What Happened
Panama is moving toward a new Economic Substance law as part of its effort to meet commitments tied to the European Union’s review in 2026. The proposal, presented by the Ministry of Economy and Finance, is intended to establish rules for foreign passive income and help the country avoid remaining on the EU list.
The debate has intensified because the legislative calendar is tight. The commitment before the Global Forum expires on July 17, 2026, while the European Union review is scheduled for October. That timing has put pressure on lawmakers to approve a technically sound law without weakening the country’s competitiveness.
Why the Law Matters
Panama has spent years reshaping its tax-cooperation framework. Between 2018 and 2024, the country adopted the Common Reporting Standard, complied with FATCA, received favorable assessments from the Global Forum, exited the FATF list in 2023, and was removed from anti-money-laundering lists in 2025. Those changes have already closed much of the information-exchange front.
The new challenge is to pass a substance regime that satisfies European expectations while avoiding unnecessary burdens on domestic activity. The proposed law focuses on entities tied to multinational groups, leaving local companies, individuals, and national structures outside its scope. It also relies on sworn declarations followed by later audits, a model designed to reduce administrative bottlenecks.
The Main Technical Concerns
Despite those improvements, the proposal has drawn scrutiny over four issues. One concern is the planned 15% tax on gross income from dividends, interest, and royalties. Critics argue that taxing gross revenue instead of net profit can push the effective burden much higher and discourage investment.
Another concern is institutional overlap. The draft gives oversight and sanctioning powers to the Ministry of Economy and Finance rather than concentrating enforcement in the Tax Authority, which already has the systems and experience for fiscal supervision.
The bill also restricts carryforward of foreign tax credits, even when a company has local losses. That could create a practical form of double taxation for businesses with income taxed abroad but weak results in Panama. A fourth issue is the use of vague terms such as “adequate” resources or facilities, which may leave too much room for interpretation and weaken legal certainty.
What Comes Next
The debate now centers on whether Panama can meet international commitments with a law that is both effective and workable. Supporters of the reform argue that the country needs a clear and modern framework to close the chapter on gray-list pressure. At the same time, lawmakers are being urged to add a transitional period of 12 to 18 months so companies can adapt gradually.
The broader test is whether Panama can comply with European standards while protecting its investment climate. The final version of the law is likely to shape how the country balances fiscal transparency, legal certainty, and economic competitiveness in the years ahead.