Panama is considering economic substance rules that could create a 15% tax on certain foreign passive income, but the proposed change is narrow. Based on the draft described, Panama’s territorial tax system would remain intact for individuals, standalone holding companies, active business income, and companies that meet substance requirements.
What Panama Is Proposing
The draft legislation would introduce economic substance requirements for some Panamanian companies.
The potential 15% tax would apply only where a Panamanian company:
- Earns foreign passive income, and
- Is part of a multinational enterprise group, and
- Does not meet the required economic substance standards in Panama.
Foreign passive income may include income such as royalties, capital gains, or dividends from foreign subsidiaries.
The law has not yet been approved, so the final requirements are not confirmed.
Individuals Are Not Affected
For individuals considering relocation to Panama, nothing changes under the draft described.
People from countries such as the United Kingdom, United States, or Canada who want to move to Panama for lower taxes can still rely on Panama’s territorial tax system at the individual level.
The key point is that Panama’s tax system continues to tax income based on source. Foreign income for individuals remains outside the Panamanian tax net under the structure described.
Standalone Panamanian Holding Companies
A standalone Panamanian company used as a personal holding company should also remain unaffected.
For example, an individual or family may use a Panamanian company to hold investments, open a Swiss bank account, or maintain an Interactive Brokers account.
If the company is not part of a multinational enterprise group, the proposed economic substance rules should not apply.
In that case, the Panamanian territorial tax system remains intact.
Active Business Income Remains Protected
A Panamanian company that is part of a broader multinational structure may still avoid the proposed tax if it earns active business income.
Examples of active income include:
- Management fees
- Administrative fees
- Service fees
- Other active business income
If the Panamanian company is structured to earn active business income rather than foreign passive income, the proposed 15% tax should not apply.
This matters for entrepreneurs using Panama as part of a wider structure involving entities in places such as the United States, BVI, Hong Kong, or Nevis.
Panama-Only Asset Protection Structures
A multi-layer asset protection structure built entirely within Panama should also remain outside the proposed rules.
If there are no foreign companies, no foreign permanent establishments, and no multinational enterprise group, then the draft rules should not impose economic substance requirements.
In that scenario, Panama’s territorial tax system remains intact.
Foreign Passive Income With Substance
The more sensitive case involves a Panamanian company that:
- Is part of a multinational group, and
- Receives foreign passive income, such as royalties, dividends, or capital gains.
Even then, the tax may still be 0% if the company meets economic substance requirements in Panama.
The expected substance factors are not final, but the draft appears to follow familiar standards, including:
- Mind and management in Panama
- Office presence in Panama
- Administrative expenses in Panama
- Real economic activity connected to the company
For companies actually using Panama as a global headquarters, these requirements may be practical to meet.
Why Panama May Be Easier Than Island Jurisdictions
Panama is presented as easier for substance planning than smaller island jurisdictions such as BVI or the Cayman Islands.
Panama has:
- About 4 million people
- Around 2 million people in Panama City
- A major financial sector
- A global trade role
- Office infrastructure
- Real staffing and management options
This makes it easier to build real substance compared with jurisdictions where companies often exist mainly on paper.
By contrast, in places such as BVI, Cayman Islands, and Bahamas, economic substance requirements can capture many more entities, including some that are not part of multinational groups or that have broader categories of income.
Possible EU Gray List Impact
One reason for the proposed rules appears to be pressure from the European Union.
Panama has faced EU gray-list issues, which can make banking and doing business with European counterparties more difficult.
The proposed economic substance rules may help Panama satisfy EU concerns while preserving most of its territorial tax model.
If that happens, Panamanian entities may face fewer obstacles when banking or doing business with European partners.
Planning Implications
Panama may require more compliance in the future.
Possible changes could include:
- Additional forms
- Substance documentation
- More careful entity classification
- More planning for multinational structures
- Clearer separation between active and passive income
- Evidence of real management or office activity in Panama
However, the draft rules appear designed to preserve most normal uses of Panamanian companies.
Practical Takeaway
The proposed 15% tax should not be treated as the end of Panama’s tax-friendly status.
Based on the draft described:
- Individuals relocating to Panama remain unaffected.
- Standalone personal holding companies remain unaffected.
- Active business income remains protected.
- Panama-only structures remain outside the rules.
- Multinational companies with foreign passive income can still remain at 0% if substance requirements are met.
The main lesson is that Panama may become more compliance-focused, but not necessarily less tax-friendly. Properly structured Panamanian entities can still benefit from the country’s territorial tax system, especially where there is real substance or where the company falls outside the narrow scope of the proposed rules.
