Panamanian Foundations of Private Interest
The initiative to create Law No. 25 of June 12, 1995, which regulates Foundations of Private Interest in the Republic of Panama, arises as a response to the popularity gained by private foundations in Europe, particularly those family held foundations organized in accordance to the Laws of Liechtenstein.
After the Liechtenstein Legislation was pre-analyzed by the writers of the Panamanian Bill of Law, which served as the basis for our newly enacted law, it was considered insufficient for the intended purposes that this type of law should have and serve in the Republic of Panama. Even though there are similarities with some of the articles of the Liechtenstein Legislation, there are quite a number of new articles in our law that, in our judgement, makes the Panamanian Legislation more attractive to investors.
One of the basic differences between Liechtenstein and Panama, is that the Panamanian Legislation does distinguishes between a family foundation and the so called mixed foundations, which motivated the main reason to change the name of the law. Thus, the expression “Foundations of Private Interest” has been utilized in Panama with the idea to include both, family and mixed foundations.
Other differences exist between both legislations, such as the monetary value of the minimum amount of assets required by the law in order to constitute the foundation, the annual tax and the express appointment of the figure of the “protector”, which is widely used in Anglo-Saxon or common law trusts. Contrary to the Liechtenstein Legislation, Panamanian Legislation does require that the member of members of the Foundation Council be Panamanians, nor does it requires that the minimum capital to constitute the foundation be paid prior to the organization of the same. It is also clearly stipulated in our legislation that “forced heirship” cannot be imposed on the “founder” of the foundation. In other words, it is not possible that third parties or persons claiming to be forced heirs could successfully attack the validity of the foundation or the will of its founder.
In this context, Panamanian Private Foundations will mainly serve to those individuals who need an effective fiduciary structure for the orderly transfer and disposition of their assets to their beneficiaries upon their death, but at the same time, wish to retain control of their assets during their lifetime.
DEFINITION OF A FOUNDATION OF PRIVATE INTEREST
It is often heard the word “foundation”, related to and in connection with those non-profit private organizations or permanent funds of public interest, maintained by contributions for charitable, educational, cultural, scientific or other benevolent purposes, some of them with considerable economic resources and very well known like The Rockefeller Foundation, The Ford Foundation, The Rotary Foundation or The Smithsonian Tropical Research Institute.
The concept or idea of a Foundation of Private Interest, though not as often heard, due to the privacy and confidentiality of its purposes, can and have been applied to a different kind of entity to serve a different predetermined private or social purpose or for the particular benefit of an individual or family in a more private or limited fashion. Such entities are known as Foundations of Private Interest (“Private Foundations”).
Hence, Foundations of Private Interest may be defined as the endowment of a patrimony to serve a predetermined private purpose contained in a document called the “Foundation Charter”. A Foundation of Private Interest is a legal entity, with its own name and internal organization, intended to hold property for a specified purpose, mostly of private interest, as provided for in the Foundation Charter. The achievement of this purpose is entrusted to a Foundation Council, which is appointed in the Foundation Charter.
A Foundation of Private Interest has a similar form to that of a Corporation, with its own and separate personality, but the flexibility to operate or implement its objectives through a mandate or dispositions in the form of a revocable private “trust”, which is only known or let known to and by the Founder.
As an instrument of family and estate planning, Foundations of Private Interest are very similar to a trust, with the difference that the Founder does not has to transfer title of the property over to a trustee.
Contrary to a corporation or a corporate entity, a Foundation of Private Interest cannot engage in trade or business on a regular basis, does not have any partners or shareholders, but for example, can very well be the owner of shares in one or more corporations and subsequently distribute the dividends received among its beneficiaries, in accordance to the instructions given by the Founder.
SOME OF THE ADVANTAGES OFFERED BY PANAMANIAN FOUNDATIONS OF PRIVATE INTEREST
Separation of Assets
The Private Foundation enables the separation of all or part of the assets from the estate of the Founder and guarantees the complete independence and autonomy of such assets.
Therefore, the endowed assets cannot be garnished or be the subject of litigation, except when in connection with obligations incurred by the Foundation itself or as a consequence of possible damages caused by the Foundation in the execution of its objectives, but under no circumstances the Foundation will be liable or will have to respond for the personal obligations of the Founder or its Beneficiaries or viceversa.
