Alvaro E. Tomas and Carlos Ernesto Gonzalez Ramirez, partners, Morgan & Morgan
What has made corporate stalwarts such as Maersk (shipping), Procter & Gamble (consumer goods), LG (electronics), Caterpillar (construction equipment), CEMEX (construction materials) , Nike (sports equipment and apparel) and Heineken (breweries), just to name a few, choose to establish their headquarters in this small country with a population of merely 4 million? The answer lies in great part in the vision of a well-known lawyer who, given all the benefits Panama already afforded foreign companies, decided to take it to a whole new level.
We all know that Panama has a privileged geographical position, nestled between the two America’s and a stone’s throw away from the Caribbean. Almost 6% percent of the entire world’s trade goes thru the Panama Canal. We know that it uses the US Dollar as currency, has a solid and competitive financial center, an enviable port and logistics system, the second largest free zone in the world, a service based economy and the region’s best airport and cargo facilities. Moreover, it enjoys a good climate the whole year round, its tourism industry is growing at breathtaking speed, its is free of natural disasters, its capital -Panama City- is filled with world class hotels and restaurants and the political and social stability of a democratic country.
The person who fathered this law, Dr. Eduardo Morgan González, states “the sole purpose of this law was to introduce special legislation to attract and promote investment, create jobs and transfer knowledge and technology, in the process making the Republic of Panama more competitive in the global economy by optimal use of its geographical position, physical infrastructure and international services.”
For a better understanding of the benefits that Law no. 41 of August 24, 2007 may offer corporate clients searching for a place to establish their base of operations for Latin America, we summarize the most important aspects of said piece of legislation:
Definition of Multinational Headquarter (MHQ)
A global or regional headquarter is defined as a legal entity that provides services of the following nature or any combination thereof:
- Management and/or administration of companies belonging to an economic or corporate group in a specific geographic area or globally, including strategic planning, business development, managing and/or training of personnel, operation, control and/or logistics.
- Logistics and/or warehousing of components or parts required for the manufacturing or assembling of any products manufactured by the company.
- Technical assistance to companies of an economic or corporate group or to customers having acquired products or services from any such companies, for which the latter shall be under the obligation to provide support services.
- Financial management, including treasury services, of an economic or corporate group.
- Accounting for an economic or corporate group.
- Drawing plans as part of designs and/or construction works, in the normal course of business of the headquarters or any subsidiaries thereof.
- Electronic processing of any activity, including the consolidation of operations of an economic or corporate group. This service includes network operations.
- Consulting, coordinating and monitoring marketing and advertising strategies for goods or services produced by an economic or corporate group.
- Support of operations and research and development of products and services of an economic or corporate group.
- Any other analogous service previously approved by Cabinet.
The MHQ group capital must be equal or more than US$200 million.
Law No. 41 provides for several tax benefits, both at corporate and personal level (for management).
At corporate level, tax incentives are:
- Total exemption on Income Taxes. Since Panama has a territorial tax system, and since the MHQ will be operating offshore (providing services to its operations outside Panama), there is no taxable income. Given the case that the MHQ provides service to a local operation, such local operation will have to be provided through a separate legal entity (another company), and any transfers of funds from that entity to the MHQ will have to retain 12.5% as income tax.
- Possibility of negotiating a tax scheme. A MHQ will not pay taxes in Panama, but if for reasons of global tax planning it wants to pay taxes, it can do so through an agreement with the local tax authorities. This agreement can include the tax rate, and any other provision that the MHQ deems necessary, provided that such provision is not against Panamanian public policy or morals.
- Exemption from sales tax for services rendered to relate corporations abroad. MHQ invoicing to offshore operations are not subject to the 7% sales tax.
- It is important to point out that exemptions from these taxes do not include exception from filing tax information with tax authorities.
Foreign personnel of the company with a Multinational Headquarters License that is covered by a Permanent Employee Visa for a Multinational Headquarters Company (“Visa de Personal Permanente de Sede de Empresa Multinacional”) will not generate income taxes if payment is received from abroad. They are also exempted from Social Security contributions. However, for these employees and their dependents the company must provide private health insurance, which must be issued by an insurance company with license in the Republic of Panama.
