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Panama Introduces Special Regime for Manufacturing Service Companies

Panama has published Law No. 159 of 31 August 2020, which provides for the introduction of a new special regime for manufacturing services to attract investment by manufacturing multinationals, the Special Regime for the Establishment and Operation of Multinational Enterprises that Render Manufacturing Services (Régimen Especial para el Establecimiento y la Operación de Empresas Multinacionales para la Prestación de Servicios Relacionados con la Manufactura - EMMA).

The regime is available for Panama companies and branches in Panama of foreign companies and requires an application to obtain an EMMA license. Companies licensed under the Multinational Enterprises Headquarters regime (Sedes de Empresas Multinacionales - SEM) are also able to benefit from the EMMA regime. Regulations setting out the exact eligibility requirements are to be issued in the near future.

The qualifying activities of EMMA companies are limited to the provision of services to companies in their MNE group and not to end customers. Qualifying activities include:

  • Manufacturing, assembly, maintenance, remanufacturing, and conditioning of products, machinery, and equipment;
  • R&D or innovation of existing products or processes, analysis, laboratory, tests, or others related to manufacturing;
  • Analysis, laboratory, testing, or other services related to the provision of services related to manufacturing; and
  • Logistics services, storage, deployment, and distribution center services for components or parts required for the provision of services related to manufacturing.

Benefits for EMMA companies include:

  • a reduced income tax rate of 5% on net taxable income from the provision of manufacturing services (payments by local taxpayers for services in relation to Panama-source income subject to 5% withholding);
  • a reduced capital gains tax rate of 2% on the sale of EMMA company shares;
  • an exemption from VAT (ITBMS) for services provided to subsidiaries that do not generate taxable income in Panama;
  • an exemption from VAT (ITBMS) on the purchase and import of goods and services;
  • an exemption from all types of import duties, taxes, and fees on products, goods, and equipment required for the execution of services; and
  • an exemption from dividends tax, and complementary tax, and business license tax.

EMMA companies are also allowed a credit for income tax effectively paid abroad on taxable income generated in Panama for the provision of services to non-residents and for tax withheld by local taxpayers. However, the income tax paid in Panama must amount to at least 2% of the net taxable income generated in Panama, and any excess credits remaining may not be carried forward or refunded.

Law No. 159 was published in the Official Gazette on 1 September and enters into force three months after the publication date, i.e., 1 December 2020.

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