Law 159 of August 31, 2020 – EMMA

SPECIAL REGIME FOR THE ESTABLISHMENT AND OPERATION OF MULTINATIONAL COMPANIES FOR THE PROVISION OF SERVICES RELATED TO MANUFACTURING (EMMA)

Law 159 of August 31, 2020

In order to attract and promote investments in productive processes, generate jobs and the transfer of technology, as well as to position the Republic of Panama in a competitive market in the global economy, the Government of the Republic of Panama has enacted Law 159 of August 31, 2020, published in the Official Gazette No. 29103-A of September 1, 2020, the new Special Regime for the Establishment and Operation of Multinational Companies for the Provision of Services Related to Manufacturing (hereinafter “EMMA” or “EMMA License”).

What is EMMA?

It is a license issued by the Ministry of Commerce and Industry for Multinational Companies, whether foreign or national, that from Panama carry out operations aimed at offering the services defined in the Law and which we mention below, to their parent company or to their subsidiaries or to their affiliates or to companies associated with said entities of the same group.

This Law will be applicable only in Panamanian territory and only applies to operations of Multinational Companies for the provision of services related to manufacturing. The EMMA License will be granted indefinitely.

Services that Multinational Companies can provide under EMMA License:

1. Services related to the manufacturing of products, machinery and equipment, provided to companies within the business group.
2. Assembly services for products, machinery and equipment, provided to companies within the business group.
3. Maintenance and repair services for products, machinery and equipment provided to companies within the business group.
4. Services related to the remanufacturing of products, machinery and equipment provided to companies within the business group.
5. Services related to product packaging provided to companies within the business group.
6. Product development, research or innovation services for existing products or processes provided to the business group.
7. Analysis, laboratory, testing or other services related to the provision of manufacturing-related services, provided to companies within the business group.
8. Logistics services such as storage, deployment and distribution center of components or parts, required for the provision of services related to manufacturing.
9. Any other similar service previously approved by the Cabinet Council through a reasoned resolution, provided that it complies with the precepts set forth in this law.

Requirements that companies must present to obtain the EMMA License :

1. The assets of the multinational company.
2. The locations or subsidiary companies, parent companies or operating subsidiaries of multinational companies.
3. The commercial or industrial activities or operations carried out by the company.
4. The listing of shares on stock exchanges or internationally.
5. The minimum number of full-time employees and the annual operating expenses of the multinational company in the Republic of Panama. In both cases, they must be appropriate to the nature of the business carried out by the companies.
6. Any other element or information that the Commission considers appropriate to establish and evaluate as a relevant and necessary requirement, in order to promote proper use of the regime.

Obligations of EMMA licensed companies:

1. Submit to the Technical Secretariat of the Commission on Licensing of Multinational Companies an annual report containing statistics concerning its operations within the national territory.
2. The obligation, where applicable, to immediately notify the Technical Secretariat of the Multinational Enterprise Licensing Commission of any change in the status of its operations in the country and of its person.
3. Provide manufacturing-related services only to the Business Group to which it belongs, in accordance with the activities permitted by law.
4. Operate in the Republic of Panama as a foreign company registered in Panama or as a Panamanian company owned by the multinational company, its subsidiaries or its affiliates.

It is important to mention that a company that directly provides services to clients or companies other than or outside its Business Group will not be considered an EMMA licensed company.

Additional activities of EMMA companies.

If a company with an EMMA license wishes to carry out additional activities in the Republic of Panama in accordance with the Multinational Company Regime (Law 41 of 2007), it may request the Technical Secretariat to take into account all documentation and information already in the file of multinational companies for the provision of services related to manufacturing, in order to ensure an expedited authorization process.

Since these are different regimes, they must keep separate accounts, in addition to the substance requirements that apply to them.

BENEFITS:

By applying under one of the aforementioned services, the company with an EMMA License will be able to enjoy a series of fiscal, immigration and labor incentives.

I. Prosecutors:

Companies that obtain an EMMA License will automatically enjoy the guarantees established in article 10 of Law 54 of 1998 on Legal Stability of Investments. That is, the rates and taxes established at the time of issuance of their license will be maintained for 10 years.

• Companies holding an EMMA License must pay income tax in the Republic of Panama on the net taxable income derived from services rendered at a rate of 5%. They must settle and pay the income tax through the annual income tax return, and may include within their deductible expenses the expenses incurred in the form of labor remuneration of all their employees, which will apply even when the employee receiving the salary is exempt from income tax.

• They may also apply as an income tax credit the amount they have actually paid for this concept or a similar one abroad, with respect to the taxable income generated in the Republic of Panama derived from the provision of services to non-residents, as well as the amounts withheld by taxpayers in the Republic of Panama. When applying this credit, the company must pay, at least, 2% of the net taxable income generated in the Republic of Panama.

• Legal or natural persons that carry out transactions with related parties that are EMMA companies will be subject to the Transfer Pricing regime in accordance with the provisions of the Tax Code.

