The Panama Foundation
Panama introduced the private Panama foundation into its law in 1995, after which many other jurisdictions followed suit.
The current law regarding foundations has been designed to offer a great measure of confidentiality and flexibility. The Panamanian foundation can be used for a broad range of purposes including inheritance planning, tax planning and asset protection.
In this article we will explain the structure of the Panama foundation, how it is established and what it can be used for.
The elements of the Panama foundation:
A Panamanian foundation is established for the benefit of a charity or for the benefit of natural person(s). The persons who benefit from the foundation are the beneficiaries, comparable to the beneficiaries of a trust. A foundation that serves the benefit of a person or group of persons is a Panama Private Interest Foundation (PPIF). The foundation is a separate legal entity without any shareholders. It is established by a founder. The founder can be a company or a person and can be, for instance, a law firm or a corporate service provider. The foundation must have a foundation council which is comparable to a board of directors. The council must consist of at least three members if it consists of natural persons or it can consist of one member if the member is a company. The duties of the council are to manage and distribute the assets of the foundation according to the foundation charter and regulations and to act in accordance of the objectives of the foundation. The members do not need to have the Panamese nationality and the founder can also be a member of the council. One must be careful in appointing the founder as a member of the council though, since it can have unintended tax consequences and undermine its usefulness as an asset protection vehicle. The foundation also offers the option of appointing a protector who can supervise the council of the foundation. An individual wanting to retain some measure of control of the assets placed in the foundation can assume the role of protector in order to achieve this. But again, care must be taken before doing so since it can endanger the security of the assets in the foundation.
The establishment of the Panama foundation:
In order to establish a PPIF some formalities must be fulfilled. The founder must draft a Foundation Charter which contains the name of the Foundation, the purpose of the foundation, the name and addresses of the council members, the amount initially contributed into the foundation (a minimum of $10,000 is required), the name and address of the Panamanian agent that has to countersign the foundation charter, the way the beneficiaries are designated, the way the charter can be amended and the duration of the foundation. The foundation charter needs to be filed at the Public. After these steps the PPIF is established.
Confidentiality of the Panama Foundation:
A big advantage of the foundation is that it’s highly confidential. The foundation charter is registered in a public register but this document does not contain the name and address of a possible protector or the information of the beneficiaries. Also how assets are distributed to the beneficiaries is not stated in the foundation charter. This information is contained in the letter of wishes that can be drafted by the individual wanting to set up the foundation. There are no annual reporting requirements for the foundation. As you can see, the Panamanian foundation offers a high level of confidentiality, only some basic information is held in a public register. The confidentiality of the information is protected by law and individuals disclosing this information will be faced with high fines or even prison sentences.
Uses of the PPIF:
A PPIF can be used for multiple purposes. One of the main advantages of a PPIF is that the assets in the foundation are owned by a separate legal entity and no longer by the individual. This makes the PPIF a very interesting structure for a number of uses. An individual can set up a PPIF in order to arrange his inheritance. He can set out when and how the assets are distributed amongst the beneficiaries after his passing. This use of the PPIF could avoid inheritance taxes in some cases (dependent on the residence of the settlor, founder and beneficiaries) and forced heirship laws. Panama give you almost complete discretion on how to structure the governance of the foundation. Lastly a PPIF is a very interesting structure to protect your assets. Since the ownership of the assets has been transferred to another legal entity, the assets in the foundation are now out of reach of possible creditors. The high level of confidentiality further protects the identities of both the individual and the beneficiaries. Transfers to a foundation with the intention to defraud creditors can be nullified provided an action is brought to a Panamanian court within three years after the transfer.
The PPIF offers a high level of flexibility and confidentiality, making it a useful tool for asset protection, inheritance and tax planning. Moreover Panama is protective of its independence, and sceptical of multi-lateral agreements infringing on its sovereignty. In 2010 for instance they withdrew from PARLACEN, the Central American Parliament, an organisation with EU-like ambitions. It is not a party to CAFTA and it is only party to a limited number of MLATs and these generally do not enforce foreign orders. Their unilateral approach also demonstrated by their increasingly unique territorial tax system (taxation based only on local sources) which severely reduced the need for tax treaties. All this shows that it sets is own course and is not likely to easily be swayed by foreign pressure. How the PPIF is best structured depends on the purpose and situation of the individual.
Freemont Group can advise and assist you in structuring and setting up a PPIF tailored to your wishes and situation. Contact us
to discover more.