Contents of this guide
The test that decides the structure
In Panama the choice rarely depends on the name of the company. The same corporation (sociedad anónima) can work as an offshore or as an operating company depending on what it does. The Tax Code taxes income produced inside the territory, wherever it is received, and its article 694 says that income from directing, from an office in Panama, transactions that are completed, consummated or take effect abroad is not considered produced in Panama. That principle, known as territoriality, is what separates the two structures.
“Offshore” is the everyday term for a Panamanian company that does not operate in Panama. The rules describe it by activity rather than by label: Law 52 of 2016 refers to legal entities that do not carry out operations that are completed, consummated or take effect inside the country. The operating company is the one that carries on a commercial or industrial activity in Panamanian territory, which is why it goes through the Notice of Operation set by Law 5 of 2007.
Radar already explains how to set up each one: how to create an offshore company and how to open a company, from the articles of incorporation to the Notice of Operation. This guide covers the earlier step, deciding which of the two fits.
Side-by-side comparison
The table summarizes how the two structures differ on the points that weigh most in the decision. Income tax rates, VAT (ITBMS) and payroll charges are detailed in the article on taxes a company pays in Panama.
| Aspect | Offshore company | Operating company |
|---|---|---|
| What it does | Holds assets, invoices and contracts outside Panama, or directs from here business whose effects occur abroad. | Sells, provides services or produces inside Panama, or invoices customers in the country. |
| Taxation | If income is produced outside the territory it is not subject to income tax (Tax Code, art. 694). | Income produced in Panama is subject to income tax, and the activity also generates ITBMS and labor charges as applicable. |
| Notice of Operation | The law requires it to start a commercial or industrial activity in the territory (Law 5 of 2007, art. 1). A company that does not operate in Panama has no such activity to notify. | It is the single procedure to start the activity. Some activities are exempt, such as liberal professions practiced individually or through civil companies (art. 4). |
| Economic substance | Reaches only entities of multinational groups with foreign-source passive income, from fiscal year 2027. | Not the main rule, but the tax return must also report foreign passive income if the entity belongs to a multinational group. |
| Annual obligations | Resident agent, accounting records held with the agent, beneficial owner information and the annual single fee. | The same as any company, plus the income tax return, RUC, invoicing and labor obligations. |
| Best suited to | International trade, asset holding, digital services to customers outside Panama. | Businesses with customers, premises, staff or invoicing in Panama. |
Questions to decide
Six questions, in this order, usually show where each case points.
- Where the customers are. If invoices go out from Panama to customers in Panama, the activity is local and an operating company fits.
- Where the work is done. An office, shop, workshop or staff in the country point to operating in the territory, even if the customers are abroad.
- What is invoiced and to whom. Sales of goods that move only abroad and the direction of transactions with effects outside the country are the cases article 694 leaves out of Panamanian income.
- Whether the purpose is to hold assets. Investments, shareholdings and intellectual property outside Panama fit an offshore. Owning real estate in the country is a different case and needs specific advice.
- Whether there is a group of companies. When the company belongs to a group with entities in other jurisdictions and receives dividends, interest or royalties from abroad, Law 526 of 2026 is reviewed.
- Whether a bank or counterparty is needed. Banks and business partners ask to see the real activity, so the company’s story needs to be defined. The guide to bank accounts for foreigners covers that side.
Economic substance from 2027
Law 52 of 2016 is often mentioned as if it were the economic substance law. Its text deals with accounting records for companies that do not operate in Panama. Economic substance in the current sense was created by Law 526 of May 28, 2026, published in Gaceta Oficial 30534-B, which adds the economic substance chapter to the Tax Code. The law applies from fiscal year 2027 (article 6), and Executive Decree 32 of September 2, 2026, Gaceta Oficial 30603-B regulates it.
Its scope is narrow. It applies to entities that are members of multinational groups, incorporated or domiciled in Panama, that obtain foreign-source passive income: dividends, interest, royalties, capital gains, real estate income and other movable capital income (articles 707-A and 707-C). The law defines a multinational group as two or more entities linked by ownership or control and tax resident in different jurisdictions. A company that is not part of such a group falls outside, and that membership is assessed case by case.
For that income to keep territorial treatment, the entity must show qualified staff and adequate premises in Panama, strategic decisions taken in the country and local operating expenses (article 707-E). Entities whose main activity is holding equity interests in other entities, or holding real estate on a non-habitual basis, need to meet only the staff and premises condition, plus reporting. An entity that fails becomes “non-qualified” and that income is taxed at a single 15% rate on net taxable income (article 707-D). The information is filed in the sworn income tax return.
At the time of writing, the rules apply from fiscal year 2027 and the details of how each condition is proven are in the regulation. Any company with foreign passive income inside a group should review it with its lawyer before closing the 2027 tax year.
