Law 641: Panama Now Requires Economic Substance from Multinationals — What You Need to Know

A Historic Law for Panama

On May 27, 2026, Panama's National Assembly unanimously approved (70 votes in favor, zero against) Bill 641, modifying the Tax Code to establish economic substance requirements for multinational groups with entities in the country.

This law marks a turning point: Panama maintained a pure territorial tax system where foreign-source income was 100% exempt. With Law 641, entities that fail to demonstrate real presence in Panama will face a flat 15% tax on their foreign passive income.

What Is Economic Substance?

Economic substance is the demonstration that an entity has real, operational presence in a country \u2014 not just a legal registration. Law 641 establishes four pillars:

1. Qualified personnel \u2014 real, compensated employees dedicated to the operation
2. Adequate facilities \u2014 physical, functional offices in Panama
3. Decision-making \u2014 strategic decisions and risk assumption occur on Panamanian soil
4. Real operating expenses \u2014 proportional, verifiable costs in the country

Who Does It Apply To?

The law targets entities that are part of multinational groups (two or more entities linked by ownership or control, operating in different jurisdictions) that:

• Are incorporated or domiciled in Panama
• Receive foreign-source passive income: dividends, interest, royalties, capital gains, or real estate income from abroad

What Happens If You Don't Comply?

Entities that fail to demonstrate sufficient economic substance face a flat 15% tax on net taxable income from those passive income sources. They must report annually in their income tax return.

Who Is Excluded?

The law exempts regulated entities supervised in Panama, provided their passive income is directly linked to their regulated activities: banks, insurers, reinsurers, securities market entities, investment fund managers, and maritime sector entities.

Why Now?

The primary goal is to advance Panama's removal from the EU list of non-cooperative tax jurisdictions. It also aims to strengthen the country's competitive position by attracting investment that generates real employment and genuine economic activity.

Timeline

• April 30, 2026 \u2014 MEF presents Bill 641 to the National Assembly
• May 2026 \u2014 Public consultations with 60+ industry groups and professionals
• May 27, 2026 \u2014 Unanimous approval in third debate
• Coming soon \u2014 Presidential sanction and publication in the Official Gazette
• 90 days after \u2014 Deadline for implementing regulations
• Fiscal year 2027 \u2014 Law takes effect

What Should You Do Now?

If your company is part of a multinational group with presence in Panama, you have until fiscal year 2027 to ensure you meet the economic substance requirements.

Limestone Group is not a law firm or tax advisory practice. We are your operational and technology partner \u2014 the real presence the law demands. We provide soft landing, local representation, qualified personnel, facilities, and state-of-the-art technology.

Take our free self-assessment to find out if Law 641 affects you.