Keys to effectively complying with the SEM regime in Panama and post-submission review to avoid surprises.
Panama requires companies under the SEM (Multinational Enterprise Headquarters) Regime to demonstrate, annually, that their operations have real economic content in the country. This entails demonstrating the execution of activities, having qualified personnel, maintaining adequate physical presence, and generating expenses proportional to their income.
From experience, having provided numerous consultations on the preparation of SEM Substance Reports, which pose several common technical challenges for many companies in the regime, we are able to share key insights for properly complying with the substance requirements:
1. License vs. operational reality: substance prevails.
Sometimes, a company keeps an activity listed on its SEM license that it no longer carries out operationally. This can happen even if the formal elimination of that activity before the Technical Secretariat occurs months after the fiscal year-end.
➡ Key point: If an activity was not carried out during the reporting period, it should not be included in the report, even if it is still listed on the license. What is reported is the economic reality, not the authorization history. A clarification note can strengthen this position and avoid observations by the authority.
2. Is it valid to operate with only one person?
Some SEM offices maintain very lean structures, operating with a single foreign employee and without local staff or subcontracting. Although this is legally possible, it must be carefully justified in the report.
➡ Recommendation: Explain why additional staffing is not required, based on the limited and specialized nature of the activities. Including contracts, detailed functions, reports, and evidence of compliance demonstrates that the appropriate level of substance required by Executive Decree 241 of 2020 has been met.
3. Operating expenses: beyond the amount.
Expenses must be aligned with the services provided, both in volume and concept. It’s not just a matter of meeting an arbitrary amount; rather, it’s about ensuring that expenses are properly supported and consistent with the declared activity.
➡ Suggested actions:
- Classify and document each expense (fees, rent, travel, training, etc.).
- Keep contracts, invoices, and withholding records.
- Ensure that expenses respond to substantive functions, not just administrative ones.
4. Outsourcing: If not applicable, please explain.
If there are no subcontracted services, it is important to specifically mark this in the report and add a brief note justifying this absence.
➡ Example:
“There is no subcontracted personnel, since the activities have been carried out directly by personnel authorized under the SEM license.”
This type of advance declaration reduces the risk of subsequent observations or requirements.
5. Other elements that strengthen the report.
- Health insurance: Be sure to include the current policy for foreign personnel, indicating the coverage and whether or not there are dependents.
- CSR and technology: Although not mandatory, participation in local activities or academic alliances conveys commitment to the country.
- Institutional Access: Facilitating advisors’ access to the InfoSEM and e-Tax portals improve reporting control and consistency with other official records.
Conclusion
Preparing an SEM report should not be limited to filling out a form; it should be the result of a well-documented strategy that reflects actual operations and meets regulatory requirements. Under the SEM Regime, transparency and substance are the foundation for maintaining tax benefits and avoiding the risk of revocation or sanctions.
Are you part of the SEM regime and have questions about whether your company meets the substance requirements? Do you need a Post-Submission Review to avoid surprises?
Write to us. We can help you evaluate, draft, and secure your report with a solid technical and regulatory foundation.
jmitre@abel-cubas
www.ccpf.com.pa
WhatsApp: 6294-0626