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Panama Foundations

Who needs a Panama foundation for asset protection?
Every person who has sufficient wealth should consider establishing a Panama foundation as part of an estate plan, especially if asset protection is the primary design objective. There are always unintended, unexpected and unforeseen risks in life, and ignoring them won't make them go away. Therefore, preparing for them is good risk management.

What is an asset protection foundation?
An asset protection foundation is an arrangement for preserving assets. A Panama foundation structure enables property to be held in a favorable legal environment. As a legal structure, a Panama foundation holds assets anywhere in the world just so long as those assets are freely alienable, which means that an asset protection foundation is an integral part of a traditional estate plan intentionally settled in a beneficial legal environment.

Who may form a Panama foundation?
One or more people or corporations, who are acting in their own name or using another's (i.e. such as an attorney in Panama), may constitute a Panama foundation. This means that the foundation can be incorporated directly by the client or by fiduciary agents or offshore companies who are acting on his behalf.

Is there a "one size fits all" comprehensive asset protection foundation plan?

No. Each individual has different kinds of assets and different estate objectives. Therefore, there is no one-size, all encompassing plan dealing with every component of an individual's financial life. Estate planning will always be a compromise of factors.

Estate planning, in particular estate planning focusing on the objective of protecting assets, is influenced by the skill and knowledge of the professionals planning and drafting the documentation. The majority recommend only those procedures with which they are familiar with, even though those techniques may be less effective than others. Asset protection planning is dependent upon two significant variables. First, the specific situation in which the clients find themselves in; second, the abilities of the professional they select to guide them through asset protection strategies.

What makes foundation planning so popular?

The Panama foundation structure has been the most flexible and useful means of establishing an estate plan for people in on both the continent of Europe and in Latin America. Estate planning is defined as the process of planning the accumulation, protection and distribution of an estate. Foundation planning also enables the owner of assets to efficiently and effectively achieve personal objectives, as well as minimizing imposition of taxation. Foundation planning further enables the founder to establish management responsibility for assets and to secure investment advice.

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

Can a Panama foundation be profit oriented?
No. Panama foundations cannot be profit oriented, however they may engage in commercial activities in a non-habitual manner or exercise rights that are derived from titles representing the share capital of corporations dedicated to business, provided that the economic proceeds from such activities are used exclusively towards the foundation's objectives. The key concept is to think of the foundation as a holding company.

What are the minimum requirements to incorporate a Panama foundation?
The minimum requirements are:

The Foundation's name and its purpose

Names of the Foundation Council Members

The Foundation's Address

Appointment of a Registered Agent

Inheritance from a father

What are the formalities needed to constitute a Panama foundation?
The foundation charter and any amendments to it may be drafted in any language and has to comply with regulations regarding the registration of acts and titles at the Public Registry for which purpose, and it must be notarized by a notary public of the Republic of Panama.

If the foundation charter or its amendments are not written in Spanish, then the same shall be notarized along 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 juridical upon it without the need for any other legal or administrative authorization. In addition, registering at the Public Registry constitutes a means of publicity with regard to third parties. This is an extremely important concept of the Panama foundation legislation.

Is a Panama foundation managed like a corporation?
The Panama foundation is managed by a Foundation Council whose powers and responsibilities are established in the foundation charter or its regulations. Note: 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 people. From a practical point of view, a bank, fiduciary or attorney are able to form an offshore management company to act as the foundation council of multiple foundations.

Which are the foundation council's statutory powers and duties?

The foundation council has the responsibility to carry out the purposes or objectives of the foundation. Unless the foundation charter or its regulations provide otherwise, the foundation council has the following general obligations and duties:

Administer the assets of the foundation in accordance with the foundation charter or its regulations

Carry out acts, contracts or lawful businesses convenient or necessary to advance the purposes of the foundation

Inform beneficiaries of the economic situation of the foundation as stipulated in the foundation charter or its regulations

Deliver to the beneficiaries of the foundation assets, properties or resources designated for them by the foundation charter or its regulations

Carry out all acts or contracts permitted to the foundation by the Foundation Law and by other applicable legal or regulatory provisions.