For example, the Foundation of Private Interest may be an effective vehicle to prevent or avoid “forced heirship” when the Founder has a particular or personal reason to prevent his legal heirs to benefit from his estate upon his death.
A Foundation of Private Interest offers the possibility to guarantee and insure the continued execution, for an indefinite period of time, after and beyond the death of its founder, of the ideas and objectives that said founder had in his mind with respect to his capital, assets or patrimony.
In this context, a Foundation of Private Interest will serve the purposes of a will or testament, either executionable at the time of the Founders’ death or of continued implementation, up to the occurrence of a predetermined event or condition, in absolute confidentiality, without the need to go through a lengthy and costly judicial process of succession.
For example, in most cases, the Founder, while alive, will be the foundations’ own beneficiary and upon his death, will have instructed the Foundation Council, which may very well be a bank, or any other entity or person, to dispose of the endowed assets among the new beneficiaries with or without subjection to any predetermined detailed private conditions or events.
Whenever a Foundation of Private Interest is constituted to be effective after the death of the Founder, it will be considered to have been in existence prior to such death with respect to the donations that the Founder may had made or endowed to the Foundation.
The requirements and information that the Foundation Charter must contain are very basic and simple. All the instructions given or that may be given by the Founder during his lifetime or just before his death may be contained in one (1) or more separate private documents known only to those involved and designated by him.
These documents usually adopt the form of a trust with clear and specific instructions as to the destine that the foundations’ assets may have during the Founders’ lifetime or at the time of his death.
Strict Secrecy and Confidentiality
The assets involved, conveyed or endowed to a Foundation of Private Interest are protected by the utmost confidentiality. They, by right of title, belong to and all bank accounts are held in the name of the Foundation.
The members of the Foundation Council and/or any other supervisory bodies, if any, and all private or public servants that may have knowledge of the activities, transactions or operations of the Foundation, must maintain strict reserve and confidentiality at all times. Infringement of this disposition and duty will be sanctioned with imprisonment for a period of six (6) months and a fine of up to FIFTY THOUSAND DOLLARS (US$ 50,000.00), in addition to any civil liability or damages that may have been caused.
No Initial Disbursement of Capital Required
The initial capital or patrimony of a Foundation of Private Interest, or any part of it, does not has to be paid-in or disbursed by the Founder at the time of execution of the Foundation Charter or after its constitution in order to operate.
Confidential Identity of the Beneficiaries
The Foundation Charter need not identify the beneficiaries, but must set out clearly the manner in which such beneficiaries will be designated. The beneficiaries may be appointed and identified in a separate private and confidential document, called the “Regulations”, which are basically a testamentary trust agreement issued by the Founder.
Such Regulations, which will govern and regulate the affairs and administration of the Foundation, are part of the terms of endowment and constitute a confidential supplement to the Foundation Charter. The Regulations of the Foundation need not be registered at the Public Registry of Panama.
Founder May Retain Full Control of the Assets
The Founder, being the principal beneficiary of the Foundation in most cases, may in fact retain full control over the assets held by the Foundation throughout his lifetime.
Complete Anonymity and Separate Patrimony of the Founder
Contrary to a Corporation, a Foundation of Private Interest does not has shareholders, so the Founder, after the organization of the Foundation, is not connected in any way to the assets endowed to the Foundation, which acquires its own and separate legal personality.
Convenient Foundation Council
A Foundation of Private Interest must have a Foundation Council, which shall very conveniently be, either a minimum of three (3) natural persons or only one (1) juridical person or entity, which may very well be a Corporation. Of course, nothing can prevent that in addition to a juridical person or entity (Corporation), one (1) or more juridical persons or entities and/or natural person(s) is(are) also appointed in a combined manner.
Easy Revocation or Amendment of the Charter
The Founder may at all times revoke or amend all or part of the Foundation Charter or Regulations or dissolve the Foundation.
Foreign Foundations May Easily Adopt Panamanian Legislation
Foundations of Private Interest organized and constituted in accordance with the laws of foreign countries, may adopt or choose to be governed by Panamanian Legislation and continue to be ruled or governed by our law for any period of time as Panamanian Foundations of Private Interest.
Easy and Unlimited Increment of Capital
The initial capital or patrimony of a Foundation of Private Interest may be increased from time to time, at the discretion of the Founder or any other designated persons.
Absence of Government Control
There is no requirement to submit any reports or accounts to the Panamanian authorities in connection with the affairs of a Foundation of Private Interest.
