On July 24, 2018, Panama issued Draft Bill No. 657, proposed by the Minister of Commerce and Industries, to modify Law 41 of August 24, 2007 (“Law 41”) which created the Special Regime for the Establishment and Operation of Headquarters of Multinational Companies. See BEPS Action 5. This bill follows the Cabinet Resolution No. 38 on June 26, 2018, during which the Minister of Commerce and Industries presented the bill.
Some of the amendments to Law 41 include the following:
Amended Article 12 of Law 41
The Licenses Commission of Multinational Company Headquarters will establish the requirements to obtain a Multinational Company Headquarters License (“License”). The requirements will include specifics regarding the multinational’s assets, its locations or headquarters, its activities or commercial operations, the quotation of shares in the local or international stock exchange, the minimum number of full-time employees (must be at least five) and its annual operating expenses incurred in Panama (minimum must be at least PAB 500,000).
Amended Article 21 of Law 41
Companies holding a License must pay a 5% income tax in Panama on the net taxable income derived from the services rendered. These services include technical or financial assistance to companies in the group.
The entities that hold a License must report income attributable to specific activities in the Income Tax Statement. Allocation of income should follow the arm’s length principle (i.e., functions performed, assets used, risks assumed). Corresponding costs and deductions will apply, and the net income will be subject to tax.
Current Article 21 allows an exemption from income tax, for companies that hold a License, for services provided to foreign entities, which do not generate taxable income in Panama.
The term for companies that currently hold a License will expire on June 30, 2021, after which, these companies will be subject to the amended version of Law 41 (e.g., taxed at 5%). According to the BEPS Action 5 final report, jurisdictions are permitted to introduce grandfathering rules allowing taxpayers benefiting from an existing regime to keep certain benefits until June 30, 2021. After that date, taxpayers cannot benefit from the old regime.
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