Can the founder create and appoint supervisory bodies over the foundation council?
The foundation charter or its regulations may provide that, in order to exercise their powers, foundation council members first have to 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 a trust. The protector may be an individual or corporation, an auditing firm, a law firm, etc. Identical to the powers and duties of the foundation council regarding the protector, 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.

How are the assets of a foundation protected from creditors?
For all legal purposes, assets of a Panama foundation constitute an estate separate from the founder's personal assets for all legal purposes, and they may not be seized, attached or be subjected to any precautionary action or measure, except in cases of obligations incurred or damages caused by actions taken that fulfill the purposes or objectives of the foundation, or of legitimate rights of the beneficiaries of the foundation. In no case shall the assets be affected or used to respond for the personal obligations of the founder or the beneficiaries.

This does not mean that a foundation can not be subjected to litigation. It means that should there be litigation, the foundation will have to be brought in that specific jurisdiction and will have to meet the legal requirements of the causes of action recognized in that jurisdiction. In some cases 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 extinguished.

What kind of assets may be transferred into a foundation?
Nearly 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 the typical kinds of property that can be suitably placed into the 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. These kinds of assets require additional planning strategies and techniques.

Do fraudulent transfer provisions prohibit transferring of assets into a Panama asset protection foundation?
The fraudulent transfer provision contained in the Foundation Law is a remedy, not a prohibition. It does not create new liability, but allows a creditor to follow the assets. The fraudulent transfer laws are a means by which creditors, under specific circumstances, can proceed against property which has been transferred, or against the person holding the property which has been transferred. These laws neither prohibit nor limit the free transfer of any asset. In fact, their operation is entirely dependent upon the assets being transferred.

However, Article 15 states that the rights and actions of such creditors shall lapse at the expiration of three years, counted from the date of the contribution or transfer of the assets to the foundation. A special conveyance proceeding is a separate legal action by which the creditor can obtain a legal determination declaring a transfer void, but only if it is properly filed within the three years mentioned above. Remedies that are available under the transfer provisions are then applicable, but are limited to the property itself or on persons holding the property. Until there is a legal prohibition against transfer, anyone may freely transfer his own property.

Apart from creditors, are transferred assets safe and secure from other risks?
Planned safety and security of assets that are held under a Panama foundation is the trademark of this kind of planning. The foundation council that manages the foundation is approved by the founder and it is usually a company or person who is engaged in foundation business as a professional fiduciary. As added security, a foundation protector can be appointed with the power to oversee the administration of the foundation operations. This protector is either a person or company chosen by the founder, the founder's attorney or accountant, or a professional company retained to serve this purpose.

Panama foundation assets can be invested with an investment advisor as authorized by the foundation council. The assets themselves can be located in whatever financial institution designated by the foundation council.

What kind of controls can the founder retain after the creation of the asset protection foundation?
Under a Panama foundation, the founder has the ability to exercise different levels of powerful direct or indirect control over the foundation council, the protector, committees, beneficiaries or the assets themselves. Nonetheless, control must be balanced against the desired level of protection to be afforded. The more control, the less protection.

What are the taxes for 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 from there, or any other act in connection, are exempt from 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 issued by corporations whose 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 Article 27 of the Foundation Law which, at the same time, is from the recently enacted Panamanian law on trusts. It is a well known fact that the tax system in Panama is territorial. This means that only transactions or activities producing effect within Panama are subject to Panamanian taxes, excepting some cases like the ones mentioned above and others. Since the 1930s, 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.

Can a foreign foundation change its jurisdiction and continue as a Panama foundation?
Yes. Foundations organized pursuant to a foreign law may continue as a Panama foundation by fulfilling the requirements of the Foundation Law.

Are the Panama foundations protected by secrecy and confidentiality?
All members of the foundation council and of the supervisory bodies, as well as public or private employees having any knowledge of the activities, transactions or operations of the foundations, are required to maintain secrecy and confidentiality at all times. Anyone who breaches this duty could be subjected to imprisonment of six months and a fine of $50,000.00, without prejudice to the corresponding civil liabilities (Article 35).

Information already having public access, such as the Public Registry, would be outside the secrecy rule. However, this secrecy provision should not serve as an excuse against legitimate inquiries 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.

For more information on Panama please contact our office.