Panama has enacted legislation imposing a 15% levy on multinational entities that cannot demonstrate genuine economic activity within its borders. The measure is framed domestically as a modernisation of the tax framework. In practice, it is an exercise in damage control, driven almost entirely by the need to exit the European Union's blacklist of non-cooperative tax jurisdictions, where the country has sat since 2020.

The National Assembly last week passed Ley 641, known as the economic substance law, with near-unanimous support, 70 of 71 deputies voting in favour, and President José Raúl Mulino signed it promptly into law. It takes effect for fiscal year 2027. Entities unable to demonstrate qualified staff, adequate premises, genuine strategic decision-making, and real operating expenditure on Panamanian soil will face a flat 15% charge on net passive income derived from foreign sources.

Yet it remains unclear how much of Panama's offshore architecture this actually dismantles. On close reading of the legislation, in fact, relatively little. Companies that can demonstrate a meaningful physical presence retain the country's longstanding territorial exemption on foreign-sourced income entirely. The law targets the most egregious end of the spectrum: shell entities with no staff, no offices, and no commercial reality, booking foreign income through a Panamanian legal address. For the broader industry, the primary consequence is higher compliance costs, not a structural overhaul.

That precedent exists elsewhere. The Cayman Islands and British Virgin Islands both absorbed comparable economic substance requirements in recent years. Neither jurisdiction saw its offshore industry collapse. What followed instead was a consolidation toward better-capitalised, more professionally staffed structures, and increased demand for local legal and administrative services. Panama is likely to trace a similar path, with the reform functioning as a barrier to entry for the most artificial arrangements rather than a fundamental reorientation of the model.

Finance Minister Felipe Chapman was explicit during the parliamentary debate that this legislation is the single most important requirement for Panama's removal from the EU list. He pointed to October's scheduled review by EU finance ministers as the earliest realistic exit point, with February 2027 as the fallback. Panama is currently the only Latin American country on the list, which also includes Russia, Vietnam, and the US Virgin Islands. The EU last updated the list in February 2026, retaining Panama while removing Fiji, Samoa, and Trinidad and Tobago.

The Panama Papers scandal of 2016 is the origin of the country's reputational problem, but a decade on, the more relevant question is structural: Panama built a significant portion of its service economy around frictionless incorporation and territorial taxation. The economic substance law preserves the core of that proposition while excising its most indefensible features. Whether that is sufficient to satisfy Brussels is a political judgement the EU will make later this year. Whether it represents genuine reform, or a calibrated minimum concession to external pressure, is a question the legislation itself answers fairly clearly.