Substance Requirements in Panama

In order to comply with the international tax transparency standards of the Organization for Economic Co-operation and Development (“OECD”) and the European Union, as well as to guarantee the country’s competitiveness, attract investment and generate employment, the Republic of Panama adopted the Substance Requirements for specific activities, in this case, for the Multinational Enterprise Headquarters Regime (“SEM”), the Special Regime for Multinational Enterprises for the Provision of Manufacturing-Related Services (“EMMA”) and some activities of companies established in Panama-Pacific, specifically, call center services for commercial use, multimodal and logistics services and office administration services.

In all the cases previously mentioned, the companies that are under these special regimes and carry out the aforementioned activities must comply with the Substance Requirements in order to enjoy the special income tax rates granted by each regime, which range from income tax exemption to a reduced rate of 5%.

In general terms, the Substance Requirements are limited to maintaining in Panama an adequate number of qualified full-time workers, dedicated to the execution of the principal activity or activities generating the revenues invoiced in Panama; as well as incurring an adequate amount of operating expenses in Panama, directly related to these principal activities. That being said, the standard defines the term adequate as “That which is suitable, appropriate and sufficient for the execution of the Principal Activity or Activities, according to the nature of the operations of each Company“.

From the Substance Requirements, it is relevant to refer to the Principal and Secondary Activities. The Principal Activities are the activities essential for the generation of income eligible for the income tax benefits contemplated in each regime; that is to say, they refer to the activities directly associated with the creation of value, whose execution is necessary for the rendering of the service or operation generating the income and which must be executed through the use of own resources or through resources provided by third parties. The activities that do not constitute a Principal Activity will be considered as Secondary Activities; therefore, they are those that are not essential for the generation of the income susceptible to the benefits of the income tax contemplated in each regime.

The Principal Activities may be executed, in whole or in part, through suppliers (third parties), provided that the outsourced activity is executed in Panama and that the company benefited has in Panama the mechanisms to exercise control and supervision of the outsourced activity.

Outsourcing all or part of the Principal Activity outside of Panama entails non-compliance with the Substance Requirements and implies that the income derived from the activities subject to such Substance Requirements are taxable at the general income tax rates. However, the Secondary Activities may be executed, in whole or in part, through suppliers (third parties), inside or outside the Republic of Panama, without affecting compliance with the Substance Requirements.

The affidavit of Substance Requirements must be filed by the companies subject to these requirements within six (6) months following the end of each respective fiscal period. Subsequently, within the following three (3) months, the respective authorities will issue a resolution indicating whether or not the companies complied with the Requirements; such resolution may be subject to reconsideration and appeal.


Juan Raul Sosa


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