PANAMA UPDATE – Legislation Creates Incentives for Multinationals to Establish Headquarters in Panama

Executive Summary:

The MHQ laws create a comprehensive scheme for multinational corporations seeking to establish a global or regional headquarter in Panama.  Multinational corporations are now opting to setup operations in Panama as a staging point for pursuing their pan-LatAm strategies (Panama playing a similar role to Singapore and Hong Kong in the Asian market).


In a concerted effort to promote the country’s long-term growth prospects, the Panamanian legislature enacted Law No. 41 of 2007, as amended by Law No. 45 of 2012  (the “MHQ laws”), which created a comprehensive scheme for multinational corporations (including its subsidiaries and/or affiliates, a “Multinational”) seeking to establish a regional headquarter in Panama (“Multinational Headquarters” or “MHQs”).  The MHQ laws seek to promote the establishment of MHQs by (i) providing MHQs and employees with considerable regulatory, labor, fiscal and tax benefits (vis-à-vis other foreign entities operating in Panama under different regulatory schemes) and (ii) streamlining the application process by centralizing and standardizing the various procedures (e.g., immigration, work permits, etc.) within a single department at the Ministry of Commerce and Industry.  Since its enactment, more than sixty Multinationals have set up an MHQ in Panama, including (but not limited to) Procter & Gamble, Dell, Caterpillar, Nestle, VF Corporation and Maersk.

Benefitting from LatAm’s most interconnected air and maritime hubs, Multinationals have successfully leveraged Panama’s infrastructure to improve upon the execution of their LatAm strategies.  From an M&A perspective, LatAm offers very attractive opportunities for both developed and emerging markets alike looking to engage in strategic acquisitions (e.g., with a view to secure key natural resources and/or to open new markets).  For example, in 2010, Chinese foreign investment in LatAm surged to approximately US$11 billion (a 44% year-over-year increase).  Beyond just focusing on mining and resources, Chinese companies are looking to increase their investments in LatAm in a broad swath of industries, including infrastructure, manufacturing, agribusiness and forestry.  In addition to Chinese companies, Multinationals from around the world are opting to setup operations in Panama as a staging point for pursuing their pan-LatAm strategies (Panama playing a similar role to Singapore and Hong Kong in the Asian market).


The MHQ laws provide considerable fiscal and tax benefits for MHQs and their personnel.  At the MHQ level, any income generated from its international operations (i.e., ex-Panama) is tax exempt.   Panama has a territorial tax system, and as such, MHQs are permitted to breakout their IBT[1] (i.e., into Panama and Global ex-Panama) and pay local income taxes only on their locally generated portion of IBT, if any.  Furthermore, the most recent amendments to the MHQ laws have further strengthened this “ecosystem” by allowing MHQs to provide services to any entity, whether foreign or domestic, that does not generate Panama sourced income without forgoing the income tax exemption for revenues generated from said activities.

The MHQ laws also provide MHQs with a value added tax exemption (Impuesto de Transferencia de Bienes Corporales Muebles y la Prestación de Servicios or ITBMS) for services rendered abroad.  For example, services rendered by an MHQ to any of the Multinational’s subsidiaries and/or affiliates operating abroad are exempt from the 7% value-added tax.  Services rendered by an MHQ locally however, continue to be subject to the 7% value-added tax.  Furthermore, MHQs may transact amongst themselves within Panama without forgoing the value added tax exemption for revenues generated from said activities.  Lastly, MHQs are also exempt from paying dividend tax.

In terms of human resources benefits, another very important advantage for MHQs (vis-à-vis other foreign entities operating in Panama under a different regulatory scheme) is that they are exempt from the Panamanian legislation that imposes strict local-to-foreign personnel ratios.  By law, unless there is specific legislation to the contrary, any and all entities operating in Panama may only have up to 10% of their work force consist of foreign personnel.  Duly licensed MHQs however, have considerable flexibility when it comes to hiring foreigners.

