Panama opens discussion on bill to tax passive foreign-source income for “shell” companies within multinational groups

On May 11, Panama’s National Assembly opened discussions on bill No. 641. It introduces a rule: for passive income from foreign sources to remain exempt from tax in Panama, companies that are part of multinational groups must demonstrate that they carry out real economic activity within the country. President José Raúl Mulino convened special parliamentary sessions—from May 4 to June 5—to speed up consideration.

Finance Minister Felipe Chapman presented the draft in the Assembly on April 30. The bill adds a new chapter IA to the Tax Code—“Economic Substance Rules for Passive Income”—and targets structures within international groups that receive foreign dividends, interest, royalties, capital gains, real estate income, and other forms of movable capital.

What the bill requires

The proposed rules introduce four economic substance tests. All of them must be met in order to preserve the territorial exemption for foreign passive income.

As noted in KPMG Panama’s analysis published in March, the conditions include:

• Qualified personnel in Panama and appropriate remuneration
• Sufficient infrastructure to carry out the company’s core activities
• Strategic decisions and risk-taking must be performed in Panama
• Operating expenses related to the assets that generate the income

To retain the benefit, all four criteria must be satisfied.

If a company fails the tests, it may be classified as “non-qualified”. According to KPMG Panama, in that case, foreign passive income would be taxed at an exceptional 15% rate of gross income, and additional penalties, surcharges, and interest could apply.

While 15% is lower than Panama’s standard corporate rate of 25%, taxation on a gross basis can result in a heavier burden for companies with tight profit margins.

In addition to the “substance” check, the bill strengthens compliance requirements. Covered companies would have to:

• file annual declarations on economic substance;
• keep supporting documents in Panama;
• submit tax returns reflecting foreign-sourced income;
• provide audited financial statements.

The bill also includes a general anti-abuse rule: the tax authority, DGI, would be empowered to recharacterize transactions if their main purpose is to obtain improper tax advantages.

Separately, KPMG points to a detail that may require corporate reshuffling: the bill limits the shared use of resources (personnel, premises, functions) to demonstrate economic substance across multiple companies. If several Panamanian legal entities are managed from the same office with overlapping staff, the group may need consolidation or restructuring.

Why the discussion is happening now

Panama has been on the European Union’s Annex I list of tax jurisdictions considered “non-cooperative” for many years. In early 2018, the country was temporarily removed after reform promises that were later not implemented to a sufficient extent. As of February 2026, Panama remains among the ten listed jurisdictions—together with American Samoa, Anguilla, Guam, Palau, Russia, Turks and Caicos, the U.S. Virgin Islands, Vanuatu, and Vietnam.

One of the EU criteria for keeping Panama’s status is maintaining the Foreign-Source Income Exemption (FSIE)—the exemption for foreign passive income, which the EU considers harmful under the Code of Conduct for Business Taxation.

At the same time, there is no need to abolish the territorial principle. EU guidance states that jurisdictions should either tax foreign passive income or impose sufficient economic substance requirements on companies benefiting from the exemption, backed by anti-abuse rules.

The next EU review deadline is October 2026. Chapman and Mulino have publicly stated that the administration’s goal is to secure Panama’s removal from the list, and the special sessions convened specifically for this bill underline the urgency.

The territorial principle remains, but becomes conditional

The bill does not overturn Panama’s territorial tax system. Income earned within the country would continue to be taxed at the standard corporate rate of 25%, regardless of whether economic substance exists. Income from domestic sources is unaffected by the reform, as is foreign active income, which also falls outside the bill’s scope.

What changes is the logic of the exemption: under current rules, Panamanian companies can avoid tax on foreign passive income without having to demonstrate that real business is conducted in the country.

Bill No. 641 makes that exemption conditional on proving economic substance, but only for members of multinational groups receiving passive income from abroad.

At the same time, the rules do not apply to individual tax residents and to standalone Panamanian companies that are not part of international groups.

Investor programs—including Qualified Investor Permanent Residency, Friendly Nations Visa, and other resident-status mechanisms—are not directly affected. Likewise, the personal territorial exemption that makes these programs attractive to high-net-worth individuals remains unchanged.

Similar examples in other countries

Panama is not the first territorial jurisdiction to take this approach. According to KPMG, Costa Rica, Uruguay, Hong Kong, and Singapore have already reformed FSIE regimes in a similar way and, in turn, managed to be removed from the EU list. In each case, multinational groups had to restructure their passive-income arrangements.

Additionally, within Panama itself, special regimes have already become dependent on meeting economic substance requirements in recent years. These include the Multinational Headquarters Regime (SEM), Panama’s Panama Pacifico free economic zone, and the Colón Free Zone. Bill No. 641 extends this logic to the general territorial exemption regime for foreign passive income.

Resistance is already emerging

Local lawyers warn that widespread implementation of the rules could trigger capital outflows, reports Newsroom Panama.

One area drawing heightened attention is the shipping register. Panama operates one of the largest ship-flag registries in the world, and ship ownership structures often use special purpose vehicles (SPVs) with minimal presence onshore—often due to the very nature of the model. Whether such assets should receive separate exemptions from economic substance requirements is currently being actively discussed.

At present, the bill remains at the first reading stage in the Assembly’s Economic and Finance Committee. If the president signs it and it enters into force, influencing the EU decision would require acting ahead of October 2026—otherwise the impact on Panama’s status may be limited.

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