Territoriality is the most quoted feature of Panamanian tax and the least examined. The principle is real, it is written into the Código Fiscal, and the Dirección General de Ingresos applies it. What people take from it is usually something the principle does not say: that a Panamanian company with foreign activity is outside the system. It is not outside the system. It is inside the system and outside the charge, and those are different positions with different consequences.
This piece is for a group that holds a Panamanian entity, or is considering one, and needs to know where the territorial line actually falls, what happens on the day it is crossed, and what the rest of the world now does with a Panamanian address. The last of those has moved considerably, and it moved in February.
What the principle says, and the word it turns on
Article 694 of the Código Fiscal makes the object of the tax income produced within the territory of the Republic, and the Dirección General de Ingresos requires the general corporate return from every private legal person that produces taxable income inside that territory, wherever the income is received and whatever its nationality, domicile or residence. The DGI’s own guidance describes gross income by reference to the activity that generates it: services rendered, business operations conducted, property let, and gains on disposal.
The operative word is produced. The charge does not follow the payer, the currency, the bank or the invoice. It follows the place where the activity that generated the income was carried on. That is why a Panamanian company invoicing a Panamanian customer for work performed abroad is capable of being outside the charge, and a Panamanian company invoicing a foreign customer for work performed in Panama City is inside it.
That is also why the principle is fragile in practice. It is a factual test about where people were and what they did, applied to arrangements documented by groups that were thinking about something else. A director who relocated, a technician hired locally, a warehouse taken for convenience: each can move income across the line without anyone forming an intention.
Where the line moves without anyone deciding to move it
Exclusion has to be established, not assumed, and the return is built that way. The DGI’s instructions for the general corporate return have the taxpayer report total income first and then subtract exempt income, non-taxable income and foreign source income, which is the order article 695 of the Código Fiscal uses to reach taxable income. Someone has to be able to say which activity produced which receipt, and where.
Three patterns cross the line most often. The first is management performed in Panama for foreign operations, because the service is rendered where the person doing it is sitting. The second is a Panamanian entity that begins holding local receivables, real property or a local licence, since the income arising from those assets has a Panamanian source regardless of who owns the entity. The third is a group that opens an office for regulatory or banking reasons and then uses it, so that the substance created for one purpose becomes the source for another.
None of those is a scheme. Each is documented in the group’s own contracts, payroll records and lease agreements. In one mandate we reviewed a structure where every part of the tax analysis was correct and the entire conclusion was wrong, because two engineers had been moved to Panama City eighteen months earlier and no one had told the tax file.
The charge once the line is crossed
The rate matters because groups often price the risk as if it were small. On the rate table the Dirección General de Ingresos publishes, the general article 699 rate for legal persons has been 25 per cent since 2011, and 30 per cent where the state holds more than 40 per cent of the shares. For individuals the article 700 scale on the same table is nil up to B/.11,000, 15 per cent on the excess up to B/.50,000, and B/.5,850 plus 25 per cent above that.
There is a second layer that is easy to miss and easy to overstate. A legal person whose gross taxable income exceeds B/.1,500,000 in a year does not pay 4.67 per cent of its income. What article 699 requires, in the form given to it by Ley 8 de 15 de marzo de 2010, is that it compute two taxable figures and pay on the greater: net taxable income calculated the ordinary way, and a figure equal to 4.67 per cent of total taxable income. The rate is then applied to whichever is higher. An entity that the second figure would drive into loss can ask the DGI not to apply it, for up to three years, but that is a relief to be obtained, not a position to be assumed. Short of it the calculation does not care about the margin: high turnover and thin profit produce a liability set by a base derived from revenue, and a group that budgeted 25 per cent of a small profit pays 25 per cent of a number it did not compute.
Estimated payments then fall due, for a calendar-year filer, on 30 June, 30 September and 31 December, which means the cash consequence of a source finding arrives before the argument about it is finished.
The sequence matters more than the rate. A source finding is retrospective by nature, because it recharacterizes income that was already received, already distributed and often already spent. By the time the question is asked, the money has left. Groups that hold a reserve against this exposure are rare, and groups that hold one sized against the alternative calculation rather than against the ordinary rate are rarer still.
Remittances abroad, and the charge on half of them
The provision that surprises groups most is not the corporate rate. It is the withholding on remittances abroad. Where a person or entity in Panama remits income to a beneficiary domiciled outside the Republic, tax is withheld by applying the article 699 or article 700 general rates to 50 per cent of the amount remitted, with an exception for documented reimbursed expenses that a foreign entity assigns to its Panamanian branch or subsidiary. The Form 05 return is due within ten days of the payment or the credit, whichever comes first, and late filing attracts surcharges and interest.
