Panama as Headquarters for Multinationals

Headquarters for Multinationals in Panama (SEM)

Companies from all economic sectors have located regional headquarters or certain key functions in the country. The international trading arm of Procter & Gamble has its headquarters in Panama, and shipping company Maersk manages its LatAm operations from the country. Pfizer found the country to be a convenient location to establish a regional center as a result of the country’s favorable situation in the region. Nestle set up a sales, services and support center in Panama in an effort to break down the barriers of distance, language and culture. Companies from the finance sector have also found Panama a profitable base. The oil and gas industry represented in Exxon, Chevron, Total, BP and others have also discovered Panama as a safe service center in the South & Central America and the Caribbean, while in the IT sector Panama has become a prime jurisdiction for gaming companies offering games to players worldwide. The pharmaceutical industry is another prominent example of strategic investment in the country, with Pfizer, Hoffman-LaRoche and Sanofi Aventis operating a regional sales and marketing unit in the country, which is responsible for the LatAm region.

Panama is increasingly ranked on decision makers’ shortlists when it comes to choosing the location of their international and regional headquarters. Panama provides access to the LatAm market of 670 million people. Offering a high quality of life, a central location and tax incentives, among other advantages, companies view Panama as a strategic location from where they can oversee investment in the developed and emerging countries of the region. Coupled with English-speaking staff and strong cultural ties, the country is gaining attention as an international management centre and an ideal hub to enter neighboring markets.

More than 189 (May, 2024) multinational corporations have re-located corporate management functions to Panama.

Investment Opportunities

The SEM Law 57 of 2018 defines a multinational company as a company that operates from Panama, aimed at offering services to its headquarters or its subsidiaries, sister companies or associated companies, or sets its headquarters in Panama. Branches will always be part of multinational companies with international or regional operations in their country of origin.

Under this law, there are opportunities for investors to either establish headquarters or establish branches/sister companies that can help carry out the operations of the Business Group. Services or activities that can be carried out from Panama under this law are the following:

New Changes

There are new additional services that a licensed multinational office can perform under the Multinational Headquarters regime, such as:

1. The administration of the Group
2. Logistics and/or storage of equipment or goods
3. Technical assistance to the Business Group
4. Back office, accounting
5. Advice, coordination and monitoring of advertising and marketing
6. Electronic processing of the activities of the Business Group
7. Financial management
8. Support for the D+1 Departments
9. Service centers and any other activities that can help the operation of the Business Group
10. Financial assistance
11. Technical assistance
12. Management
13. Financial management support
14. Risk assessment
15. Credit analysis
16. Due diligence
17. Custody of documents
18. Data processing
19. Corporate treasury

b. Insurance, securities and banking entities are required to perform a formal consultation to regulators before applying to a Multinational Headquarters license.

Tax Matters

Income Tax (ISR)

• Companies with SEM license will pay ISR at a 5% rate on the net taxable income applicable to the services it renders.
• SEM companies will file income tax returns annually and may consider as deductible expenses the remuneration of all employees, including those exempted on their remuneration in accordance with Article 26 of the SEM Law.
• Companies with SEM License may apply as credit to their ISR:
  • The amount paid for ISR or another analogous concept abroad (withheld) with respect to the net taxable income generated in Panama related to services rendered to non-residents.
  • The amount withheld by taxpayers in Panama as ISR according to Article 23 of the SEM Law.
• When tax credits are applied, the SEM entity must pay a minimum of 2% of the net taxable income as ISR. Those credits may not be considered as accrued credits nor be subject to tax rebates.

ISR withholdings

• The taxpayer in Panama who benefits from a service from a SEM company must withhold 5% on the amount to be sent to the SEM company as long as the service is needed for the production or conservation of the source of income or is considered a deductible expense for the beneficiary of the service.
• The SEM company who benefits from a service, copyright, loans, financing rendered by an entity outside of Panama must withhold 5% on 50% of the amount to be sent. It will be subject to ISR in Panama as long as the service has an impact on the Panamanian source of income of the SEM. If the SEM company is in loss when the remittance is performed, the withholding is applicable on payments outside of Panama.
• The remuneration of the SEM executive with Permanent Personnel SEM Visa will be exempted from ISR, social security contributions and education tax, only if such remuneration is paid, assumed and recognized as labour expense in the accounting records of the SEM company.

