Corporate Tax News Issue 57 - January 2021

New substance requirements for multinational headquarters regime

The Multinational Headquarters Regime (also known as the SEM Regime, as per its acronym in Spanish), provides an array of benefits to multinational enterprises willing to set up and operate a regional headquarters office in Panama that will solely provide services to its related group subsidiaries and affiliates. Available tax, migratory and labour benefits will only be applicable to certain activities specified by Law No. 41 of 2007.

Because of these benefits, the SEM regime - as well as other Panamanian preferential regimes - were under the spotlight of the Forum of the Harmful Tax Practices (FHTP) preferential tax regimes review. As Panama became a signatory of the BEPS Inclusive Framework, local regulations were amended to comply with the requested minimum standards, including the principle of economic substance. Several amendments have been made to the SEM regime, but in this article we focus on the latest amendments regarding new substance requirements. 

Economic substance requirements

Prior to establishing the substance requirements, the terms “principal or primary activities” and “secondary activities” are defined, to determine how substance requirements must be met. Primary activities are defined as activities directly associated with the generation of income of the SEM entity, whereas the secondary activity is not directly associated to the generation of income of the SEM entity. The main or principal activity must be one or several activities specified under Law No. 41 of 2007.

The substance requirements will apply so long as the SEM entity wishes to obtain the tax, migratory and labour benefits of the regime. The entity must:

  • Carry out its principal activity or activities within the Panamanian territory,
  • Maintain an adequate number of employees,
  • Incur an adequate amount of operational expenses to carry out the principal activities, and
  • File annual reports to the SEM Commission of the Ministry of Industry and Commerce.

Because the term “adequate” is vague and subjective for each enterprise, it has been defined in the law as “whatever is suitable, appropriate and sufficient for the execution of the principal activity or activities, as per the characteristics of the enterprise and the nature of the business”. Therefore, the exact number of employees and amount of operational expenses will vary between each SEM entity.

Annual reports

Since the beginning of the SEM regime, an annual report   has been an obligatory requirement for SEM entities. Before the amendments, SEM entities provided very basic information about the operation of the company; however, substantial and detailed information must now be provided, as well as supporting documentation:

  • Financial audited statements of the SEM entity
  • Affidavits by the legal representative and CPA signing the CIT return, with detailed information such as:
    • Details of the principal and secondary activities that were carried out by the SEM entity,
    • Income generated by the activities that were carried out, including gross income, direct and indirect costs, and net income,
    • External third parties, if any of the principal activities were outsourced,
    • Investments made in Panama during the fiscal year,
    • Details of activities with technology or education know-how carried out during the fiscal year,
    • Other: the SEM Commission may request any other information or documents deemed to be necessary.

Filing dates

The annual report must be filed to the SEM Commission within six months after the end of the entity´s fiscal year, i.e. by 30 June of each year. If the entity has a special fiscal year, then the report must be filed six months after the end of the entity´s fiscal year.

For this first year where the amendments have been introduced, the SEM Commission has established two different filing dates, according to the date the SEM entity obtained its licence:

  • If the licence was obtained on or before 17 October 2017, the report must be filed by 30 June 2021 (with the entity´s information for the fiscal year 2020).
  • If the licence was obtained after 17 October 2017, the report must be filed by 31 December 2020 (with the entity´s information for the fiscal year 2019)[1].

The SEM Commission must issue a resolution stating that the SEM entity has complied with the filing of the annual report within a period of six months, which will also be sent to the General Directorate of Revenues in order to apply the tax benefits of the SEM regime.

Non-compliance and penalties

If a SEM entity fails to file the annual report on time, the SEM Commission will issue a resolution within a period of 30 days, declaring the entity´s non-compliance, that will serve as a written warning.

Not filing the annual report will be considered a minor infraction that will be punished with a penalty of between USD 5,000 and USD 50,000. Filing the report with incomplete information, or not providing any additional information or documents requested by the SEM Commission, are also considered minor infractions.

The SEM Commission may also charge a major infraction penalty of between USD 50,000 and USD 100,000 if the SEM entity has received a total of three written warnings, repeatedly incurs minor infractions, keeps employees without proper labour visas, or has foreign employees that are not effectively working for the SEM entity.

Repeatedly incurring major infractions will cause the cancellation of the SEM license.


As onerous as they may seem for SEM companies, these requirements seek to maintain the regime´s benefits that will keep Panama as a competitive and attractive country for multinational enterprises to establish themselves. Entities with a SEM license must thoroughly review their activities and operations to comply with the new substance requirements.

Rafael Rivera

Lilia Isabel Lee


[1] If the SEM entity´s audited financial statements are not ready by 31 December 2020, the SEM entity must inform the SEM Commission via email before the submission date.