EMMA (Establishment and Operation of Multinational Companies for the Provision of Services Related to Manufacturing Activities Regime)
Nearshoring is also a model very much applicable in the services sectors, notably taking the form of Business Process Outsourcing (BPO) – where call centers boast multi-lingual staff as capable as a more costly workforce on US soil. Indeed, Panama has excelled in the international services market, and services overall account for around 70% of GDP.
Panama has also made notable inroads higher up the services value chain, giving the more familiar global offshore addresses of India.
The term “Nearshoring” has become a trendy name for a practice of outsourcing or moving business processes to a nearby country. It is important to understand that COVID-19 disrupted the way the supply chain was designed, whereby most companies had all their “eggs in one basket” and manufactured in one single place. Reality struck when a limited capability to produce goods in other parts of the world (nearer) to the end consumer had not been foreseen, hence making nearshoring a new solution to possible future crises.
All of this makes of Panama the ideal place to establish a Regional or Headquarters of Multinational Company, while supporting the national economy by capital investment, local consumption of goods and services, creating employments and transferring technology and knowledge. Together with the private sector, the Government of Panama approved a new Law that supports the development of this important sector, through the gathering of tax and immigration incentives under one legal framework and the creation of a Single Window Service to grant Licenses for Multinational Companies Headquarters.
In August 2007, Law 41 came into force promoting the opening of multinational corporation installations in the Republic of Panama. This area is the responsibility of the new “Licensing Commission on Multinational Enterprise Headquarters.” This is chaired by the Deputy Minister of Foreign Trade. Some of its functions are establishing licensing requirements for these firms, ensuring that Panama becomes an attractive center for multinationals and creating mechanisms to facilitate monitoring. All licenses are processed by the Regional Headquarters Office at the Ministry of Industry and Commerce (MICI).
Some of the advantages for choosing Panama as a Regional Headquarters for a Multinational Company are:
- Freedom from exchange controls and monetary restrictions and use of the US$ dollar as currency.
- Political stability and respect to the principles and application of the laws.
- International banking, insurance and financial center.
- Excellent legal framework allowing 100% foreign owned investments.
- Strategic geographical location with top container ports at both the Pacific and Atlantic oceans.
- Proximity to Colón Free Trade Zone (“CFZ”) is the largest free zone in the Americas and the second largest in the world.
- Special laws for industrial parks, call centers, ecommerce and others facilitating trade and investment.
- Abundance of international transportation services and excellent telecommunications services.
- Availability of office, commercial, industrial and housing space.
- Cosmopolitan city offering excellent living conditions
- Simple visas, residence and work permit requirements.
- Availability of bilingual education.
- Availability of skilled, multilingual office and staff employees
By means of Law No.159 of August 31, 2020, the Special Regime for the Establishment and Operation of Multinational Companies for the Provision of Services Related to Manufacturing Activities (EMMA, for its acronym in Spanish) is established. This regime allows a company foreign duly registered in Panama, or a Panamanian company (owned by a multinational company, affiliate or subsidiary), to establish a regional headquarters in Panama and provide manufacturing services authorized by the law to companies in its own business group. Below we highlight the most relevant aspects of the EMMA Regime.
A. General Considerations
(i) Authorized Services
Among the services that EMMA licensed companies can perform, which in all cases must be provided only to companies of the same business group, are the following:
- Manufacture of products, machinery and equipment;
- Logistics services such as storage, deployment and distribution center for components or parts;
- Analysis, laboratories, tests or others related to the rendering of services related to manufacturing;
- Product development, research or innovation of existing products or processes;
- Assembly of products, machinery and equipment;
- Maintenance and repair of products, machinery and equipment;
- Remanufacture loaned products, machinery and equipment;
- Product conditioning;
For the granting of an EMMA License, the following parameters will be taken into account:
- The assets of the multinational company;
- The locations or affiliated companies, subsidiaries, or companies associated with the multinational operation;
- Commercial or industrial activities or operations carried out by the Multinational Company;
- The listing of shares on local or international stock exchange;
- Minimum of full-time employees and annual operating expenses incurred in Panama by the EMMA Company.
