By Laura Pinilla, Associate, BaseFirma Colombia
On August 31, Panama’s president Laurentino Cortizo signed Law No. 159, establishing a new tax regime designed to encourage multinationals to establish and operate manufacturing services in Panama.
The new law, called EMMA for its Spanish acronym, seeks to attract and promote investment in productive processes, job creation, technology transfer, and improve Panama’s competitiveness in the global economy.
Only multinational enterprises can apply to the EMMA tax regime through a foreign company registered in Panama or a Panamanian subsidiary.
Only multinational enterprises can apply to the EMMA tax regime through a foreign company registered in Panama or a Panamanian subsidiary.
Companies under the EMMA regime must provide services to related parties. Therefore, these companies cannot provide services directly to clients or other entities that are not part of the same multinational group.
The activities allowed by the regime are strictly related to manufacturing and include the assembly, maintenance, repair, re-manufacturing, conditioning of product, development, investigation or innovation services, analysis, lab work, tests, and other services as long as they support the provision of manufacturing services such as logistics storage, deployment, distribution of components and parts.
Companies under the EMMA regime receive fiscal incentives such as a corporate income tax rate of 5%. Also, the companies may include within their deductible expenses those incurred in respect of labor compensation for all their employees and will proceed even when the worker receiving the salary is exempt from income tax.
Other incentives include exemptions from payment of dividends, complementary and branch tax, these exemptions will apply regardless of the income´s source (local, foreign or exempt); and an exemption from paying all import taxes, levies, or duties derived from the importation of all types of merchandise, products, equipment, and goods, in general.
Also, a capital gains tax of 2% on the transfer of shares or securities applies; however, in these cases the buyer will have to withhold 1% of the sale price as an advance payment of the capital gains tax.
Companies under Panama’s EMMA regime must fill their income tax return according to the arm’s length principle.
These companies are also subject to the transfer pricing regime on transactions carried out with local and abroad related parties, or those located in the Colon Free Zone, Fuel Free Zone, Panama Pacific, SEM, City of Knowledge, or any other free zone or special economic area.
These companies are also subject to the transfer pricing regime on transactions carried out with local and abroad related parties, or those located in the Colon Free Zone, Fuel Free Zone, Panama Pacific, SEM, City of Knowledge, or any other free zone or special economic area.
Migratory benefits for employees and their dependents are contemplated into the law, including temporary and permanent visas. Temporary visas are given for two years and can be extended. Permanent visas are issued for five years, after which the employee may apply for permanent residence in Panama. Under both visa arrangements, the employee is exempt from income tax, social security, and education tax.
Finally, it is important to mention that one of the biggest purposes of Panama’s EMMA regime is the knowledge exchange and training of the Panamanian labor force.
Therefore, the law requires companies under this regime to establish technical teaching centers or adopt additional training programs in association with universities and educational centers.
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