Half the remittance, at the corporate rate, is an effective charge that changes the arithmetic of intragroup service and royalty flows out of Panama. It is a payer-side obligation, so the Panamanian entity carries the exposure whether or not the recipient ever engages with the Panamanian system. Groups that treat a Panamanian subsidiary as a cost centre paying management fees upward should model this before the first invoice, not after the first assessment.
Reporting continues even where the charge does not
Territoriality removes a charge. It does not remove a filing obligation, and it does not remove the entity from the information layer. The DGI’s exchange of information unit runs automatic exchange under the common reporting standard, country-by-country reporting and FATCA, alongside exchange on request through information exchange agreements, bilateral treaties and the multilateral convention on mutual administrative assistance. The DGI also administers the transfer pricing report, Form 930, due under article 762-I of the Código Fiscal within six months of the close of the fiscal period.
That combination is what defeats the older understanding of a Panamanian company. The entity may owe nothing in Panama and still generate a data set that reaches the jurisdiction where its beneficial owner lives.
The accounting record obligation runs on the same logic. A legal person that carries on no operations perfected, consummated or taking effect inside Panama, or that exists exclusively to hold assets, must keep accounting records and supporting documentation for at least five years and deliver them, or copies, to its resident agent by 30 April for the period closed the preceding 31 December. That is article 1 of Ley 52 de 2016 as replaced by Ley 254 de 11 de noviembre de 2021. The agent then files a sworn declaration listing the entities it serves in three categories, the third being those whose records it does not hold, due on 15 July, a date the Law fixes and the DGI applies in preference to the implementing decree. The Law points its sanctions at the companies named in that third category. Appearing in that third list is what triggers the exposure.
Under the same law the DGI may fine a legal person from five thousand to one million balboas and a resident agent from five thousand to one hundred thousand, and it orders the Public Registry to suspend the corporate rights of an entity that fails to deliver the required information. While it lasts nothing can be registered for that entity, and the only certification issued is one recording the breach. For a holding entity that block is the real damage: it stops the sale, the pledge and the notarial act the group needed.
What Europe now does with a Panamanian entity
This is the part that changed. In the update of 17 February 2026 the Council retained Panama in Annex I of the EU list of non-cooperative jurisdictions for tax purposes, in a list of ten that also contains American Samoa, Anguilla, Guam, Palau, the Russian Federation, Turks and Caicos, the US Virgin Islands, Vanuatu and Viet Nam.
Annex I is not a reputational label. It is a switch that activates defensive measures in national law. The Dutch designation regulation in force from 1 January 2026 lists Panama on the limb that tracks the European list. Under the Wet bronbelasting 2021 that designation produces a conditional withholding tax on interest, royalties and dividends paid by a Dutch entity to an affiliated entity established in a designated jurisdiction, at the highest rate of Dutch corporate income tax, which article 22 of the Wet op de vennootschapsbelasting 1969 puts at 25.8 per cent for 2026. Other Member States apply their own measures, and they are not uniform.
For a European group the practical effect is that the Panamanian entity is no longer neutral in the chain. It changes the tax result of payments made to it from Europe, independently of anything the entity does or where its income is produced.
The listing is also reviewed rather than fixed, and the Commission puts it on a twice-yearly cycle. The Council revised Annex I in February by adding two jurisdictions and removing three, which is the ordinary rhythm of the exercise. A structure priced against the current list should be re-tested at the next revision, and the test belongs in the same annual file as the accounts rather than in a memorandum written once at formation.
The bank asks a different question
It is worth separating two lists that are routinely confused. The tax list is the Council’s. The anti-money-laundering list is the Commission’s, made under delegated regulations amending Delegated Regulation (EU) 2016/1675, and Panama does not appear in the Annex to that regulation as consolidated at 29 January 2026. A bank refusing a Panamanian file is not applying that list.
What the bank is applying is a risk assessment in which an ownership structure that looks unusual or excessively complex for the business, a legal person that is a personal asset-holding vehicle, and a customer resident in a higher-risk geography are each a potentially higher-risk factor under Annex III to Directive (EU) 2015/849. Territoriality does not answer that question, because the bank is not asking about the charge. It is asking about the rationale for the entity, and a structure whose only stated advantage is that income is not taxed anywhere gives an answer the file cannot use.
Where the principle still holds
Territoriality remains a genuine feature, and for a genuine Panamanian business it does exactly what it says. A group with real operations in Latin America, run from Panama with people and premises, pays Panamanian tax on Panamanian activity and is not charged on activity conducted elsewhere. That is a coherent position and it survives the listing, because the listing changes what happens to payments from Europe rather than what happens inside Panama.
What no longer holds is the version in which the entity exists because nobody taxes it. That version now faces a source test it has to evidence, a remittance charge it has to fund, an information layer that reports it, a European withholding it triggers, and a bank that asks why it exists. Any one of those is manageable. The problem is that the structures built on the old understanding usually meet all five at once, and they meet them in the same quarter.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.