Additionally, holders of a Permanent Employee Visa for a MHQ may import their household goods free of import tax and may import a vehicle for its family use every 2 years. However, sales taxes must be paid.
These tax exonerations will not apply to Panamanian employees or other foreign employees that are the holders of a visa different than a Permanent Employee Visa for a MHQ, which will be subject to the tax norms and provisions in force in the Republic of Panama.
Please note that Law No. 41 creates three (3) visas specifically for foreign employees of the MHQ. These visas are processed before the Ministry of Trade and Industry. These visas are:
- Special Visas for Permanent Personnel of MHQ. These visas are issued to foreign personnel at a managerial or executive level, and to their dependants. The visas will be issued for a 5 year period.
- Special Visas for Temporary Personnel of MHQ. These visas are issued to any personnel of a MHQ that has to come to Panama for activities related to the MHQ. It has a maximum duration of 3 months. This type of visa also eliminates the requirement of obtaining a working permit or any other permit from any governmental authority.
- Special visas (permits) for special events. These visas are to be issued to personnel of the MHQ that come to Panama to attend a specific event. These visas are only for MHQ personnel that hold a nationality which requires a visa to enter the country. All other personnel will not need to apply for this visa if coming only for a specific event or short visits, such as meetings, planning, technical training, etc.
Please note that the Permanent Employee Visa for a MHQ shall be given for a term that may not be longer than the term established in the employment contract, which shall in no case be longer than five (5) years. Holders of these types of visas will not be required to obtain a work permit (usually required for all other types of visas).
Labor regulation incentives
Law No. 41 exempts MHQ from the application of labor quotas, in the case of holders of Special Permanent or Temporal Permits for Permanent or Temporal Personnel of MHQ. These means that the proportion of 10% foreigners to 90% Panamanians required by the Labor Code, does not apply when foreigners working with the MHQ are holders of these Special Residence Permits.
In order to benefit from all of these incentives, a MHQ will have to apply for a license before the Licensing Commission for Multinational Headquarters.
As a final note, special areas in and around Panama City are being developed with modern infrastructure, logistical systems, communications, schools and housing to cater to the amount of executives and personnel of MHQ that are moving to live in Panama.
By: Amanda Barraza de Wong, Associate, Tax Law
With Panama being a jurisdiction whose tax system is based on the Principle of Territoriality, and whose economy revolves around financial, legal and logistic services… what policy should it have with regards to foreign capital? Certainly a policy for attracting direct foreign investment. Capital that provides financing for development itself. And that capital does not arrive alone; it is accompanied by natural or legal persons, which motivates the analysis of whether to consider them tax residents or not.
In Panama, we have specific criteria to determine after a study of each particular case, whether a natural or legal person can be considered a tax resident under the provisions of both the Tax Code and the Treaties to Avoid Double Taxation in force.
Tax residence certificate
The residential tax certificate is the document that accredits a person, being a natural or legal person, his/her tax residence in our country and it is only issued by the General Directorate of Revenues (DGI) based on article 762-N of the Tax Code, Executive Decree 958 of 2013 and regulatory resolutions.
The basic requirements established by the DGI for the issuance of the Tax Residence Certificate in the Republic of Panama are the following, in addition to the criteria that underlie the analysis:
- Petition addressed to the DGI containing:
- Clear and express identification of the applicant.
- Specification of the tax treaty or agreement to which it wishes to be allocated, when applicable.
- Original Public Registry Certificate, in the case of legal persons.
- Copy of identity card or passport of the applicant or the Legal Representative.
- Power of attorney, in case of legal persons.
- Other relevant evidence.
Since the fiscal year 2010, there have been several regulations issued on this concept; it is a topic that has been developed particularly over time and we believe that it will continue to evolve.
By: Ricardo Alemán, partner, Morgan & Morgan
The International Labor Organization (ILO) defines sexual harassment as “any conduct of unwanted sexual nature that, according to the reasonable perception of the recipient, interferes with their work, is established as a condition of employment or creates an intimidating hostile or offensive work environment.”
