Frequently Asked Questions about Panama Foundations

1. Who needs a foundation for asset protection?

Every individual who has sufficient wealth to consider establishing a foundation as part of a traditional estate plan must consider asset protection as one of the primary design objectives. Life is full of unintended, unexpected and unforeseen risks. Ignoring them doesn’t mean they go away. Planning for them is good risk management.

2. What is an asset protection foundation?

All foundation arrangements are for the preservation of assets. A Panama foundation structure enables property to be held in a favorable legal environment. As a legal structure, a Panama foundation can hold assets anywhere in the world so long as those assets are freely alienable. In effect, an asset protection foundation is an integral part of a traditional estate plan which is intentionally settled in a beneficial legal environment.

3. Who may form a Panama foundation?

One or more individuals or corporations, acting in their own name or through another (i.e. the client’s attorneys in Panama), may constitute a Panama foundation. In other words, the foundation can be incorporated directly by the client or by fiduciary agents or offshore companies acting on his behalf. Our firm may act and provide the fiduciary agent or offshore company.

4. Is there one ideal comprehensive asset protection foundation plan?

No. Every person has different sorts of assets and different estate objectives. There is no one-size, all encompassing plan to deal with every component of a person’s financial life. Planning for a total estate will always be a compromise of factors.

Estate planning, and in particular estate planning focusing on the objective of the protection of assets, is greatly influenced by the skill, knowledge and biases of the professionals who are planning and drafting the documentation. Most recommend only those procedures with which they are familiar, even though those techniques may be less effective that others. Asset protection planning is dependent upon two significant variables. Firstly, the specific situation in which the clients find themselves in; and secondly, the abilities of the professional they choose in guiding them through asset protection strategies. If both are in harmony, then there can be some excellent results.

5. Historically, why has foundation planning been so popular?

The private foundation structure has traditionally been the most flexible and useful means of establishing an estate plan for Continental Europeans and Latin Americans. Estate planning is generally defined as the process of planning the accumulation, protection and distribution of an estate. Foundation planning enables the owner of assets to efficiently and effectively achieve personal objectives, as well as minimize the imposition of taxation. It enables the founder to establish management responsibility for assets and to secure investment advice.

A foundation arrangement allows the founder to be assured that the right assets will go to the right persons at the right time. An estate plan utilizing a foundation is the fundamental international mechanism for enabling the intergenerational transfer of wealth efficiently, effectively and securely.

6. Can a Panama foundation be profit oriented?

Panama foundations shall not be profit oriented, but they may nevertheless engage in commercial activities in a non-habitual manner or exercise rights deriving from titles representing the share capital of corporations really dedicated to business, provided that the economic result or proceeds from such activities are used exclusively towards the foundation’s objectives. The key concept here is to think of the foundation as a holding company.

7. What are the minimum requirements to incorporate a Panama foundation?

The main information required is:

• Name and Purpose of the Foundation;
• Names of the Foundation Council Members;
• Address of the Foundation;
• Appointment of a Registered Agent; and
• Patrimony.

8. What are the formalities to constitute a Panama foundation?

It is worth noting that the foundation charter as well as any amendments may be drafted in any language and must comply with the regulations regarding the registration of acts and titles at the Public Registry for which purpose, it must first be protocolized by a notary public of the Republic of Panama.

If the foundation charter or its amendments are not written in Spanish, the same shall be protocolized together with its Spanish translation made by a certified public translator of the Republic of Panama.

The registration of the foundation charter of a private foundation at the Public Registry shall confer upon it juridical personality without the need for any other legal or administrative authorization. Registration at the Public Registry shall additionally constitute a means of publicity with regard to third parties. This is an extremely important concept of the Panama foundation legislation

9. Is the Panama foundation managed like a corporation?

The same way a corporation is administered by a board of directors, the Panama foundation is managed by a Foundation Council whose powers and responsibilities shall be established in the foundation charter or its regulations. Unless the Council is a juridical person (i.e. offshore company), the number of individual members of the foundation council shall be no less than three (3).

10. Which are the statutory powers and duties of the foundation council?

The foundation council is responsible for carrying out the purposes or objectives of the foundation. Unless the foundation charter or its regulations provide otherwise, the foundation council shall have the following general obligations and duties:

• To administer the assets of the foundation in accordance with the foundation charter or its regulations.
• To carry out acts, contracts or lawful business which are convenient or necessary to advance the purposes of the foundation.
• To inform the beneficiaries of the economic situation of the foundation as stipulated in the foundation charter or its regulations.
• To deliver to the beneficiaries of the foundation the assets, properties or resources designated for them by the foundation charter or its regulations.
• To carry out all such acts or contracts which are permitted to the foundation by the Foundation Law and by other applicable legal or regulatory provisions.

These foregoing powers and duties are merely those provided by default in the Foundation Law. Please note that the law expect the founder of the foundation to expressly detail all powers, obligations and duties of the foundation council and any supervisory bodies in the respective charter or its regulations.

11. May the founder create and appoint any supervisory bodies over the foundation council?

The foundation charter or its regulations may provide that, in order to exercise their powers, the members of the foundation council must obtain the previous authorization of a protector, committee or other supervisory entity appointed by the founder or the majority of the founders.

The figure of the protector or supervisory body is typical of the trust. The protector may be one individual or corporation, or an auditing firm, or a law firm or others. Identical to the powers and duties of the foundation council, regarding the protector, the Foundation Law expects the founder to establish clear parameters, but in default or as a compliment thereof, it sets several general duties and obligations of such protectors.

