Palladium-silver-based alloy catalysts have a great potential for CO-free hydrogen production from formic acid for fuel cell applications. However, the structural factors affecting the selectivity of formic acid decomposition are still debated. Herein, the decomposition pathways of formic acid on Pd-Ag alloys with different atomic configurations have been investigated to identify the alloy structures yielding high H2 selectively. Several PdxAg1-x surface alloys with various compositions were generated on a Pd(111) single crystal; their atomic distribution and electronic structure were determined by a combination of infrared reflection absorption spectroscopy (IRAS), X-ray photoelectron spectroscopy (XPS), and density functional theory (DFT). It was established that the Ag atoms with Pd neighbors are electronically altered, and the degree of alteration correlates with the number of nearest Pd. Temperature-programmed reaction spectroscopy (TPRS) and DFT demonstrated that the electronically altered Ag domains create a new reaction pathway that selectively dehydrogenates formic acid. In contrast, Pd monomers surrounded by Ag are demonstrated to have a similar reactivity compared to pristine Pd(111), yielding CO and H2O in addition to the dehydrogenation products. However, they bind to the produced CO weaker than pristine Pd, demonstrating an enhancement in resistance to CO poisoning. This work therefore shows that surface Ag domains modified by interaction with subsurface Pd are the key active sites for selective decomposition of formic acid, while surface Pd atoms are detrimental to selectivity. Hence, the decomposition pathways can be tailored for CO-free H2 production on Pd-Ag alloy systems.