Panama’s National Assembly opened debate on May 11 on Bill 641, which would require that members of multinational groups demonstrate genuine economic activity in Panama to keep their foreign-source passive income tax-free. President José Raúl Mulino called extraordinary legislative sessions from May 4 through June 5 specifically to fast-track the measure.
Economy and Finance Minister Felipe Chapman formally presented the draft to the Assembly on April 30. The bill creates a new Chapter IA in the Tax Code, titled “Rules of Economic Substance for Passive Income,” and targets entities within multinational groups that receive dividends, interest, royalties, capital gains, real estate income, and other movable capital income from abroad.
What the Bill Requires
Under the proposed rules, qualifying entities must meet four substance tests to preserve Panama’s territorial exemption on their foreign-source passive income.
A KPMG Panama analysis published in March laid out the requirements:
- Employing qualified and remunerated staff in Panama
- Maintaining adequate facilities for the entity’s principal activity
- Conducting strategic decision-making and assuming risks within Panamanian territory
- Incurring operational expenses tied to income-generating assets
All four must be satisfied.
Entities that fail to meet these thresholds would be classified as “non-qualified.” According to KPMG Panama’s May analysis of the bill, their foreign-source passive income would face an exceptional 15% income tax rate levied on gross income, plus potential fines, surcharges, and interest.
That rate is lower than Panama’s standard 25% corporate rate, but applying it to gross rather than net income could produce a heavier tax burden for entities with thin margins.
Beyond the substance test itself, the bill imposes new compliance burdens. Covered entities would need to file annual sworn declarations of economic substance, maintain supporting documentation in Panama, submit income tax returns reporting foreign-source income, and produce audited financial statements.
A general anti-avoidance rule rounds out the package. It would give the tax authority (the Dirección General de Ingresos, or DGI) power to reclassify transactions whose primary purpose is obtaining improper tax advantages.
KPMG’s analysis flagged one detail likely to force corporate restructuring: the bill limits the shared use of resources (personnel, facilities, functions) to demonstrate substance across multiple entities. Groups that currently run several Panamanian entities from a single office with overlapping staff may need to consolidate or restructure.
Why Now
Panama has been on the European Union’s Annex I list of non-cooperative jurisdictions for tax purposes for years, having been briefly removed in early 2018 after making reform commitments it subsequently failed to deliver on. As of the February 2026 update, Panama remains among ten listed jurisdictions, alongside American Samoa, Anguilla, Guam, Palau, Russia, Turks and Caicos Islands, the U.S. Virgin Islands, Vanuatu, and Vietnam.
One of the EU’s criteria for Panama’s continued listing is the maintenance of a Foreign-Source Income Exemption (FSIE) regime considered harmful under the EU Code of Conduct on Business Taxation.
Abolishing territoriality is not required. Instead, the EU guidance asks that jurisdictions either tax foreign-source passive income or impose adequate substance requirements on entities benefiting from the exemption, paired with anti-abuse rules.
October 2026 is the next EU review date. Chapman and Mulino have both stated publicly that delisting is the administration’s goal, and the extraordinary sessions called specifically for this bill signal the urgency.
Territorial Principle Survives, With Conditions
The bill does not replace Panama’s territorial tax system. Income generated within Panama remains subject to the standard 25% corporate rate regardless of substance, and income from domestic sources is unaffected by the reform. Foreign-source active income also falls outside the bill’s scope.
What changes is the conditionality of the exemption. Under current law, a Panamanian entity’s foreign-source income is simply not taxed, with no questions asked about whether the entity conducts real business in the country.
Bill 641 would make that exemption contingent on proving substance, but only for members of multinational groups receiving passive income from abroad.
Individual tax residents and standalone Panamanian companies that do not form part of a multinational group are not covered.
Panama’s Qualified Investor Permanent Residency program, Friendly Nations Visa, and other investor residence pathways are not directly affected by the bill, nor is the personal territorial exemption that makes these programs attractive to high-net-worth individuals.
Precedents Elsewhere
Panama is not the first territorial jurisdiction to adopt this approach. Costa Rica, Uruguay, Hong Kong, and Singapore have all reformed their FSIE regimes along similar lines and subsequently achieved removal from the EU list, according to KPMG. Each reform required multinational groups operating in those jurisdictions to restructure their passive income arrangements.
Special regimes within Panama itself have already moved in this direction. The Multinational Headquarters Regime (Sede de Empresas Multinacionales, or SEM), the Panama Pacifico Special Economic Area, and the Colón Free Zone were all amended in recent years to condition their tax benefits on substance compliance. Bill 641 extends the same logic to the general territorial exemption for foreign-source passive income.
Pushback Already Emerging
Local lawyers have warned of potential capital flight if the rules are implemented broadly, according to Newsroom Panama.
One flashpoint is the ship registry. Panama operates the world’s second-largest flag registry, and vessel-owning special purpose vehicles typically have minimal onshore presence by design; whether they should receive a carve-out from the substance requirements is already under active discussion.
The bill remains in first debate before the Assembly’s Economy and Finance Committee. Presidential promulgation, if it comes, would need to precede the October EU review to have any effect on Panama’s listing status.