As the jurist Oscar Vargas Velarde points out in his work on Labor Law, jurisprudence in the United States indicates that sexual harassment can also occur in two aspects:
- First: the “quid pro quo”, in which some type of reward is offered (promotion, salary raise, etc.) in return for sexual favors. It is direct harassment and the determining factor is that the conduct is unwelcome by the person to whom the conduct is directed.
- Second: the hostile work environment, in which sexual harassment is sufficiently severe or pervasive enough to alter the victim’s employment conditions and foster an abusive work environment.
Types of Sexual Harassment
Taking into consideration the definitions and criteria of the various courts, Panamanians and foreigners, we can determine the existence of at least three types of sexual harassment, namely:
- Harassment or persecution between co-workers, of the opposite sex or of the same sex, for eminently sexual purposes.
- The intimidation or harassment of a boss towards a subordinate, including under promises of salary or position improvements or threats of sanctions or dismissal also for sexual purposes.
- Work environment harassment, which is unwelcome sexual incitements or solicitations, with the purpose or effect of coercing in an unjustified manner a person’s work performance or creating an offensive, hostile, intimidating or abusive work environment to achieve that the worker leaves the job. This discomfort may be manifested through the display of pornographic material, such as magazines, photographs, mail or other means.
As noted, these conducts can be of varied nature, such as requirements, propositions, jokes, teasing, and display of posters or photos with sexist remarks, from physical behaviors or unwanted contact that can be vexatious for the victim, until it becomes assault or sexual assault.
Many victims of sexual harassment accept this situation and do not report it because they fear losing their jobs and, also, for fear of not being taken seriously since most of the time they do not have evidence to prove the harassment and, thus, it would be one’s person word against another one. Although the victims of sexual harassment are mostly women, men also suffer from them, especially in today’s world where more and more women occupy more important or higher-ranking roles within companies.
What does Panamanian legislation say for companies?
The Republic of Panama approved Law 7 of February 14, 2018, which adopts measures to prevent, prohibit and punish discriminatory acts and dictates other provisions. The provisions of the Law are of public order and bind all those who are in the national territory.
This law prohibits and establishes responsibility for all acts of violence that threaten the honor, dignity, physical and psychological integrity of the people. It also defines “harassment, sexual or moral harassment”, as the systematic or continuous action or omission or eventual repetition, in which a person insinuates, invites, requests, pursues, limits or restricts rights, diminishes freedom, acts disrespectfully or offensively, humiliates others in order to obtain some sexual retribution or affects the dignity of the other person.
In the workplace, it includes, but is not limited to, exploitation, the refusal to give the victim the same employment opportunities, not applying the same selection criteria, not respecting the permanence or general conditions of work or discrediting the work accomplished.
It defines “racism”, as a conception that starts from a superiority of certain races or race over others, and “sexism”, as the attitude or action that undervalues, excludes, over presents and stereotypes people by their sex.
Obligations of the employer according to the new Law
Every employer shall have the responsibility to establish an internal policy, through orientation programs and included in the internal regulations or collective agreements, that prevents, avoids, discourages and sanctions the acts of harassment, sexual or moral harassment, racism and sexism.
Failure to comply with the measures ordered by the employers entails a fine of B/.550.00 to B/.1,000.00, imposed by the jurisdictional labor authority, each time a case is sanctioned for any of the conducts provided in the law.
The Ministry of Labor and the hierarchical superiors in the private company are the entities in charge of ensuring compliance with the Law, when the responsibility for establishing the policy against the described conducts is borne by the employer.
What should the affected employee do?
An employee who feels sexually harassed or persecuted should inform their superior or the corresponding department what is occurring and provide evidence, if available, to allow the employer to conduct the corresponding investigation, which allows him/her to dismiss the harasser on justified grounds. Likewise, the employee harassed by a superior, for sexual purposes, can resign from employment on justified grounds, and by proving what has been reported, the employee shall be entitled to payment of the compensation provided for in the Labor Code, in cases of dismissals with cause justified.
The procedure to investigate and resolve cases of harassment, sexual or moral harassment, racism and sexism shall be expeditious, effective and confidential and in no case may exceed the period of three months, counted from the filing of the complaint.
