Panama has enacted a 15 percent tax on corporations without domestic activities, targeting shell companies used by wealthy foreigners to shield profits earned abroad, as the country seeks to shed its tax-haven reputation and exit a European Union blacklist, Bloomberg reported.

Under the new rules, companies must demonstrate that they have offices, personnel, and business operations in Panama to remain tax-exempt, a requirement intended to discourage the creation of paper corporations that exist only to shield money obtained abroad. Companies that earn money abroad but maintain a significant domestic presence will still not be taxed on their foreign profits, according to the report. 

Panama hopes the measure will improve its reputation and potentially remove it from the EU list of non-cooperative jurisdictions for tax purposes, where it has been singled out since 2020. Lawmakers have specifically cited the EU blacklist as motivation for the bill. Finance Minister Felipe Chapman called the reform the “most important” element to getting Panama off the list during bill discussions last month, the news outlet said. 

The change is not expected to upend Panama’s offshore industry, even as it raises costs, because it still allows a path for corporations to remain tax-exempt, Bloomberg said.

“This is going to generate more employment in Panama because corporate structures are going to be more expensive, you are going to need more legal services,” said Mauricio Marin, who heads Bastet Family & Corporate Consulting, in the report. “Panama remains an interesting jurisdiction, although certainly some people will leave.”

Panama is the only Latin American nation among the 10 jurisdictions on the EU list of non-cooperative jurisdictions, which also includes Russia, Vietnam, and the U.S. Virgin Islands.