The Charter May Be in Any Language
The Foundation Charter of a Foundation of Private Interest and any amendments thereof may be constituted in any language with characters of the Latin alphabets.
Low Cost And Fast Organization
A Foundation of Private Interest can be organized in a very short period of time at a very low cost, presenting itself as an effective and convenient vehicle for tax planning and succession purposes.
The following structure or case scenario is given as an example of one of the many uses that a Panamanian Foundation of Private Interest may have:
- The client gives the instructions to set up a Panamanian Foundation of Private Interest.
- The Foundation of Private Interest is represented and managed by a Foundation Council, which is bound to the client through a private mandate agreement or trust.
- The Foundation Council shall exercise the private mandate or trust agreement in strict confidentiality, exclusively in accordance to the clients’ instructions.
- The Foundation Council will then incorporate the Founders= private mandate agreement or trust into a document called Regulations, which are issued in a private and confidential manner, designating the client as the first and principal beneficiary of the Foundation.
- The Foundation Council may open a bank account and grant the client, through a private and confidential power of attorney, full authority to operate such an account or directly authorize the client to open and operate a bank account, anywhere in the world, as it deems convenient.
CONSTITUTION OF A FOUNDATION OF PRIVATE INTEREST
In order to constitute a Foundation of Private Interest, a person designated as the “Founder” should execute a document called the “Foundation Charter”. In either case, the Foundation Charter so executed should then be registered at the Public Registry of Panama. A Foundation of Private Interest may be constituted to begin its existence as of its registration date at the Public Registry of Panama, or after the death of its Founder.
The Foundation Charter must contain at least the following information:
The name of the Foundation may be in any language with characters of the Latin alphabets, and must contain the word “Foundation” in its text.
The Initial Capital or Patrimony of the Foundation
The initial capital or patrimony of a Foundation of Private Interest and nature of its properties or assets, may not be less than TEN THOUSAND DOLLARS (US$ 10,000.00).
In most cases, in order to maintain the confidentiality of the real and full net worth of the endowed assets, the Foundation is organized with the minimum capital required by the law (US$ 10,000.00). After its constitution, other assets may be transferred through private documents in strict confidentiality.
The initial capital or patrimony of the Foundation, or any part of it, does not has to be paid-in or disbursed by the Founder at the time of execution of the Foundation Charter or after its constitution in order to operate. The capital or the assets may be endowed at any time after the constitution of the Foundation.
It is very important to note that once the Founder or third persons have promised to endow certain capital or assets to the Foundation, the Foundation or its beneficiaries have the right to claim such capital or assets from the Founder or such third parties, who must fulfill his promise.
Full Name(s) and Address(es) of the Member(s) of the Foundation Council to Which the Founder Could Be a Member
The Foundation Council is the administrative body of the Foundation and will have the powers vested in them by the Founder and will execute its duties in accordance to the instructions and objectives set forth by the Founder.
The Foundation Council may be composed of either a minimum of three (3) natural persons or only one (1) juridical person or entity, which may very well be a Corporation. Instead, in addition to a juridical person or entity (Corporation), one (1) or more juridical persons or entities and/or natural person(s) may also appointed in a combined manner.
The Domicile of the Foundation
Taking into consideration all the benefits and fiscal advantages offered by our legislation, in most cases, the Foundation will be domiciled in the Republic of Panama, even if all its activities and/or all of its assets take place or are located abroad.
The Name and Domicile of the Resident Agent of the Foundation, Which Must Be a Lawyer or Law Firm in the Republic of Panama
Every Panamanian Foundation of Private Interest shall have a Resident Agent in the Republic of Panama, which may be a lawyer, or law firm authorized to practice in the Republic of Panama. The functions of such an agent refer particularly to juridical representation before all national authorities. According to Panamanian law, when the representative of a juridical person acts on its behalf before the authorities, he is not acting in his own interest but in the name of a different person and therefore, carries out an activity, which is reserved to lawyers.
The Objectives of the Foundation
We have to bear in mind that a Foundation of Private Interest, contrary to a Corporation, cannot engage in trade or business on a regular basis. A Foundation of Private Interest can only engage in those commercial acts or execute any kind of contracts in connection with the Foundations’ objectives and purposes or conservation of its patrimony.
