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 charges income tax on income produced from a source within the territory of the Republic, whatever the taxpayer’s nationality, domicile or place of incorporation, and wherever the income is received. 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
The DGI’s guidance treats income from sources outside Panama as outside the charge, along with defined incentive-regime income and certain exempt interest and dividends. What that framing exposes is that exclusion has to be established, not assumed. 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. For legal persons the general rate under article 699 has been 25 per cent since 2011, and 30 per cent where the state holds more than 40 per cent of the entity. For individuals the scale under article 700 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. A legal person whose gross taxable income exceeds B/.1,500,000 in a year must compute the tax twice, once by the ordinary method and once under the alternative calculation at 4.67 per cent of total taxable income, and pay whichever is greater. That mechanism does not care about the margin. An entity with high turnover and thin profit can find its liability set by the alternative figure, and a group that budgeted 25 per cent of a small profit finds itself paying a percentage of a large one.
Estimated payments fall due on 30 June, 30 September and 31 December for a calendar-year filer, 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 rates to 50 per cent of the amount remitted, with an exception for reimbursed expenses between a foreign entity and its local subsidiary. The return is due within ten days of payment or credit, 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 operates 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 administrative assistance convention. It also administers transfer pricing reporting through Form 930, with a documentation study behind it.
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 with no operations taking effect in Panama, or that only holds assets, must keep accounting records and supporting documentation for at least five years, and must deliver them to the resident agent by 30 April for the period closed the preceding 31 December. The agent files a sworn declaration with the DGI by 15 July listing the entities it serves, including a third category for those whose records it lacks. Appearing in that third list is what triggers the exposure.
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 may order the Public Registry to suspend the entity’s corporate rights, after which nothing can be registered for it and only a certificate of non-compliance is issued. 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, the Turks and Caicos Islands, 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, and the consequence under the Wet bronbelasting 2021 is a conditional withholding tax on interest, royalties and dividends paid by a Dutch entity to an affiliated entity in a designated jurisdiction, at the highest corporate rate, which is 25.8 per cent in 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. 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 this year’s list should be re-tested against next year’s, 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 on the version published by the Commission as at today. A bank refusing a Panamanian file is not applying that list.
What the bank is applying is a risk assessment in which incorporation in a jurisdiction with no real economic activity, a complex ownership chain and a personal asset-holding purpose are all recognized higher-risk factors. 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.