Whenever a case of harassment, sexual or moral harassment, racism and sexism is reported, companies must prepare a written report thereof, which shall contain the details of the investigation, allegations and testimonies and other elements of evidence.
Whoever falsely denounces any conducts sanctioned in the Law shall commit the offense of criminal simulation, according to the Criminal Code.
Effects of the law in the education sector
The regulations set forth in Law 7 of February 14, 2018 also apply to students of educational and teaching centers, both official and private within the Republic of Panama.
It defines harassment, sexual or moral harassment, such as threats, intimidation, humiliation, mocking, physical abuse and discrimination against people with disabilities or any type of discrimination based or not on the sex of the victim.
It also defines racism as the conception that starts from a superiority of certain races or races over others, based on a supposed biological purity that must be translated into advantages for the superior race, or in the recognition of its dominion over others or others that are eventually discriminated against and treated unworthily.
On the other hand, sexism is defined as the attitude or action that undervalues, excludes, over represents and stereotyped people by sex.
Obligations of educational entities
Every official or private school shall have the responsibility to establish an internal policy that prevents, avoids, discourages and punishes acts of harassment, sexual or moral harassment, racism and sexism. Consequently, they should:
- Implement counseling, guidance and promotion programs on the prohibition of conducts provided by law.
- Establish, through internal work regulations or orders of management, a complaint and resolution procedure, adequate and effective, to enable the submission of complaints for such conducts. This procedure must establish adequate internal policies as established in this law providing confidentiality, protection to the claimant and witnesses, as well as an exemplary sanction for those engaging in the described conduct. Said procedure may not exceed a period of three months to be established.
Non-compliance with the measures set forth in the law by employers, hierarchical superiors of the victim in educational centers shall be sanctioned with a fine of B/.500.00 to B/.1,000.00.
Article published in the Tax Column of the newspaper La Prensa (April 15, 2018)
The National Assembly approved a bill that will allow individual guardians and taxpayers to deduct education expenses incurred with respect to their minor dependent or dependents, which includes (but not limited to as we understand) enrollment and school fees, as well as school supplies, school uniforms and school transport, related to the first level of education or general basic education and the second level of education or secondary education in public and private schools.
To read the full article click here
Article published in the Tax Column of the newspaper La Prensa (April 1, 2018)
Someone once told me: “well-made rules subsist over time.” On the 7th of May, Cabinet Decree 109/1970 and its amendments, which regulate the Directorate General of Revenue (DGI), will celebrate 48 years since its approval.
To read the full article click here here.
Partners Francisco Arias and Ricardo Arias, and associate Cristina de Roux contributed with the Panama chapter of Chambers & Partners Securitization Guide 2018.
In this edition, attorneys from eighteen countries summarized the key aspects and developments in each one of their jurisdictions, including Panama, where the activity in the securities sector has been performed in recent years as an alternative form of financing.
The complete guide is available here.
Partner Inocencio Galindo and senior associate Aristides Anguizola contributed with the Panama chapter of Chambers & Partners Mining Guide 2018. In this edition, expert attorneys in the mining sector summarized the key aspects and developments in fourteen jurisdictions.
The complete guide is available here
Article published in the Tax Column of the newspaper La Prensa (March 4, 2018)
Act 51 of 2013 granted the opportunity to regularize the taxes administered by the National Revenue Authority (ANIP, known today as Directorate General of Revenues -DGI-) in favor of taxpayers for the payment of their taxes on undeclared income in the correct manner, regardless of whether there was fault or willful misconduct, and until the 2011 fiscal period.
To read the full article click here.
Article published in the Tax Column of the newspaper La Prensa (February 18, 2018)
The changes introduced by Act 66 of October 17, 2017 (Act 66/2017), brings with it a new concept and alternative to the procedure on the part of the taxpayers, which is the right to adopt or not to the regime of family tax patrimony (PFT) or main dwelling (VP).
To read the full article click here.
Partner Jose Carrizo and senior associate Aristides Anguizola contributed with the Panama chapter of Chambers & Partners Insolvency Guide 2018. In this edition, attorneys from 27 countries summarized about the trends, rules, regulatory issues, among others, in this matter for each of their jurisdictions.
The complete guide is available here.