Schedule a Substance Assessment
The Tax Consequences of Non-Compliance
If an entity fails to demonstrate sufficient substance, it may be classified as a non-qualifying entity. In that case, the foreign passive income in scope becomes subject to a flat 15% tax on net taxable income.
That tax outcome is especially relevant for structures that currently rely on Panama’s territorial treatment without maintaining a meaningful local footprint. In addition, corporate groups should consider whether they can build substance in Panama or whether a structural optimization elsewhere would be more efficient.
BROOKFORT’S VIEW
This is not a law to leave until 2027. In practice, the structures most affected are often the ones that look simple on paper but depend heavily on territorial tax assumptions.
Our experts can help assess whether your Panamanian entities are exposed, what level of substance would be needed, and whether there are more efficient alternatives. To evaluate your current corporate framework under these new requirements, contact our Brookfort Management Team for a strategic consultation.
Corporate Strategy Update: If you want to review alternative structures, you can also explore our comparative analysis on the Spanish Holding Company Framework to evaluate robust cross-border alternatives.
This article is provided for informational purposes only and does not constitute legal or tax advice. The content herein should not be relied upon as a substitute for consultation with qualified tax or legal professionals. Readers are strongly encouraged to seek professional guidance tailored to their individual circumstances before making any tax or legal decisions regarding the topics discussed above.