The MHQ laws also provide foreign executives and middle management working in Panama (“Foreign Executives”) with several benefits as well.   For example, salaries paid to Foreign Executives from any of the Multinational’s offices abroad are exempt from income tax.  Furthermore, Foreign Executives may import certain household items into Panama without having to pay any import taxes.[2] Also, any and all foreign personnel working for an MHQ in Panama are exempt from paying social security contributions in Panama.[3]

Regarding immigration issues, MHQs can now conduct immigration procedures directly through the Ministry of Commerce and Industry (eliminating the need to transact these procedures separately at the Immigration Bureau).  Pursuant to the MHQ laws, the following new visa categories were created for MHQ personnel: (i) visas for permanent MHQ personnel;[4](ii) visas for temporary MHQ personnel;[5](iii) visas for dependents of permanent MHQ personnel;[6]and (iv) visas for MHQ personnel attending to a special event.[7] MHQ personnel may also opt for permanent residency after having had a valid MHQ visa for a period of five consecutive years.


In order for an operation/office to qualify as an MHQ under the MHQ laws, an MHQ is required to provide “services” to its global or regional headquarters, subsidiaries and/or affiliates from its operation/office in Panama.  For the purposes of the MHQ laws, the term “services” includes (but is not limited to) the following: (i) administration and/or management of a Multinational’s operations; (ii) management of a Multinational’s logistics and/or warehousing; (iii) provision of technical assistance to a Multinational and/or its customers; and (iv) providing financial management, accounting, consulting, and/or such other analogous service to a Multinational.

MHQs can be established through any of the following bodies corporate: (i) a foreign body corporate (i.e., the holding company and/or a subsidiary of a Multinational) duly registered with the Public Registry of Panama, and/or (ii) a Panamanian body corporate owned by a Multinational.

To obtain an MHQ license from the Ministry of Commerce and Industry, a Multinational must submit an application to the License Commission of Multinational Headquarters (the “Licensing Commission”).   The list of documents requested by the Licensing Commission as part of the application includes (but is not limited to) the following:  (i) the incorporation documents of the applicant; (ii) the audited, consolidated financial statements of the Multinational, which must evidence assets equal to or in excess of US$200 million; (iii) a reference letter from a reputable bank; (iv) an estimate of the initial investment to be made by a Multinational to start-up the MHQ; and (v) a list of such Foreign Executives that will occupy executive and/or middle management positions at the MHQ.  All documentation filed with the Licensing Commission must be translated into Spanish by a certified public translator and legalized and/or apostilled by the competent authorities.  The application process generally takes approximately thirty working days (i.e., calculated as the date the completed application is filed with the Licensing Commission).



[1]Income before taxes

[2]Foreign executives may only avail themselves of this exemption for goods imported in connection to their initial relocation to Panama.  Nevertheless, foreign executives are allowed to import one car into Panama tax free every two years.

[3]This exemption is contingent on said employees (i) refraining from applying for permanent residency in Panama, and (ii) maintaining medical insurance throughout their entire stay in Panama.

[4]These visas are issued for a period of five years to Foreign Executives.  These visas can be renewed multiple times for an additional five year period.  Holders of this visa category are not required to obtain a separate labor permit in order to lawfully work in Panama.

[5]These visas are issued for a period of three months to any MHQ personnel.  Holders of this visa category are not required to obtain a separate labor permit in order to lawfully work in Panama.

[6]Their spouse and/or partner of over five years, underage children, dependent children under the age of twenty five studying in Panama, and their parents are eligible for this visa category.  These visas may be issued for a period of up to five years, and may be renewable depending on the duration of the applicable Foreign Executive’s visa.

[7]These visas are issued to MHQ personnel travelling to Panama on a temporary basis to attend a specific event (e.g., meeting, technical training program, etc.).  The length of these visas is determined on a case by case basis.