Transfer Pricing

• As of the 2019 tax period, persons who carry out operations with related parties that are SEM companies will be subject to transfer pricing.
• The transfer pricing regime is applicable as well to the operation of the SEM company with related parties in Panama, or that are tax residents in other jurisdictions, or that are established in the Colon Free Zone, or that operate in an Oil Free Zone, in the Panamá Pacífico Economic Area, City of Knowledge, or that are SEM, or in any other free zone or special economic areas.

Dividends Tax

• SEM companies are exempted from Dividend Tax, Complementary Tax and tax applicable to branches. Rules of Article 733-A of the Fiscal Code are not applicable to SEM companies.

Tax Printers

• SEM companies are not subject to the use of fiscal printers but must have support of their activities.

Operations License Tax

• SEM companies are not subject to the Operations License Tax as they do not have the obligation to obtain an Operations License.

Capital Gains

• The earning or loss in the transfer of stock issued by the SEM company will be subject to the capital gains regime, at a fixed rate of 2% where the purchaser has the obligation to withhold 1% from the total value of the transfer.

Tax Agreements

• Tax Agreements between SEM companies and the Ministry of Economy and Finance will no longer exist.

Regulatory Matters

Services Provided by the SEM Company

• Financial assistance services that SEM companies can provide to their related companies were expanded, including expressly technical, financial and/or administrative assistance, as well as other support services including, without limitation, risk analysis, credit analysis, due diligence, compliance, custody of documents, data processing center and/or document and corporate treasury services, as well as inter-company loans.
• If the above services are provided to companies within the group that carry out banking, insurance, reinsurance and/or securities business in Panama or abroad, the SEM company must previously inform the respective regulator of its intention to obtain a license for the provision of these services to a regulated and related company.
• The financial assistance services included under Law 57 of 2018 do not include or authorize any activity that requires obtaining a special license issued by the Superintendency of Banks, the Superintendency of Insurance and Reinsurance, the Superintendency of the Securities Market, or any other similar regulator.

Recipient of Services

• Law 57 of 2018 incorporates a change in form to Law 41 of 2007, clarifying that unless expressly provided exceptions under the Law, SEM companies may only provide services to companies within their economic group.

SEM License Requirements

• Companies interested in obtaining a SEM License must comply with the requirements set forth by the Licensing Commission of the Multinational Company Headquarters, considering parameters provided in Law 41 of 2007 (assets of the company group, places where it operates, activities carried out, stock exchange listing), as well as the minimum number of full-time employees and annual operating expenses appropriate for the operations.

Legal Stability of Investments

• Companies obtaining a SEM License as of January 1, 2019, will automatically be subject to the Legal Stability of Investments Regime from the issuance of the SEM License: tax stability on national taxes for 10 years, and on municipal taxes for 5 years, including indirect taxes (customs and labor stability).

Operations License

• SEM companies are not required to obtain an Operations License for the purposes of providing services authorized by the SEM Law. Law 49 of 2009 (which amended Law 5 of 2007) already provided that SEM companies do not require an Operations License.

License Cancellation

• SEM companies that carry out activities other than those authorized by their License will be sanctioned with license cancellation and will also be liable for unpaid taxes, fines, surcharges, interest and penalties, in accordance with the Tax Code of the Republic of Panama.

Immigration Matters

Permanent Residency for SEM Employees

• Permanent Residency for SEM Employees is included for foreigners working for a SEM company after a five (5) year period, counted from the date of approval of the Visa for Permanent Personnel.
• Foreigners that obtain this permanent residency will be able to continue working for the SEM company.
• This option is subject to the payment of ISR, social security and educational tax applicable to the salary and other labor remunerations earned by the foreign employee, including salary in kind.
• The employee that obtains permanent residency will not require any additional process to work in a SEM company, nor to reside in Panama.

Pull Factors

Panama has established itself as a magnet for foreign-owned companies and is improving its competitive position steadily. A stable business environment, favorable corporate tax regime, world-class infrastructure and excellent quality of life are just a few of the many reasons why companies relocate senior decision makers to perform strategic functions from Panama. In the long term, the prospects are good that Panama will benefit from the growth in the region and become an increasingly popular choice for the location of international and regional headquarters.

Review the list of Multinational Companies in Panama here.