Foundations of Private Interest have been designed to serve mainly as “holding” entities, that is to be the last holders of shares, assets or any kind of property in a chain of proprietorship, which do not operate or do not engage in commerce or industry. Consequently, a Foundation of Private Interest cannot have a commercial or industrial license to operate.
The objectives of the Foundation do not have to be specific, identify or mention any of the beneficiaries involved. The Foundation Charter need only to explain, in a general way, what sort of benefits the beneficiaries will receive. The specifics and details will be contained in the Trust Agreement or Regulations that the Foundation Council will issue in a confidential manner.
The Form of Designating the Beneficiaries of the Foundation
This clause is of the utmost importance, for which on its basis, a private and confidential, parallel and complimentary document to the Foundation Charter called the Regulations (Trust Agreement) will be created to identify and explain all the details in connection with benefits and beneficiaries of the Foundation and its objectives.
In this context, the information as to the identity of the beneficiaries or assets of the Foundation will only be known to the interested parties and remain totally confidential.
The Reservation as to the Right to Modify the Foundation Charter
The reservation as to who may amend or modify the Foundation Charter must be clearly indicated in order for the Public Registry Office to know if any amendment that may be filed for registration is legitimate and complies with the rules contained in the Foundation Charter. This right is usually reserved to the Founder.
The Duration of the Foundation
The existence period of the Foundation, which may very well be perpetual.
The Final Destiny of the Assets or Manner in Which to Liquidate the Foundations= Patrimony in Case of Dissolution
In most cases, the Foundation Charter will read as follows: “In case of dissolution, the Foundation, after paying all of its debts and obligations, the liquidation will proceed in accordance to the provisions stipulated in the Regulations.”
Any Other Legal Provision Deemed Convenient By the Founder
In addition to the minimum legal requirements that the Foundation Charter must contain, the client may add any number of clauses or provisions to deal with or as to the representation of the Foundation before third parties, powers of the Foundation Council, procedure to solve controversies between the parties involved or the beneficiaries, etc.
REGISTRATION OF THE FOUNDATION CHARTER
The registration of the Foundation Charter at the Public Registry Office of Panama vests the Foundation with legal personality and becomes a legal entity, without other legal or administrative authorization. As such, the registration of the Foundation constitutes notice to third parties as to the existence of the same as a legal entity.
THE FOUNDATIONS’ ASSETS OR PATRIMONY
The assets or patrimony of the Foundation may consist in any kind of property, real estate and/or personal, securities, cash or other, anywhere in the world. It is not necessary that such assets are transferred to the Foundation immediately upon its constitution, but the obligation to transfer said property must be established in the Foundation Charter. Although the Foundation may of course derive or receive income and other benefits from its assets, it may not however engage in trade or conduct business activities on a regular basis with the intention of making profit out of such activities as a business.
Once a Foundation of Private Interest comes into existence, the Founder is bound to transfer to the Foundation the assets, which he undertook to contribute according to the Foundation Charter. The Foundation Charter may also provide that the Foundation may receive properties transferred to it by third parties from time to time.
Neither the Founder nor any other body of the Foundation is responsible for the liabilities of the Foundation. In the event of insolvency of the Foundation, however, the Founder, and other parties who have undertook to transfer assets to the Foundation, but have not done so, may be bound to transfer such assets.
THE FOUNDATION COUNCIL
The Foundation must have a Foundation Council composed of not less than three (3) natural persons, or instead, of one (1) legal entity or juridical person, of any nationality or domicile. The first members of the Foundation Council may be appointed by the Founder in the Foundation Charter. The Founder may reserve to himself the right to remove the members of the Foundation Council and to designate their substitutes or any additional members.
The Foundation Council is responsible for the observance of the objectives of the Foundation and as such it is obliged to administer the assets or patrimony of the Foundation in accordance with the Foundation Charter and the Regulations (Trust Agreement), with powers to execute all acts and contracts and in general, to conduct the affairs and administration of the Foundation.
The Foundation Charter or the Regulations (Trust Agreement) may provide for the creation of organs of fiscalization, composed of natural or juridical persons, such as auditors and/or protectors. The Foundation Council shall also render accounts to the beneficiaries, if specified in the Foundation Charter or the Regulations (Trust Agreement).
The beneficiary or beneficiaries is(are) the person(s) who according to the Foundation Charter is(are) entitled to any present or future advantages or benefits from the Foundation.
