With the enactment of Law 57 of October 24th, 2018 that modifies Law 41 of 2007, creating a Special Regime for the Establishment and Operation of Multinational Headquarters and the Commission of Multinational Headquarters, new rules applicable to SEM (for its acronym in Spanish) companies are established.
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 return on an annual basis 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 its ISR:
- The amount paid for ISR or another analogous concept abroad (withheld) with respect to the net taxable income generated in Panama related with services rendered to non-residents.
- The amount withheld by taxpayers in Panama as ISR according to Article 23 of the SEM Law.
- When the tax credits are applied, the SEM entity must pay as a minimum of 2% of the net taxable income as ISR. Those credits may not be considered as accrued credits nor being subject to tax rebates.
- The taxpayer in Panama who benefits with 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 being considered as deductible expense for the beneficiary of the service.
- The SEM company who benefits with 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 in 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 of 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.
- As of 2019 tax period, persons who carry out operations with related parties that are SEM companies, will be subject to transfer pricing.
- 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.
- 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.
- 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.
- The earning or loss in the transference of stock issued by the SEM company will be subject to the capital gains regime, but at a fixed rate of 2% where the purchaser has the obligation to withhold 1% from the total value of the transference.
- Tax Agreements between SEM companies and the Ministry of Economy and Finances will no longer exist.
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.
- In case that 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, as it may be required in order to provide financial services or conduct any other regulated activities in Panama.
Recipient of Services
- Law 57 of 2018 incorporates a change in form to Law 41 of 2007, for the purposes of clarifying that unless the 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, which requirements shall be set forth taking due regard of the parameters provided in Law 41 of 2007 (which include the assets of the company group, places where it operates, activities carried out, and stock exchange listing), as well as the minimum number of full-time employees and annual operating expenses for the company applying for a SEM License, which must be appropriate for the operations.
Legal Stability of Investments
- Companies obtaining a SEM License as of 1 January 2019, will automatically be subject to Legal Stability of Investments' Regime, from the issuance of the SEM License, this is: tax stability on national taxes for 10 years, and in municipal taxes for 5 years, including indirect taxes (includes custom stability and labour stability).
- SEM companies are not required to obtain an Operations License for the purposes of providing services authorized by the SEM Law. This provision, however, is not new. By virtue of Law 49 of 2009 (which amended Law 5 of 2007 that regulates the Operations License), it was already provided that SEM companies do not require an Operations License.
- SEM companies that carry out activities other than those authorized by their License in accordance with the provisions of the SEM Law, will be sanctioned with the cancellation of their license and will also be liable for unpaid taxes, including fines, surcharges, interest and penalties, in accordance with the provisions of the Tax Code of the Republic of Panama.
Permanent Residency for SEM Employees
- Permanent Residency for SEM Employees is included as a new to those foreigners working for a SEM company, after a five (5) year-period, counted from the date of the approval of the Visa for Permanent Personnel.
- Foreigners that obtain this permanent residency, will be able to continue working for the SEM company.
- It is clarified that 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 foreigner employee, including salary in kind.
- The employee that obtains permanent residency will not require to carry out any additional process to work in a SEM company, nor to reside in Panama.
1 January 2018:
Law 57 2018 will enter into force.
30 June 2021:
- Termination date of Tax Agreements of SEM companies having these types of agreements.
- Date when SEM companies must have implemented the modifications of article 12 of La 41 of 2007, this is: requirements for the license.
SEM companies that are registered under the Legal Stability of Investment's regime, before 25 October 2018, will keep it until their respective expiration dates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.