12. How are foundation assets protected from creditors?

The assets of the Panama foundation shall constitute an estate separate from the founder’s personal assets for all legal purposes, and may not be seized or attached or be subject to any precautionary action or measure, except in case of obligations incurred, or damages caused by virtue of actions taken fulfilling the purposes or objectives of the foundation, or of legitimate rights of the beneficiaries of the foundation. In no case shall such assets be affected or used to respond for the personal obligations of the founder or the beneficiaries.

This does not mean that a foundation is not subject to litigation. It does mean that if there is litigation, it will have to be brought in that specific jurisdiction and will have to meet the legal requirements of the causes of action which are recognized in that jurisdiction. In some cases, even where a cause of action could be brought, the specific jurisdiction may restrict the time period during which this can happen. Once that statute of limitation period has passed, the right to bring a legal action is legally extinguished.

13. What kind of assets may be transferred into a foundation?

Virtually, any kind of assets which are capable of being transferred free and clear can be settled into a foundation. Cash, securities, partnership interest, and real estate are typical of some of the types of property which can be suitable placed into foundation. The highest degree of protection is afforded to those kinds of assets which can, in times of legal duress, be physically located away from the jurisdiction or physically transferred away do require additional planning strategies and techniques.

14. Apart from creditors, are the transferred assets safe and secure from other risks?

Planned safety and security of the assets held under foundation are the hallmark of this type of planning. The foundation council which manages the foundation is approved by the founder and is normally a company or person which engages in foundation business as a professional fiduciary. As an additional security, a foundation protector can be appointed with power to oversee the administration of the foundation operations. This protector is a person or company chosen by the founder, the founder’s attorney or accountant, or can be a professional company which is retained to serve this purpose.

The foundation assets can be invested with an investment advisor as authorized by the foundation council. Assets themselves can be located in whatever financial institution the foundation council designates, but normally the choice is in favor of one of the well-regarded financial institutions related to our firm.

15. What sort of controls can the founder retain after the creation of the asset protection foundation?

Under the Panama foundation, the founder can exercise different levels of powerful direct or indirect control over the foundation council, the protector, any committees, the beneficiaries or the assets. Nevertheless, control must also be balanced against the desired level of protection to be afforded. More control, less protection.

16. Are Panama foundations subject to foreign forced heirship rules?

The existence of legal provisions regarding inheritance at the place of domicile of the founder or of the beneficiaries shall not affect the foundation or its validity and shall not prevent the attainment of its purposes in the manner provided in the foundation charter or its regulations (Art. 14). This provision is vital from the point of view of asset protection and protects the founder and beneficiaries from forced heirship rules contrary to the wishes of the founder.

Within reasonable possibilities, all foundation assets should be transferred to the jurisdiction of the foundation or to a country without forced heirship legislation. It is important to express, however, that this Panamanian provision will govern only if the rules of the Panama foundation are enforced. Careful attention and planning should be given to this aspect and our experience in providing solutions should be of interest.

17. What is the taxation of a Panama foundation?

The acts of constitution, amendment or extinction of the foundation as well as the acts of transfer, transmittal or encumbrance of assets of the foundation and the income arising therefrom, or any other act in connection therewith, are exempted from all taxes, contributions, duties, liens or assessments of any kind , provided they are related to:

Assets located abroad.
Money deposited by natural or juridical persons whose income is not obtained from a Panamanian source or is not taxable in Panama due to whichever reason.
Shares or securities of any kind issued by corporations which income is not derived from a Panamanian source or which are not taxable for whatever reason, even when such shares or securities are deposited in the Republic of Panama.
This is the full text of Art.27 of the Foundation Law, which at the same time, save some small changes, is from the recently enacted Panamanian law on trusts. It is well known that the tax system in Panama is territorial, which means that only transactions or activities producing effect within Panama are subject to Panama taxes, also excepting some cases like the ones mentioned above and others. Since the 1930s, the territorial rule of taxation has prevailed in Panama’s fiscal law. Accordingly, all income from domestic business is taxable, while income from foreign sources remains exempt and freely transferable. This applies both to individuals and to corporations. Panama has not signed any agreements on juridical or information assistance with foreign countries on tax matters.

The only tax payable by a Panama foundation are US$ 400.00 as a fixed annual tax.

18. Can a foreign foundation change jurisdiction and continue as a Panama foundation?

Indeed, foundations organized pursuant to a foreign law may continue as a Panama foundation by fulfilling the flexible requirements of the Foundation Law. As a result of this simple procedure, multiple Liechtenstein foundations have already elected to change their jurisdiction and continue as Panama foundations.

19. Are the Panama foundations protected by secrecy and confidentiality?

All members of the foundation council and of the supervisory bodies, if any, as well as public or private employees, who have any knowledge of the activities, transactions or operations of the foundations, must at all times the same in secret and confidentiality. Breaches of this duty shall be sanctioned with imprisonment of six (6) months and a fine of US$ 50,000.00, without prejudice to the corresponding civil liabilities (Art.35). The requirements for maintaining and the sanctions for breaching the secrecy are strong.

Information already of public access like the Public Registry is obviously outside the secrecy rule. However, this secrecy provision should not serve as an excuse against legitimate inquiries through pertinent channels regarding specific criminal actions, such as drug trafficking and money laundering, for which the Republic of Panama has implemented specific legal procedures, in a major effort to improve and protect Panama’s international offshore center.

While not providing any specific legal or tax counsel, nevertheless for some individuals or companies, Panama foundations may offer specific tax advantages over other jurisdictions.

Notwithstanding these previous articles and considerations, it is important to refer you to our standard charter and regulations of a Panama foundation since you will find therein the answer or treatment to many questions and potential scenarios. A complimentary copy may be requested to our Panama offices.