Panama territorial tax system: how foreign-source income is taxed

Many foreign companies choose Panama because of its territorial tax system. But “territorial” does not mean “no taxes” or “no obligations”. Under the Panama territorial tax system, what matters is where each item of income is produced. Not where your company is incorporated, and not where you get paid.

From fiscal year 2027, Law 526 of 2026 also changes the rules for passive income earned by multinational groups. This guide explains what changes and what stays the same.

How does the Panama territorial tax system work?

Article 694 of Panama’s Fiscal Code defines what income tax applies to: taxable income produced inside Panama’s territory, wherever it is received. The taxpayer can be Panamanian or foreign.

In practice, this means two things:

• Panama-source income pays income tax, whoever the beneficiary is.
• Income produced outside Panama does not pay income tax. It can still pay dividend tax when it is distributed (more on that below).

Residency matters mostly for one thing: whether the payer has to withhold tax.

What counts as Panama-source income?

Article 694 lists cases the law treats as produced in Panama. These are the ones that most often affect a foreign company:

• Pay for work done in Panama. Salaries and fees for work performed in the country are Panama-source income, even if the employer is a foreign company.
• Services from abroad that benefit someone in Panama. This covers fees, royalties, trademarks and technical know-how paid to someone not domiciled in Panama. They are Panama-source income if the payer deducts them as an expense and they help produce local income.
• International transport. The portion of freight and fares with origin or final destination in Panama.

In the second case, the payer must withhold. The rate is 25% applied to 50% of the payment, which means an effective withholding of 12.5%.

Is a salary paid from abroad taxed in Panama?

This is one of the most common questions we get. The answer follows the same rule: what counts is where the work is done, not where the money comes from. If an employee works in Panama, the salary is Panama-source income, even if a foreign parent company pays it from an account abroad.

If you have people working in Panama, setting up local payroll correctly is part of complying. See our payroll service for foreign companies.

What is not Panama-source income?

Paragraph 2 of Article 694 lists three activities that do not generate Panama-source income, even if they are carried out from an office in Panama:

1. Invoicing from Panama sales of goods that only move abroad. For example, an office in Panama buys products in Asia and sells them to a customer in Colombia. The goods never enter Panama. The margin is not Panama-source income.
2. Managing from Panama transactions that are completed, consummated or take effect abroad. For example, a regional management team in Panama coordinates contracts that are performed and used in other countries.
3. Distributing dividends from income not produced in Panama. This applies to companies that do not need a business license (aviso de operación) or do not earn taxable income in Panama, when the dividends come from foreign income.

Situation	Panama-source?
Sales to customers in Panama	Yes
Salary of an employee who works in Panama	Yes
Consulting from abroad deducted by a local company	Yes, with withholding
Sales invoiced from Panama of goods that never touch Panama	No
Managing from Panama contracts that take effect abroad	No

The line between the two is not always obvious. A company with mixed income must separate its revenue and its costs carefully.

Law 526 of 2026: economic substance for foreign-source passive income

Law 526 of May 28, 2026 was published in Official Gazette 30534-B. It applies from fiscal year 2027. It creates an exception to the territorial system for a specific group of companies.

Who it applies to. Entities incorporated or domiciled in Panama that are part of a multinational group. The law defines a group as two or more entities linked by ownership or control and resident in different jurisdictions. Regulated financial entities, insurers, securities market entities, funds and certain shipping companies are excluded, subject to conditions.

What income it covers. Foreign-source passive income:

• Dividends and profit shares.
• Interest.
• Royalties.
• Capital gains.
• Real estate income.
• Other income from movable capital.

How much it costs. An entity that shows economic substance keeps the territorial treatment: 0% on that income. One that does not pays a single, final 15% rate on the net taxable amount of that income.

What substance means. In short, the law requires:

• Qualified staff and adequate facilities in Panama.
• Strategic decisions made in Panama and risks borne in the country.
• Operating expenses in line with the activity.

Companies that only hold shares or real estate, with no substantial business activity, follow a simplified regime. According to an analysis by ECIJA, Executive Decree 32 of 2026 regulated these rules. For example, it requires two in-person board meetings a year in Panama. For holding companies, it presumes substance if they have at least one qualified, paid director or manager resident in Panama.

What must be reported. Every year, the entity includes its foreign passive income and its substance information in its income tax return.

Dividends from foreign-source income: 5%

Foreign income does not pay income tax, but its dividends can pay dividend tax. A company with mixed income pays 5% on dividends that come from foreign-source income. The general 10% rate applies to dividends from Panama-source income.

If the company does not need a business license and earns no taxable income in Panama, its dividends from foreign income are not considered Panama-source. That is why it matters to know which category your company falls into. We summarize it in our guide to the taxes a company pays in Panama.

Why you still have accounting and filing obligations

Income that pays no tax still has to be documented. These obligations remain:

• Accounting records. Panamanian legal entities must keep accounting records, even if they only operate outside Panama or simply hold assets. They must give a copy to their registered agent every April 30. Fines range from B/.5,000 to B/.1,000,000.
• Income tax return. A company with mixed income files a return for its Panama-source income and must be able to show which part is foreign.
• Substance reporting. From 2027, entities in multinational groups with foreign passive income report it every year.
• Withholding. If you pay for services from abroad that you use in Panama, you must withhold.

When should you get advice?

It is worth reviewing your case if any of these sound familiar:

• Your Panamanian company receives dividends, interest or royalties from other group companies.
• You invoice from Panama sales or services to customers in other countries.
• You have customers both in Panama and abroad.
• You have no employees or office in Panama, but you are part of a group with presence in several countries.
• You have people working in Panama who are paid from abroad.
• Your accountant has never explained which part of your income is foreign.

There is little time left before 2027. Checking now whether your entity can show substance helps you avoid paying 15% on income that pays nothing today.

How ARVA helps

Since 2005, ARVA has worked with subsidiaries of multinationals and foreign companies with operations in Panama. We review which part of your income is Panama-source, how to document your foreign income and what you need to show economic substance. Learn about our service for foreign companies in Panama or our tax advisory service, and message us on WhatsApp.