(iii) Limitations and Restrictions
A company holding an EMMA license can only provide the authorized services to its business group. In this sense, an EMMA company that wishes to carry out an additional authorized service/activity, which was not included in its registration license, must request a modification of its license to expand the authorized activities. On the other hand, a company cannot carry out any commercial activity other than the authorized services and activities listed above.
B. Tax Considerations
(i) Income Tax – A reduced Income Tax rate of 5% on the net taxable income was established for the services provided by companies holding an EMMA license.
(ii) Personal Income Tax – Personnel working under the EMMA Permanent Visa will not be subject to Income Tax as long as the EMMA company that pays the salaries considers them as a deductible expense in its accounting.
(iii) Import Tax – EMMA companies will be exempted from import tax on all types or classes of merchandise, products, equipment and other goods in general, including, but not limited to, machinery, materials, containers, raw materials, supplies, supplies and spare parts.
(iv) Tax on the Transfer of Goods and the Provision of Services (ITBMS) – The services provided by the EMMA company are not subject to the collection and subsequent payment of the ITBMS (VAT.
(v) Dividend, Complementary and Branch Tax – It is established that companies holding an EMMA License will be exempt from payment of Dividend Tax, Complementary Tax and Tax on Branches.
(vi) Operation Notice Tax – Companies that operate under an EMMA License will not have to obtain a Notice of Operation, and therefore will not be required to pay the Tax on Notice of Operation.
(vii) Foreign Remittance Tax – Companies located in the Republic of Panama that benefit from a service or act performed by an EMMA company, must retain 5% of the amount to be paid to the EMMA company-
(viii) Capital Gain Tax – The gains obtained as a result of the sale of shares or securities issued by companies with an EMMA license will be subject to a capital gain tax of two percent (2%).
(x) Legal Stability of Investments – Any company registered under the EMMA regime will automatically obtain legal stability in tax and municipal matters for a period of ten (10) years, which will allow it to ensure all the rights and benefits granted at the time of its registration, in accordance with Law 54/ 1998.
(xi) Transfer Pricing Rules – Regarding Transfer Pricing, it is established that companies holding an EMMA license will be subject to said regime, forcing them to establish their operations with related parties according to the Principle of Full Competition or “Arm’s Length Principle”.
C. Migration and Employment Considerations
(i) Foreign Personnel Visa
Foreign personnel working for the EMMA company could request two immigration categories:
- EMMA Permanent Personnel Visa: Foreigners who work at the EMMA at the executive level. This visa will also cover the dependents of the visa holder. This visa is granted a period of five (5) years extendable for the same time. Employees with this type of visa may choose to obtain permanent resident status in Panama at the expiration of the five-year term. In that case, they would be subject to income tax and other contributions such as Social Security and Educational Insurance fees.
- EMMA Temporary Personnel Visa: Foreigners who provide technical services and training to the EMMA company. This visa is granted for a period of two (2) years, extendable.
(ii) Employee Hiring Regulations
Companies covered by the EMMA License, may hire trusted foreign workers to occupy positions of managers of high and medium levels, as well as temporary personnel required for their operation. In this sense, it is considered that these employees fall under the provisions of the Panama Labor Code regarding to companies whose transactions take effect abroad. This implies that the maximum percentage of ten percent (10%) of foreign workers is not applicable to the company, as established in said Code.
(iii) Applicable Employment Legislation
For the purposes of this law, the employment contracts of employees holding an EMMA Permanent or Temporary Personnel Visa will be subject to the regulations of the Labor Code. In that sense, the limit of weekly hours worked, paid vacations, thirteenth month, seniority premium, and the severance fund must be met.
The BusinessPanama Group provides a convenient One Stop Shop offering the following services –
- Setting up a company or branch
- Locating office and living premises in Panama City for the company and its executives
- Legal services for setting up all operations, contracts, permits, etc.
- Accessing special tax incentives
- Applying for visas, work and residence permits
- Relocation services
For more information, please contact us.