Panama Taxes Wealthy Shell Companies to Escape EU Blacklist

PANAMA · BUSINESS

Under pressure from Brussels, Panama has moved to tax the “paper companies” long associated with its offshore industry — a calculated step to shed a reputation that has dogged it for years.

A 15% tax aimed at shell companies

Panama’s National Assembly approved a reform of the country’s fiscal code introducing a 15% tax on foreign passive income for multinational companies that cannot demonstrate real economic substance on Panamanian soil. The measure — Bill 641 — passed unanimously in its third debate on May 27, with 70 votes in favor, completing the legislative process in just three weeks during extraordinary sessions called specifically for it. Under the new rules, companies must show they have offices, personnel and genuine business operations and decision-making in Panama to keep their exemption on foreign earnings. The aim is to discourage the creation of “paper companies” that exist only to shield money earned abroad.

The push to leave the EU blacklist

The speed of the process reflects pressure from the European Union. Brussels set the approval of this legislation as a condition, ahead of its next review in October 2026, for assessing whether Panama can exit its list of non-cooperative tax jurisdictions. Panama is the only Latin American country on that list, which has ten members in all, among them Russia and Vietnam. The country’s finance minister, Felipe Chapman, called the reform the “most important” element for getting Panama off the list. The move is meant to align the country with international transparency standards after years in which its name was synonymous with offshore secrecy.

Why the offshore industry may survive it

Despite the headline, the change is not expected to upend Panama’s large offshore sector — though it will raise costs. The law still allows certain corporations to keep their tax exemption, provided they can prove a real presence. The country’s network of law firms that specialize in setting up companies for foreign clients could even see more demand as businesses scramble to meet the new requirements. Analysts note that other jurisdictions, such as the Cayman Islands and the British Virgin Islands, have introduced similar “economic substance” rules in recent years without destroying their offshore industries.

What it means for the region

For Latin America, Panama’s move is a notable signal. As a long-standing hub for cross-border company formation, the country’s decision to tax substance-free structures — even under external pressure — nudges regional norms toward greater transparency. The real test will come in October, when the European Union decides whether the reform is enough to take Panama off its blacklist. The outcome will shape both Panama’s standing in global finance and how aggressively other offshore-friendly jurisdictions feel they must follow.