Panama has been looking to improve its position as a regional business center through policies that facilitate international investments. For this reason, the System of Multinational Corporation Headquarters, or SEM Panama, was established in 2007 as a special fiscal regime.
You might be wondering, what are multinational corporations? These entities can be defined as large companies that operate in multiple countries and maintain a centralized headquarters.
Panama as a Hub for Multinational Corporations
Now that you know what are multinational corporations, Panama has increasingly become a focus of their attention over the years. As a result, according to MICI (el Ministerio de Comercio e Industrias de Panamá), the country reached the figure of 189 multinational company headquarters operating there in April of 2023. Strategies like SEM Panama provide a variety of tax and operational incentives, attracting global business and investment, and making this country an attractive destination for establishing multinational headquarters.
Special Regime for Operation of Multinational Company Headquarters (SEM) in Panama
As stated above, SEM Panama offers a unique set of benefits for international investors, creating a competitive environment where these corporations can manage their regional operations efficiently. This SEM system was established in 2007 under Law 41, which stipulates:
Multinational companies covered by this System shall operate as registered foreign companies in Panama or as Panamanian companies owned by a multinational company, its subsidiaries or its affiliates.
The above allows multinationals to develop their administrative, accounting, financial, and other operations from Panama. Additionally, this special regime offers different initiatives and benefits. The reform introduced by Law 57 of 2018 has expanded the range of services that SEMs can offer, while also establishing additional requirements and fiscal modifications that strengthen Panama’s position as a strategic location for corporate operations in the region.
SEM Panama: Incentives and Legal Framework
The System of Multinational Corporation Headquarters (SEM) in Panama provides incentives that propel the country as an important option for multinational operations by reducing costs and increasing operational flexibility. Besides, SEM systems offer companies with tax incentives, Visas and employment facilities, a solid legal structure, and supportive regulatory policies.
SEM Law: Regulations Governing Multinational Companies in Panama
The SEM Law (Sistema de Empresas Multinacionales) establishes guidelines for international companies operating in Panama, including key tax regulations and provisions for visas.
- Tax regulations: Law 57 of 2018, which amends the previously mentioned Law 41, establishes a 5% rate on the net taxable income derived from the services provided and allows the deduction of expenses related to labor remunerations, even if the worker is exempt from income tax. On the other hand, profits or losses from the sale of shares or securities are subject to a 2% capital gains tax.
- Provisions for visas: Foreign employees and their dependents (spouses, children under 25 who are enrolled in school, and parents) having a SEM Permanent Staff Visa can work in Panama for up to five years. For short-term needs, such as technical or training services, the authorities can grant a Temporary Staff Visa for up to three months. The multinational corporation has the capability to recruit senior foreign executives, provided that it complies with applicable labor regulations.
Role of ITBMS in Panama and Multinational Operations
The ITBMS is a value-added tax applied to the transfer of goods and services within the country. For multinational operations, this tax has specific implications. Multinational firms holding a special license, such as SEM Panama, are exempt from this tax on services they provide to foreign entities, as long as those services do not generate taxable income in Panama. However, these companies are still liable for ITBMS on local purchases and imports.
Therefore, ITBMS Panama serves as a revenue source for the country while also guaranteeing that international business contribute fairly to the local tax system when engaging in domestic activities.
Why Panama Free Zone Are Attractive to Multinational Companies
Clearly, the country has certain qualities that make it a global financial center. When considering what are multinational corporations, it becomes clear why the strategic advantages of Panama Free Zones make them highly appealing to international businesses.
- Companies operating in Panama Free Zones benefit from significant tax exemptions including income tax, import duties, and value-added tax (VAT).
- The strategic location of these Free Trade Zones near the Panama Canal offers an advantageous logistical position, supplies easy access to major international markets and improves trade efficiency.
- The business environment in Panama’s free zones relies on simplified regulatory procedures and fewer operational restrictions, without neglecting a stable legal and financial environment.
- Economic incentives and investment support programs reduce costs and facilitate business operations.
- The zone has an advanced infrastructure, featuring modern logistics and warehousing facilities.
Although the government provides several benefits and attractions, it is important to keep in mind some important implications at the time of setting up a multinational headquarters under the SEM Panama.
Process and requirements to Set Up Multinational Headquarters under the SEM system in Panama
Bearing in mind what are multinational corporations and how they work, the process of establishing this kind of business under the SEM Panama involves five key steps and requirements structured to warrant proper compliance with this law.
SEM Panama Application Submission
The process begins with the submission of an application for SEM status, accompanied by documentation that describes in detail the company’s multinational operations and its intended activities in Panama.
Proving Multinational Status
Corporations must demonstrate their status as a global entity with operations in multiple countries, through, for instance, consolidated financial statements and details of foreign subsidiaries.
Minimum Capital Investment
This requirement allows that only companies truly interested in establishing significant operations in Panama are granted SEM status. The minimum capital investment promotes the economy and job creation within the country.
SEM License Issuance
Once verification is successful, the Panamanian authorities issue a SEM Panama license. This license formally recognizes the company as a beneficiary of the SEM systems, and grants it access to the associated fiscal and regulatory incentives.
Annual Registration from SEM companies
To maintain SEM Panama status, SEM companies must undergo annual registration and compliance checks. This process involves submitting updated information on the company’s operations and financial status.
The Strategic Importance of SEM for Multinational Growth
The SEM Panama system has played a fundamental role in the growth and expansion of international companies by providing a stable and beneficial operating environment in Panama. The incentives offered under the SEM structures, combined with the strategic advantages of location and Panama free zone, create a compelling case for SEM companies aiming to optimize their activities across the region. Understanding what are multinational corporations reveals their impact and presence in the global market, as exemplified by their operations in Panama. International companies can establish their headquarters in Panama to capitalize on the country’s favorable business climate, thus improving their global presence and operational efficiency.
Set Up Your Company in Panama with Kraemer & Kraemer
SEM Panama attracts and supports international business by providing a favorable legal and fiscal environment. With its tax incentives, regulatory benefits, and advantages of the Panama free zone, this country offers an ideal base for multinational companies headquarters, which propels growth and investment in the global business landscape. For that reason, it is important to have an expert that provides SEM services in Panama, ongoing support throughout the process and provides appropriate legal advice.
Contact Kraemer & Kraemer to learn more about SEM Panama or to set up your company today.