• Since these are export services, they will not incur Tax on Transfer of Personal Property and Provision of Services (ITBMS), provided that they are provided to persons who do not generate taxable income within the Republic of Panama.

• Exemption from dividend payments, complementary tax and branch tax, regardless of whether they are from a local, foreign or exempt source.

• They are not subject to the use of fiscal equipment; however, they are required to document their activities through invoices or equivalent documents that allow the General Directorate of Revenue to properly control, record, account for and audit the transactions carried out.

• They will not be required to obtain a Notice of Operation for the provision of services established in the EMMA Law.

• They are exempt from all taxes, levies, fees, or import duties on all types or classes of merchandise, products, equipment, and other goods in general, including, but not limited to, machinery, materials, packaging, raw materials, inputs, supplies, and spare parts that are used or required for the execution of the provision of services related to manufacturing. These may not be sold, leased, given as collateral, or auctioned off judicially, without paying the corresponding taxes, duties, and rates.

• Products manufactured, processed, assembled or remanufactured by a company established in a special economic area in the national territory, a free zone, a free trade zone or a customs control and surveillance area may be introduced into the national tax territory by a company of the Business Group paying the respective tariffs or customs taxes, only on the value of the raw materials and foreign components incorporated in the product, taking as a basis the tariff that corresponds to each raw material or component incorporated in the final product.

Tax incentives for Personnel holding a Permanent or Temporary Visa under EMMA:

• Exemption from Income Tax, social security and education insurance contributions, salaries and other labor remunerations, to the extent that the salaries and remunerations are paid, assumed and recognized as personnel expenses in the company’s accounting.

• Exemption from paying taxes that may be applied to household goods for import purposes when the worker moves to the Republic of Panama for the first time. In addition, the worker may request a full customs exemption from the National Customs Authority, once every two years, for the import of a motor vehicle for personal or family use.

II. Migratory:

The EMMA Act creates new visas specifically for foreign workers who are hired. The types of visas are:

• Temporary Visa for Multinational Company Personnel for the Provision of Services Related to Manufacturing:

These visas will be granted to foreigners who provide services, at an operational or training level, to the Multinational Company, for a period of two years, renewable.

It is also granted to dependents and in no case may it be longer than the validity granted to the Visa for Temporary Operational Personnel of Multinational Companies.

Once the Temporary Personnel Visa is granted, a work permit will be granted in a single procedure that grants the right to work in the Republic of Panama, while working for the Multinational Company with an EMMA License.

• Permanent Visa for Multinational Company Employees:

These visas will be granted to foreign personnel while working within the multinational company with an EMMA License. They will be valid for up to 5 years, extendable for the same period, except in those cases where the employment contract establishes a shorter term.

It is also granted to dependents and in no case may it be longer than the validity granted to the Permanent Staff Visa whose application it covers.

Holders of this visa will not need to complete any additional procedures or obtain any permission from another state entity to work or reside in the Republic of Panama.

• Permanent Residence of Multinational Company Personnel:

Foreign personnel who have worked for any Multinational Company under the EMMA Law may, after a period of 5 years from the approval of the first EMMA Permanent Personnel Visa, opt for Permanent residence.

Foreigners who obtain Permanent Residence will be subject to paying income tax and social security and educational insurance fees, as applicable.

III. Labor:

Employment aspects for staff hired with EMMA License:

• A company covered by an EMMA License may hire trusted foreign workers to fill senior and middle management positions, as well as temporary staff, as required for its operation.

• Any foreign person who has the status of dependent of a foreign worker under a Visa or Residence Permit may work in the Republic of Panama, provided that he or she meets the necessary conditions to process a work permit.

• Dependents who obtain a work permit and work in the Republic of Panama will be subject to income tax and social security and educational insurance contributions for the salaries and other remunerations received.

• Anyone holding a Permanent Staff Visa or a Temporary Staff Visa under EMMA may not engage in work activities other than those they perform in the multinational company.

• Every worker who has a Permanent or Temporary Company Personnel Visa EMMA will be subject to the regulations of the Labor Code, except for those exceptions in this Law.

• Companies may sign employment contracts in any form established by the Labor Code with foreign workers under the terms of this Law.

• Companies covered by an EMMA License must ensure the exchange of knowledge and the training of Panamanians who wish to apply for jobs in these multinational companies.

License Cancellation and Tax Effects :

Any company that carries out activities in the national territory other than those authorized by law will have its license cancelled and will be liable for any unpaid taxes, fines, surcharges, interest and penalties in accordance with the Tax Code.

Workers who enter Panama under the protection of the Law without actually working for the multinational company will be sanctioned with a fine of up to five thousand dollars (US$5,000.00).

Any company that fails to make the communications established as obligations of the Law or that fails to comply with the other provisions may be sanctioned with a fine of up to one hundred thousand balboas ($100,000.00).

Establishment and Legal Stability :

Companies will automatically enjoy, from the moment of their registration, guarantees regarding legal stability of investments. That is, from the granting of the License they will enjoy fiscal, labor, immigration and legal benefits for 10 years.

Law 159 of August 31, 2020 will come into force on December 1, 2020.