Style Versus Substance

Date : 17-July-2007

From Panama – meetings during the rainy season.

For the most part, in the Asset Protection arena, the Wild West era in Panama is a distant memory. However, being on the ground in Panama you can still feel that huckster mentality lurking about. Panama is promoted as one of the retirement havens of the world, but just like everything else in life, you must have certain awareness to protect yourself regardless of whether you are a resident or a tourist.

Some changes in Panama’s property tax law are causing quite a stir. These changes are to be expected as any developing nation builds infrastructure.

Most of the problems I see are a lack of understanding in business deals from both sides. In Panama, the trend is to use foundations to set up business affairs, however the U.S. tax code may indicate an emphasis towards safer options. Think of it this way, would you buy a piece of real estate in your home town and not know the tax burdens from local, state and federal tax regimes?

Panama is probably the most notable jurisdiction with its recent 1995 foundation act. Panama has tried to combine the best of other jurisdictions around the globe. A Panamanian foundation is considered by many to be a good, inexpensive choice for a number of reasons. In Panama, there is no legal requirement to disclose the name of the real founders, the beneficiaries, or the foundation's protector. There are no requirements to hold annual meetings and no filing of annual tax returns in Panama. The foundation also has no capitalization requirements, and there is no time frame in which contributions need to be made. Panama foundations are separate juridical entities, and therefore, have legal ownership of the assets they hold. Management and distribution of the assets are vested in the foundation council, which are essentially a board of directors rather than a trustee of a trust. Other than yearly fees, as of this date, Panama imposes no tax of any kind on their foundations.

Sometimes when I hear the word structure, the hair on the back of my neck stands up. Structure is a word reminiscent of old offshore scams, Forex get rich quick schemes, and brainless Ponzi schemes that conned little old ladies out of their grandchildren's inheritance. This seems to be where many developing countries get stuck while sorting out the legalities of infrastructure, and this is why I advocate for certain awareness and a healthy skepticism when conducting business in Panama.

I remember the first time I visited Panama. I was escorted from the airport in a private car to a very well-appointed downtown, upscale law firm, and I watched a lawyer draw circles on a white board extolling the virtues of the revolutionary new Panamanian corporations and foundations. In less politically correct times, I was allowed to refer to the white board spiel as the Amway circle presentation. I can still remember the lawyer telling me that company A owns company B, which in turn owns company C, which in turn borrows money from foundation 1, which has a board of directors that don’t really exist. At that time, my first question was how does this structure work for a U.S. citizen with regard to tax compliance? In those days the answer was “más omenos”“ In other words, what’s done in Panama stays in Panama, which is probably where Las Vegas got the saying.

Many web sites promote the untold benefits of Panamanian foundations without disclosing their darker side. These types of foundations, from the IRS’s perspective, are specifically treated for tax purposes as an individual, partnership, corporation, trust or estate, no matter what the country of origin calls them. The IRS has specific code provisions for tax abuse and language that allows for re-characterization of an entity they do not like. Panamanian foundations could be classified as a trust for tax purposes in certain limited situations, but they are more likely to be taxed as a corporation.

While Panamanian Foundations have their place in international planning, and indeed for tax planning in a host of countries, the U.S. is not one of them. The foundation strategy may help with privacy and Asset Protection, however, in the case of a private interest foundation holding U.S. real property, it is hard to imagine a U.S. judge not completely ignoring Panamanian law in favor of a founder's or beneficiaries' own state.

To the Point - Style versus substance

As a company, we still receive many calls from folks who want to use privacy or stealth as their asset manager.

If you are a long time reader, you are aware that judges routinely ignore structures in favor of allowing the flow through liability to the person. A real Asset Protection Plan is really a good business plan that is well thought out, has meaning and a valid purpose. The rest of the so-called structuring is proverbial B.S.

The real reason for writing this article is that all over the world there are great investments to be had. The U.S. growth rate is an arguable 2 to 4 percent. Why not avail yourself of the new ideas and new destinations?

As a word of caution, if you are going to invest or do business in another country, get advice from well-qualified professionals from your country of origin and your country of choice. There is no shortcut, and not knowing the rules is an exercise in futility. Style works well if you are on the E Channel; but for your business dealings, you need good, solid advice from qualified tax planners and other professionals before stepping into your latest investment idea.

Back To Panama

It is a new day on the isthmus between the Pacific Ocean and the Caribbean Sea. Panama has all the trappings of a good jurisdiction and is certainly a great vacation spot. As far as Panama real estate goes, the free money has already been made! The speculators are still around, and there certainly is no lack of pitchmen. The fact is real deals are ongoing, and real value is being added. Panama continues to be a place worth a look, but bring a bag of skepticism with your suntan oil.

Until next time,

John

ABOUT THIS EDITOR:

John Dietz is a strategic advisor at Trustmakers.com with a passion for client solutions that can encompass your business, your real estate, and your personal assets. Mr. Dietz serves to educate you on the latest in asset protection planning.

Full Bio - Email John