Growing international pressure to strengthen tax transparency and ensure that tax benefits are aligned with actual value creation continues to transform tax systems around the world. In this context, Panama has taken a significant step forward with the enactment of Law No. 526 of 2026, which introduces economic substance requirements for certain passive income from foreign sources earned by entities belonging to multinational groups.
The introduction of economic substance requirements in Panama comes amid an international trend characterized by increased scrutiny by tax authorities of the actual economic presence of entities that are part of multinational groups.
What does Law No. 526 establish?
The new legislation incorporates specific economic substance rules applicable to certain entities within multinational groups that receive passive income from foreign sources.
Under this framework, companies must demonstrate that they have an adequate economic presence in Panama, including human resources, assets, and activities actually carried out within the country. The objective is to ensure that the income earned is supported by real economic functions and not solely by corporate structures designed to access certain tax benefits.
Although Panama maintains its traditional territorial taxation system, the new legislation introduces additional criteria for assessing when certain income may qualify for such treatment.
Among the main types of passive income covered by the regime are dividends, interest, royalties, capital gains, and certain income derived from financial or real estate assets located outside Panama.
The Relationship Between Economic Substance and Transfer Pricing
Although Law 526 is not a specific regulation on Transfer Pricing, its implementation is closely linked to the principles that currently underpin international standards in this area.
One of the fundamental pillars of the OECD Transfer Pricing Guidelines is that the allocation of profits within a multinational group must be aligned with the functions performed, the assets used, and the risks assumed by each entity.
Consequently, economic substance has become an essential element in validating corporate structures, intragroup financing models, intellectual property holdings, and regional service centers.
Tax authorities in various jurisdictions have increased their focus on entities’ actual capacity to generate economic value, evaluating aspects such as:
- The presence of qualified personnel to carry out the declared activities.
- Effective strategic decision-making within the jurisdiction.
- Availability of physical and technological infrastructure.
- Financial capacity to assume business risks.
- Active participation in the management and operation of revenue-generating assets.
From this perspective, economic substance and Transfer Pricing become complementary concepts within the same international tax compliance strategy.
Furthermore, entities that fail to demonstrate the economic substance required by Law 526 could lose the tax treatment applicable to such income and become subject to a single, definitive 15% rate on net taxable income, which is scheduled to take effect beginning in the 2027 tax year.
Impact on Multinational Groups
The new Panamanian legislation could have significant implications for multinational groups that use entities located in Panama for investment management, financing, holding intangible assets, or other activities related to passive income from foreign sources.
In particular, organizations will need to assess whether their current structures have the level of substance required to support the functions and economic benefits attributed to such entities.
It will also be advisable to review the consistency between:
- Transfer Pricing documentation.
- The functional analyses developed for each entity.
- The allocation of risks and assets within the group.
- Evidence of economic activities actually carried out in Panama.
A lack of alignment among these elements could increase exposure to scrutiny by tax authorities, both in Panama and in other relevant jurisdictions.
A Global Trend That Continues to Gain Momentum
The introduction of economic substance requirements in Panama is part of a trend observed in multiple jurisdictions in recent years.
Initiatives stemming from the BEPS Project, rules on the automatic exchange of information, tax transparency standards, and the implementation of Pillar Two have reinforced the need for international corporate structures to be grounded in genuine economic logic.
In this context, multinationals must no longer merely demonstrate that their operations formally comply with tax regulations, but also that the profits earned reflect actual activities carried out by the entities receiving them.
Law 526 represents a significant step in the evolution of the Panamanian tax system and confirms the growing importance of economic substance as a central element of
modern international taxation. For multinational groups, this new regulation presents an opportunity to review their corporate structures, strengthen the documentation of their intra-group transactions, and ensure that the allocation of profits is supported by effective economic functions.
In an environment where tax authorities are increasing their audit capabilities and international cooperation, alignment between economic substance and Transfer Pricing will become increasingly critical for managing risks and ensuring global tax compliance.
At TPC Group, we have a team of specialists in Transfer Pricing, international taxation, and tax planning, ready to advise multinational companies on evaluating corporate structures, regulatory compliance, and managing tax risks arising from new international regulatory trends.
Source: