Is Panama Still Territorial? What Law 526 Actually Changes

"Panama isn't territorial anymore." We have heard it enough times this autumn to check it. The short answer, from the law-firm and Big Four notes we read on October 14, 2026: Panama is still a territorial tax country. But a law passed in May adds a real condition for one kind of structure, and if you hold one, it is worth reading before January.

What the law does, and what it doesn't

Law 526 of May 28, 2026 added a chapter to Panama's Fiscal Code on economic substance for certain foreign-source passive income. Baker McKenzie summarizes it as preserving the territorial system while introducing an exception, and Díaz y Asociados says the general principle that income from outside Panama is not taxed there remains in effect. So the starting point has not moved. What the law adds is a condition on a specific kind of income, received by a specific kind of entity.

Two conditions, both at once

Mata & Pitti (updated September 2026) reads the regime as applying only when both of these are true:

1. The entity is part of a multinational group. That means two or more entities linked by ownership or control, tax resident in different jurisdictions, and included in the group's consolidated financial statements (or the kind that would be, if such statements were prepared).
2. It receives covered foreign-source passive income. The sources list dividends, interest, royalties and capital gains; Mata & Pitti and Díaz y Asociados add foreign real estate income and other capital income.

If either is missing, Mata & Pitti says the regime should not apply. Baker McKenzie notes the law does not appear to set a minimum revenue or asset threshold, so for an in-scope structure the amount does not matter.

What happens if you are in scope

An in-scope entity keeps the benefit of the territorial rule only if it shows real presence in Panama and reports it. Executive Decree 32 of September 2, 2026 (Official Gazette 30603-B), which regulates the law, spells this out, as summarized by KPMG Panama:

• A board or equivalent body that holds at least two meetings physically in Panama each fiscal period, documented in minutes.
• People and premises in Panama proportionate to the activity, with supporting records kept in Panama for five years.
• Reporting inside the annual income tax return, not on a separate form.
• A lighter test for pure holding entities (holding shares, or real estate on a non-habitual basis): a paid, suitably qualified director or administrator resident in Panama is presumed to satisfy the people requirement. That treatment is lost if the entity takes part in the day-to-day decisions of the companies it holds, lends to unrelated third parties or carries out regulated financial intermediation.

If an in-scope entity does not meet the requirements, the covered income becomes subject to a single, final 15% tax on net taxable income (Baker McKenzie; Díaz y Asociados). Mata & Pitti is explicit that this is not a new general tax on passive or foreign income. It is the consequence of falling short of the substance rules, for entities already inside the regime.

Who the sources say is generally outside

Mata & Pitti says simple asset structures owned by individuals, single private-interest foundations and holding entities that do not actually receive foreign passive income in a given period generally fall outside the regime, and that each case should be reviewed on its own. We found no source saying the law reaches an individual's own foreign income when no entity is involved; the regime is written for entities. Note that Decree 32 defines "entity" broadly (company, partnership, trust, foundation), so holding your assets in a foundation does not by itself take you out. The two conditions above decide.

The grey area is the common middle case: a Panamanian company that is owned alongside another company abroad. Whether they count as a "group" depends on tax residence and consolidation, and that is a question for a lawyer with your documents, not for an article.

Why the myth sticks

Headlines say Panama now has a 15% tax on foreign passive income. For an in-scope entity that has no substance, that is accurate. For everyone else it is misleading. And "nothing changed" is not accurate either: Baker McKenzie calls the 15% a significant departure from the previous treatment for the structures it reaches. The honest summary is narrower than either headline.

If this might be you

Mata & Pitti says the regime applies to fiscal periods starting on or after January 1, 2027, and the regulation is already published, so there is something concrete to plan against. Before then, three questions are worth answering on paper:

1. Is there at least one other entity linked to the Panamanian one by ownership or control, and where is each one tax resident?
2. Does the Panamanian entity receive dividends, interest, royalties, capital gains or rents from abroad?
3. If both are yes: where are its decisions made, who works for it, and from what premises?

What this doesn't cover

This is not a review of any structure. It does not cover tax residence or reporting obligations in your home country, which can apply whatever Panama does, or Panama's rules on income from Panamanian sources. We did not read the text of the Official Gazette ourselves; this piece rests on the summaries by Baker McKenzie, KPMG Panama, Mata & Pitti, Díaz y Asociados and Legal 500, which agree on the essentials. Details can change when the Tax Authority issues further guidance.