SEM Law Reform
Background Law No. 41 of 2007, amended by Law 45 of August 10th, 2012 and Law 57 of 2018, establishes incentives for the creation in Panama of Multinational Corporations Headquarters (SEM, for its acronym in Spanish), whose main activities are the technical, financial and/or administrative assistance to companies with the same corporate group and the provision of services to companies of the same group. Under this modality, it is allowed to establish multinational corporations in Panama with the purpose of having a headquarter that provides support to its affiliates in the region. They may operate as a foreign company registered in Panama or as a Panamanian company, owned by a multinational company. By applying under the activities listed below, the SEM company shall be able to enjoy a series of fiscal, migratory, and labor incentives. The activities allowed under this law are the following: Outsourcing: It is important to take into account that the main activity or activities can be performed, in whole or in part, through resources provided by suppliers (outsourcing), as long as the outsourced activity be performed in Panama and the mechanisms to exercise monitoring and supervision of the activity in Panama be maintained. Services related to manufacturing, EMMA License: It is important to mention that the multinational companies that are operating in Panama and provide services with manufacturing to related companies or those that have a SEM License, and are willing to increase or expand activities to provide services related to manufacturing described in the EMMA Law or Law 159 of August 31, 2020, may adhere to this system. The Technical Secretariat may take into account all the documentation existing on file to ensure an expedited automation process. Legal stability of investments: Companies incorporated under the SEM regime as from 1 January 2019 shall automatically enjoy, as of the moment of their registration, the guarantees established in Article 10 of Law 54 of 1998 on Legal Stability of Investments. That is to say, from the granting of the License they shall enjoy the fiscal, migratory labor and legal benefits for 10 years. Annual report: Companies with a SEM License must submit once a year and within six months after the end of their fiscal period, an annual report containing an affidavit with information about the company and the new requirements of substance, which will be signed by the legal representative and a certified public accountant. The form can be downloaded from the website www.sem.gob.pa. The Technical Secretariat of the Commission of Multinational Company Headquarters Licenses shall issue an administrative resolution stating whether or not the company complies with the substance requirements for the relevant fiscal period. The company may request reconsider and appeal the resolutions of the Technical Secretariat. If the company complies, the Technical Secretariat submit the Resolution to the Directorate General of Revenues to apply the 5% income tax rate. If the company does not comply, the Technical Secretariat submit the Resolution to the G Directorate General of Revenues to apply the income tax rate at 25%. I. Fiscal Fiscal benefits and obligations of corporations which obtain a SEM License: Substance requirements: SEM companies must comply with Substance Requirements. This means that in order to enjoy the benefit of the reduced rate of 5% of income tax granted by Law 41 of 2007, for the activities contemplated in Article 4 of the Law, it is necessary to prove that the main Activities performed to generate the income benefited by the tax incentive have been carried out in Panama, that the SEM company has an adequate number of qualified full-time employees and an adequate amount of operating expenses, which are directly related to the Main Activity. In case of non-compliance with the Substance Requirements, the company must pay income tax at 25% with the corresponding fines, surcharges, and interest. To prove compliance with the Substance Requirements, the SEM company must keep records, books, and documentation showing the adequate level of employees and operating expenses, according to the main activity for up to five years. II. Immigration Incentives for Foreign Executives, holders of SEM visas: The SEM Law creates new visas specifically for foreign employees hired by the SEM company. The kinds of visas are: Visas for SEM Permanent Personnel: These shall be granted to the employees of an administrative-executive level. The same shall have the same validity up to 5 years, renewable for the same term, except for those cases in which the labor contract establishes a shorter term. The holders of this visa shall not require work permits and may renew this visa for an indefinite term. Visas for Dependents of SEM Permanent Personnel: For their spouses or common-law couples living for a minimum of five (5) years in conditions of stability and singularity, underage children and children under twenty-five (25) years which are students, as well as the parents of said personnel, who shall remain in Panama under the responsibility of SEM´s personnel. They shall have the same term as that of the SEM´s personnel. The salaries and other labor remunerations, including the salary in kind, shall be considered exempt from income tax, social security, and education insurance contributions, insofar as said salaries and labor remunerations are paid, assumed, and recognized as personnel expense of in the accounting of the SEM company. Definite Residence for SEM Permanent Personnel: The foreign personnel that had worked for any SEM company, after the 5-year term of their SEM Permanent Personnel visa had elapsed, may opt for a definite residence. The Permanent Personnel that obtains the definitive residence shall be subject to the payment of the income tax and the social security and education insurance contributions. Visas for SEM Temporary Personnel: These visas shall be granted for a period not greater than 3 months for employees that have to come to Panama for any activity related to SEM. Like the visa for SEM Permanent Personnel, it does not need a labor permit. III. Labor Companies covered by a SEM License may hire trusted foreign workers to fill senior and mid-level management positions. This is understood as those employees who perform management, inspection, or representation services for the company. Such foreign personnel must comply with the provisions of Article 17 of the Labor Code, with respect to companies whose transactions are developed, consummated, or be effective abroad. Any foreigner with the status of a dependent of a foreign worker under a visa or residence permit from the Multinational Corporation Headquarter may work in the Republic of Panama, provided that he or she meets the necessary conditions to process a work permit in one of the existing or recognized categories by Panama. These permits must be processed at the Immigration Office of the Multinational Corporations Headquarters or the One-Stop Investment Counter. Dependents who obtain a work permit and work in Panama shall be subject to the payment of income tax, and social security and educational insurance contributions for wages and other remuneration received. SEM companies must seek technological exchange, and for such purposes, may hire foreign employees of administrative levels, as well as support or related services personnel with proven academic capacity. Requirements: The legal requirements for the obtainment of the SEM License are the following: The application form must be completed and the following documents must be attached: Substantive Conditions: The Corporate Group assets must be equal or greater than two hundred million United States dollars (US$200,000,000.00) or that the applicant company must render its services to at least seven (7) affiliates, subsidiaries or associated companies. In order to evidence the foregoing, the following documents shall be included in the filing as applicable: i. Consolidated Financial Statements of the Corporate Group to which the applicant company belong, duly audited or certified by an independent Certified Public Accountant and apostilled; or ii. Affidavit signed by the legal representative of the applicant company of the Corporate Group, identifying the affiliates, subsidiaries, or associated companies to which the services shall be rendered. The legal representative signature shall be duly authenticated before a Notary Public of Panama or apostilled. In the event of establishing a parent company in Panama, an initial minimum capital, of not less than two million United States dollars (US$2,000,000) is required. For its proper verification, the following must be attached: i. Cash Flow Report ii. Certification issued by the treasurer or secretary of the applicant company, the signature duly authenticated by a notary, indicating the shareholding interest of the companies of the Corporate Group in order to prove the ownership of the multinational company. In case the applicant company is operating in Panama, the following must be submitted: i. License number or operation notice of the corporation under which the same was operating, as applicable. ii. Financial statements of the local company. iii. Copy of the last Income Tax Return. Note: Furthermore, all the documentation submitted together with the application form shall fulfill the following requirements: As of the entry into force of the SEM Law, our law firm has acquired extensive experience, helping international clients in the obtainment of the SEM Licenses, therefore we are at your disposal for any clarification that you deem appropriate. Contact us at igranet@icazalaw.com for more information.MULTINATIONAL CORPORATION HEADQUARTERS (SEM) REGIME
Updated according to Executive Decree No. 241 of September 16, 2020, and Resolution 023-20 of September 17, 2020