PANAMANIAN FOUNDATIONS: 
A KEY TO PRIVACY AND PROTECTION

 

 

Those interested in Panamanian foundations have many questions, but I have found that what most people first want to know is:  What’s the difference between a trust and a Panamanian foundation?  Very little, is the simple reply, and although this article is only a general outline of the subject and is not intended to substitute for a detailed analysis of the Private Interest Foundation legislation created under Law Number 25 of 1995 in Panama, it will give the reader a broad picture which will provide an overall view of this useful addition to Panama’s slate of offshore financial services products. 

 

The definition of the Panamanian foundation can be elusive and it has been viewed as an incorporated company without participating members but still having limited liability.  It can be argued also that it acts like a trust but operates like a company because it is, in essence, a company with beneficiaries instead of shareholders. The foundation can be created by one or more individuals and it can also be formed by a company or other legal entity.  Although the foundation must have a name, it is not necessary for the party or parties creating it to be recorded in the foundation charter as the founder or founders because a nominee can be used.  In this way complete confidentiality can be achieved.  The confidentiality provisions of the local law require both professionals and public servants not to divulge information to unauthorised third parties, except that disclosure will be sanctioned in the case of defined crimes.  Unauthorised disclosure can result in a fine and imprisonment. 

 

Foundations in Europe have been used for over 100 years and it is fair to say that the law governing Panamanian foundations is based on Liechtenstein law so the nature of the Panamanian foundation is understood and appreciated by many Europeans.  Foundations in Panama, as in Europe, are ideal succession tools, and they can either be inter vivos (active during the client’s lifetime) or testamentary (upon death) but they may not engage in general commercial activities, unlike a trust.  Although the Panamanian foundation cannot be established for purposes of commercial profit, it can own assets (such as active companies) which do generate profits.  It is best to regard it both as a receptacle for the assets of the offshore structure and the means by which beneficial ownership of those assets is determined.  The foundation can serve as a substitute for a will which avoids probate and can effectively isolate a portion of one’s estate dictating the management and succession of specific assets.

 

The fundamental difference between a foundation and a trust is that one has its roots in the common law and the other is a product of civil (Napoleonic) law.  Whilst a trust is wedded to equity, the foundation is the owner of its own assets and functions in a codified legal system.  Also, unlike the trust (with some exceptions), it is necessary to have the Panamanian foundation charter notarised and recorded in the Public Registry in order to validate its terms if it is to be irrevocable.  Revocable foundations only need to be executed before a notary.  Rather than trustees, the foundation is managed by a council which acts more like a board of directors.  Although the foundation appears – and is – similar to a trust, it is, in fact, as I mentioned earlier, more like a company in its style of operation.  Its component parts comprise the Foundation Charter, Foundation Council (minimum of 3 persons if not a corporate body), Protector or Adviser/s (optional) and Regulations (a private document which does not need to be registered and can contain the details of the beneficiaries and other ancillary matters which the client wishes to record but keep confidential).  And, like a company, the Panamanian foundation must have a local Registered Agent (lawyer or law firm) in order to establish a legal address in Panama.  It can also usually be transferred into and out of Panama in a similar way to companies that are able to change domiciles. 

 

The terms of the foundation charter can be made as fluid or rigid as one wishes and the regulations can be written in such a way that their provisions can be altered to meet contingencies.  Unlike the trust, the initial minimum corpus is US$10,000 cash (or equivalent value in another currency).  

 

The assets of the foundation are not subject to local taxes unless (with some exceptions) the income is earned within Panama.  One important – and attractive – tax exemption extends to money placed on interest-bearing deposit with any banking institutions by the foundation in Panama.

 

But before you proceed with establishing a foundation you should satisfy yourself in a number of areas.  It is important for US tax payers, for instance, to understand that classifying the Panamanian Private Foundation for US tax purposes can be complex, but the tax classification is important so that tax returns are filed correctly and tax can be limited or, in certain special instances, avoided.  In the past it has been claimed by the ill-informed or unscrupulous that Panamanian foundations were a means by which all taxation can be avoided, but this is not correct.  Under US tax law unless the foundation is exclusively for charitable purposes, it must be classified as either a trust , an association taxable as a corporation, a partnership or a disregarded entity.

 

Panamanian foundations certainly add scope to the options available in offshore estate planning and they should not be overlooked as potential elements in the implementation of an overall offshore plan.  They do, under certain circumstances, serve as a viable alternative to the ubiquitous foreign asset protection trust.  They are lower profile and less vulnerable to hostile interpretation by the courts. Assets properly gifted cannot be seized or attached and they cannot be used to satisfy the obligations of either the founder or the beneficiaries.  The only exception is that creditors have a right to challenge a Panamanian foundation within a period of 3 years from the date the assets being claimed are given to the foundation.  So the period runs from the date that the assets went into the foundation and the fact that the foundation has been in existence for, say, 5 years already will have no bearing on the case whatsoever.

 

The only cautionary note which I would add is that because there are many drafting and tax issues to be taken into consideration, you should ensure that you choose the right professionals to advise you.  The tax and legal implications onshore should be clarified and in the case of practitioners offshore, you should make sure that they are properly licensed.  Ask also about their qualifications and experience. If it is at all possible, I strongly recommend that you try and visit the offshore practitioner:  there is no substitute for making personal contact.  Finally, on the question of professional costs, don’t be guided solely by this factor alone.  I have found that often what is cheap has turned out to be costly in other ways and no more so than when it concerns offshore financial services. 

 

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