Common mistakes
- Using an offshore to operate in Panama. Invoicing local customers, having premises or hiring staff in the country belongs to an operating company. Operating without the Notice of Operation goes against Law 5 of 2007, and article 694 protects only income generated outside the territory.
- Assuming “offshore” means no obligations. Companies without operations in Panama must keep accounting records and supporting documents and make them available through the resident agent (Law 52 of 2016, amended by Law 254 of 2021).
- Overlooking the beneficial owner registry. Law 129 of 2020 creates a single system in which the resident agent, registered with the Superintendency of Non-Financial Subjects, collects the beneficial owner information of the legal entities that require that service.
- Keeping an office or activity center in the country without analyzing it. Article 762-M of the Tax Code, as worded in 2026, treats as operating in Panama through a permanent establishment any premises, fixed place of business or activity center held there by a person domiciled abroad.
- Choosing by upfront cost instead of by activity. Setting up the wrong structure later forces a reorganization. The factors that drive cost and the proposal are reviewed with the firm after assessing the case.
When each one fits
The offshore company fits when the business, investment or assets are outside Panama and the company is only incorporated here: international trade, digital services to foreign customers, holding equity interests or intellectual property. Legal Solutions Panama describes it on its offshore company formation page as a company incorporated in Panama that can be used for international business, investments, e-commerce, digital services or asset-holding structures outside Panamanian territory.
The operating company applies when there are customers, premises, staff or invoicing in Panama. On its page on attorneys to establish a company in Panama, the firm distinguishes between the offshore company, for international operations, and the operating company, for businesses that generate revenue locally. Both can be incorporated remotely, without the client traveling, according to the firm. The process with a lawyer is also covered in the interview with Kathia Rivera, founder and president of Legal Solutions Panama.
Mixed cases, such as a group with one company contracting abroad and another operating in Panama, are usually solved with two separate companies. Corporation, LLC or private foundation is compared separately, depending on whether the use is asset or commercial.
Choosing between an offshore company and an operating company depends on the case. Legal Solutions Panama handles the incorporation of both structures for foreigners and investors.
Frequently asked questions
What is the difference between an offshore company and an operating company in Panama?
The difference is the activity and where the income is generated: the offshore does not operate in Panama and the operating company does. Both are Panamanian companies, but the operating company needs a Notice of Operation for its commercial or industrial activity and pays tax on income produced in the territory, while the offshore is limited to business, investments or assets with effects abroad.
Does an offshore company pay taxes in Panama?
In general it does not pay income tax on income produced outside the territory, under article 694 of the Tax Code. It remains subject to other obligations, such as the annual single fee and compliance duties. From fiscal year 2027, entities of multinational groups with foreign passive income must show economic substance to keep that treatment.
Can an offshore company operate in Panama?
A company that operates with customers, premises or staff in Panama stops being an offshore in the practical sense and should be treated as an operating company, with a Notice of Operation and tax on local income. Law 5 of 2007 sets the Notice of Operation as the procedure to start a commercial or industrial activity in the territory.
What is economic substance and who does it apply to?
It is the real presence in Panama of qualified staff, premises, strategic decisions and operating expenses tied to foreign-source passive income. Under Law 526 of 2026, it applies from fiscal year 2027 to entities of multinational groups incorporated or domiciled in Panama that obtain that income. A company with no multinational group is outside it.
What are the yearly obligations of each one?
Both need a resident agent, beneficial owner information and payment of the annual single fee. The offshore adds accounting records held with the resident agent, and the operating company adds the income tax return, invoicing and the labor and ITBMS obligations its activity generates.
The information in this article is general and does not replace the advice of a qualified lawyer for the specific case.
Related articles
- How to create an offshore company in Panama: requirements, steps and obligations
- How to open a company in Panama: from the articles of incorporation to the Notice of Operation
- Taxes a company pays in Panama
- Corporation, LLC or private interest foundation: which suits
- Panama as an Offshore Jurisdiction: What Still Holds and What Does Not
- Bank Account for a Panama Offshore Company: Requirements and Due Diligence
Sources
All sources were checked on October 6, 2026. Official sources are in Spanish.
- Law 526 of May 28, 2026, Gaceta Oficial 30534-B, economic substance rules and article 762-M.
- Executive Decree 32 of September 2, 2026, Gaceta Oficial 30603-B, regulation of Law 526.
- Panama Tax Code, article 694.
- Law 5 of January 11, 2007, Notice of Operation, and Panamá Emprende.
- Law 52 of October 27, 2016, Gaceta Oficial 28149-B, with its content summarized in this compendium.
- Law 254 of November 11, 2021, Gaceta Oficial 29413-A, with the scope of record delivery summarized by a Panamanian law firm.
- Law 129 of March 17, 2020, text as amended by Law 254 of 2021.
- Legal Solutions Panama: offshore company formation and attorneys to establish a company in Panama.
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