The Law 41 of 24 August 2007, modified by Law 45 of 10 August 2012, creates a special regime for the establishment and operation of multi-national companies’ headquarters in Panama and creates the Licenses Commission of Multi-national Companies Headquarters (henceforth ‘Law 41’).
Through the granting of a special license, multi-national companies can establish headquarters in Panama and make use of the country’s unique location and infrastructure, while at the same time benefitting from a favourable tax treatment for the company, special migratory visas for its workforce, and flexible labour regulations for their employment contracts.
In order to qualify for the benefits of Law 41, the company or its business group has to fit specific criteria: it has to have headquarters in a foreign country, carry out activities in several countries or different regions of the same country, and its assets should be of at least US$200 million.
Companies that fulfil these criteria can opt to obtain a license and establish a Multi-national Company Headquarter (MHQ) in Panama. An MHQ is intended to be a part of the multi-national company, which provides services to the company’s headquarters, subsidiaries, affiliated companies or associated companies outside of Panama.
Legal Status of MHQs
MHQs can operate as a foreign company registered in Panama or as Panamanian corporation that is owned by the multi-national company, its subsidiaries or affiliates. While the company may also engage in local activities, they must do so through a separate legal entity. The separate entity must keep their personnel separate from the MHQ’s personnel and cannot avail of the benefits Law 41 grants to the MHQ.
An MHQ can carry out the following type of services for the multi-national company or companies that are part of the same business group:
- Management and/or administration of operations of any of the companies of an economic or corporate group in a specific geographic area or globally, including strategic planning, business development, managing and/or training personnel, operation control and/or logistics.
- Logistics and/or warehousing of components or parts required for the manufacturing or assembling of any product manufactured by the company.
- Technical assistance to companies of an economic or corporate group or to customers having acquired products or services from any such companies, for which the latter shall be under the obligation to provide support services.
- The financial management, including treasury services, of an economic or corporate group.
- The accounting of an economic or corporate group.
- Preparation of plans being part of the designs and/or constructions, or any thereof, in the normal course of business of the headquarter or any subsidiaries thereof.
- Consulting, coordination and monitoring of marketing and advertising strategy for goods or services produced by any economic or corporate group.
- The electronic processing of any activity, including the consolidation of operations of an economic or corporate group, which may include network operations.
- Support of operations and research and development of products and services of an economic or corporate group.
- Any other analogous service previously approved by the Cabinet Council.
Obtaining a License
The Technical Secretariat evaluates the request and documentation and if no additional documents are needed, the license may be granted within 10 to 15 days. This license is granted indefinitely, along with a unique registration number to be used in all the administrative proceedings in Panama, which will coincide with the company’s tax registration number (RUC or registro único de contribuyentes in Spanish). After obtaining a license, MHQs are under the obligation to present an annual report to the Technical Secretariat regarding their activities in the isthmus and will have a duty to report any changes in the status of their operations in the country and its personnel.
Tax Benefits for MHQs
Law 41 establishes tax benefits for the MHQ and for its management personnel. The hallmark of the tax system of Panama is linked to strict adherence to the principle of territoriality. Only taxable income generated from any source within the Republic of Panama, regardless of where it is paid from or received, is subject to tax liability. Because MHQs essentially generate their income from providing services abroad, there is little or no taxable income.
Law 41 establishes the following tax benefits for the corporation:
- MHQs are exempt from payment of income taxes on the services it provides to parties that do not generate taxable income in the Republic of Panama, and are also exempt from dividend and complimentary tax.
- MHQs are exempt from paying the tax on the transfer of goods and services to export services provided to parties that do not generate taxable income in the Republic of Panama, with the following limitations:
- MHQs with local operations in Panama must provide those services through a separate legal entity and will be liable for the tax on the transfer of goods and services;
- MHQs must pay this tax for good and services purchased within the country and for their imported products.
MHQs are not required to use fiscal equipment for invoicing.
- MHQs are permitted to reach tax related agreements with the Ministry of Economy and Finances in order to consolidate their earnings and the payment of taxes for income obtained in several countries.
The foreign management personnel of MHQs are granted the following tax benefits:
- They are exempt from payment of income tax, social security and education contributions so long as their salaries are paid from abroad.
- They are allowed to import household items without the payment of custom duties on their first arrival to the country.
Immigration Benefits for MHQs
There is a special and efficient procedure for obtaining visas for the personnel of an MHQ. Law 41 instructs the Ministry of Commerce and Industry to procure the paperwork for the foreign personnel and their dependants, which they do through a ‘Single Window Service’.
The Visa for Permanent Personnel of MHQs is issued for renewable periods of five years, during which they have the benefit of multiple entries and exits. Holders of this type of visa do not require a work permit and may request permanent residency status after five years of residence in Panama.
For temporary personnel, there is a Special Visa for Temporary Personnel of MHQs, which can be obtained by personnel from countries that require a visa to enter Panama. This visa has a maximum duration of three months and the holder does not require a work permit. Special visas are also available for special events, obtainable by personnel of countries who require a visa to enter the country and will only enter for a specific event.
Personnel of nationalities classified as ‘restricted’ by the Republic of Panama, whose entry to Panama is restricted and subject to a lengthy authorised visa process, can request a special entry visa for themselves and their dependents at the ‘Single Window Service’, which will allow them to enter the country and process their Special Visa for Temporary Personnel of MHQs without having to process a separate authorised visa, which is the norm for persons of restricted nationalities.
It must be noted that the ordinary visa application requirements and costs still apply and the MHQ personnel need to be covered by private medical insurance plan.
Labour Law Benefits for MHQs
Benefits conferred upon personnel by Law 41 include the fact that MHQ personnel do not require work permits and that Labour Code mandated quotas do not apply to the management personnel of MHQs.