The beneficiary or beneficiaries may be appointed in the Foundation Charter or in the Regulations (Trust Agreement), either by the Founder or by any other person authorized to do so in accordance with either document. The nature and extent of the benefits can be specified in the Foundation Charter or in the Regulations (Trust Agreement).
AMENDMENTS TO THE FOUNDATION CHARTER
Unless otherwise provided for in the Foundation Charter, the Founder may reserve to himself the right to amend the Foundation Charter. Whenever modifications to the Foundation Charter are allowed, they must be made and signed by the Founder or his assignees in accordance with the provisions contained in the Foundation Charter.
The amendments to the Foundation Charter must contain the date, name of the person or persons subscribing the amendment and must be authenticated by a notary public in the place where the document is executed.
REVOCATION OF THE FOUNDATION
Generally, Foundations of Private Interest are irrevocable except in the following circumstances:
- Before the Foundation is registered at the Public Registry of Panama.
- When the Foundation Charter provides otherwise.
- In cases when the Foundation has been established as a will, before the death of the founder.
The transfer of assets or property to the Foundation is irrevocable unless it is otherwise established in the act of transfer.
CHANGE OF DOMICILE
The domicile of a Foundation of Private Interest constituted under Panamanian law may be transferred and therefore, become subject to the laws and jurisdiction of a foreign country, if provided in its Foundation Charter. Similarly, the domicile of Foundations of Private Interest constituted under the laws of a foreign country may be transferred to the Republic of Panama and therefore, become subject to the laws of the Republic of Panama.
DISSOLUTION OF THE FOUNDATION
A Foundation of Private Interest may be dissolved in the following circumstances:
- On the date of termination of its existence as provided for in the Foundation Charter.
- Upon attainment of the objectives for which it was constituted or if their attainment is impossible.
- If it becomes insolvent.
- Loss or extinction of all of its assets.
- Revocation by the authorized persons.
- For any other reason as provided for in its Foundation Charter.
REGISTRATION FEES AND TAXES
A registration fee is payable upon the registration of a Foundation of Private Interest at the Public Registry of Panama, based on the capital stated in the Foundation Charter, in accordance with the following schedule:
First US$ 10,000.00
From US$ 10,000.01 up to US$ 100,000.00
From US$ 100,000.01 up to US$ 1,000,000.00
More than US$ 1,000,000.00
US$ 50.00 for the first US$ 10,000.00 plus US$ 0.90 per additional US$ 1,000.00 or fraction thereof, up to US$ 100,000.00
US$ 131.00 for the first US$ 100,000.00 plus US$ 0.60 per additional US$ 1,000.00 or fraction thereof, up to US$ 1,000,000.00
US$ 671.00 for the first US$ 1,000,000.00 plus US$ 0.12 per additional US$ 1,000.00 or fraction thereof
Additionally, each Foundation must pay a twenty percent (20%) surcharge over the above mentioned registration fee.
Every Panamanian Foundation must pay an annual franchise tax of US$ 350.00 for the first year at the moment of its incorporation and of US$ 400.00 for each consecutive year thereafter: a) before July 15th of every year, if incorporated between January 1st and June 30th; and b) before January 15th, if incorporated between July 1st and December 31st, to maintain the full effectiveness of the foundation. For all legal purposes, full effectiveness of a foundation shall be deemed to be it’s valid registration at the Public Registry of Panama.
As of May 2012, new legislation in the Republic of Panama (Law No. 28 of May 8, 2012) increased the annual franchise tax to US$ 350.00 for the first year and to US$ 400.00 for each consecutive year and regulated its payment.
Default on the payment of this tax will cause a fine of US$ 50.00 per year or fraction thereof, and will stop the registration and/or issuance at the Public Registry of Panama of any documents and/or certifications related to the Foundation. If tax plus fine (US$ 400.00 + US$ 50.00) are not paid before the corresponding due dates of the following year, it will cause an additional fine of US$ 400.00 per year or fraction thereof. If all taxes plus fines are not paid for ten (10) consecutive periods / years, the foundation will be automatically stricken from the record (Public Registry of Panama) and it will be considered legally dissolved and non-existent.
In accordance with the general taxation laws of the Republic of Panama, only income produced within the Republic of Panama is subject to income tax in Panama. Consequently, the income of a Foundation of Private Interest, which is not produced in the Republic of Panama, is not subject to any income tax in Panama.
The Foundation Charter, Regulations (Trust Agreement) and any other document will be furnished to the client in both English and/or Spanish.