I. CONCEPT - MAIN USES
For those readers who are not
familiar with the concept of a foundation, it consists of
the endowment of a patrimony for a specific purpose or object
as stipulated in the document by which the foundation is created
and internally organized, known as the FOUNDATION CHARTER.
An appointed body known as the FOUNDATION COUNCIL is entrusted
with the pursuit of the object of the foundation. The person(s)
who creates the endowment is known as the FOUNDER and the
persons who benefit from the endowment (traditionally the
founder and/or members of his family) are known as the BENEFICIARIES.
Once the foundation charter is
registered at the Public Registry, the property endowed or
to be endowed becomes a separate estate from that of the founder
by acquiring a legal identity of its own, thus becoming a
The information regarding the
names and justifys of the beneficiaries of the foundation is
usually provided to the foundation council by means of a private
and confidential document (that is to say a document which
does not need to be registered at the Public Registry) known
as the REGULATIONS.
Contrary to the traditional corporation,
the private foundation does not have shares, it does not recognize
shareholders and the founder does not acquire any such justifys
in relation to the foundation's property. The law does recognize,
however, the beneficiaries or the persons for whose benefit
the foundation is created, which can include the founder.
The possible uses of a private
foundation are so broad that we can safely conclude that practically
all of the objectives which can be achieved by the widely
used "trusts", can also be accomplished by properly
structuring a private foundation.
Private foundations are mostly
utilized as the ultimate holder of a given patrimony administered
by professionals for the benefit of the founder and/or other
appointed beneficiaries, allowing the founder, at the same
time, to plan in advance (in the Regulations) for the transfer
of the benefit or the orderly succession of such patrimony
in case of his sudden demise.
II. PURPOSE OR OBJECT OF THE
It is important to explain that,
as in Liechtenstein, a Panamanian private foundation, as stipulated
in Article 3 of the Law, cannot be simply profit oriented
or be used to carry on a particular business.
Although the private foundation
shall be used more as a holding company, it can sporadically
perform certain business transactions when these are desirable
or advantageous to the foundation and only if the proceeds
of such transactions are destined exclusively for the non-commercial
purpose or object of the foundation.
Therefore, the purpose of a
private foundation shall be along the following lines: to
contribute to the costs of upbringing, education, aid, as
well as general maintenance or other similar purposes of one
or more members of one or several families, as established
in the Regulations. In addition to the members of one or several
families, the foundation may benefit other individuals or
legal entities, including institutions of any kind, and it
may make the necessary provisions for the orderly disposal
or succession of its patrimony. To achieve its object the
foundation council is authorized to preserve, administer,
and invest the foundation's assets in an appropriate manner,
be they of whatever kind, particularly real estate and holdings
in other entities, and to conduct any business and legal transactions,
which serve the pursuit and realization of said object.
III. FOUNDATION DOCUMENTS
Two main documents make up a
foundation: the Foundation Charter and its Regulations or
A. THE FOUNDATION CHARTER
As mentioned above, Panamanian
law requires that a foundation charter be registered at the
Public Registry in order for the foundation to acquire a legal
identity. Like any other legal entity which will have justifys
and obligations and which will acquire and own assets of all
kinds, the law requires that certain basic information be
provided in the charter in order to constitute a valid foundation.
The information required is:
1. The name of the foundation,
which may be in any language using the characters of the Latin
alphabet, and which, to avoid confusion, shall not be identical
or similar to that of any other foundation previously registered
in the Republic of Panama. The name shall include the word
"foundation" to distinguish it from another individual
or from a different kind of legal entity.
2. The initial capital of the
foundation, expressed in any currency of legal tender, which
shall in no case be less than an amount equivalent to US$
3. A complete and clear designation
of the name and address of the member or members of the foundation
council, of which the founder may be a member.
4. The domicile of the foundation.
5. The name and domicile of the
resident agent of the foundation in the Republic of Panama,
who must be an attorney or law firm. The resident agent must
countersign the foundation charter prior to its registration
at the Public Registry.
6. The purposes or objects of
7. The manner of appointing the
beneficiaries of the foundation, which may include the founder.
8. The reservation of the justify
to modify the foundation charter when deemed appropriate.
9. The duration of the foundation.
10. The destination to be given
to the estate of the foundation and the manner of liquidating
said estate in the event of dissolution.
11. Any other lawful clauses,
which the founder may consider desirable.
Unlike some Liechtenstein foundations
and Common Law trusts, the fact that the foundation charter
needs to be registered in Panama offers it more judicial safeguards:
it gives the Public Registry the necessary elements to issue
a "Public Registry Certificate", thus ensuring the
true existence of the foundation. This document may be legalized
by apostille, and it has been proven to be a great tool for
the prompt opening of bank accounts in the name of the foundation.
1. Any information not required
by law to be included in the foundation charter and which
the founder would rather keep confidential can always be written
into the Regulations. As in Liechtenstein, the Regulations
are a private document and, as such, do not need to be registered
at the Public Registry or anywhere else. Traditionally, then,
any information containing the names of the beneficiaries
and their justifys over the foundation property is written
into the Regulations. Consequently, the beneficiaries' identity
and any successive provisions need not be revealed to any
government agency, not even to the attorneys organizing the
2. The Law places practically
no limits upon the structuring of the beneficial interests
of a foundation. One of the more common scenarios is for the
founder to designate himself/herself as beneficiary for life
and to provide successive beneficiaries upon his or her death.
3. The Law further enhances the
confidentiality of this instrument by creating in article
35 severe penalties (fines of up to US$50,000 and imprisonment
for up to six months) for breach of the duty to keep the information
confidential. This obligation applies to members of the foundation
council and of the supervisory bodies, if any, as well as
to public or private employees having any knowledge of the
activities, transactions or operations of the foundation.
4. Furthermore, the Regulations
may be kept outside the country in the hands of the founder,
his fiduciary agent, the protector or any other person or
institution vested with the confidence of the founder. For
all of the above-mentioned reasons, plus some additional ones
which will be explained in other parts of this newsletter,
the Private Foundation has been called the perfect living
will. There is no need to open public proceedings if the founder
dies, and his wishes regarding the use, transferal and final
destination of his assets can be carried out privately by
the foundation council.
IV. FOUNDATION COUNCIL
The foundation council shall
be appointed at the time the foundation is constituted. It
shall be made up of no less than three (3) members in case
of private individuals or only one in the case of a legal
entity. The Law does not require any of its members to be
The powers and responsibilities
of the foundation council shall be established in the foundation
charter or in the Regulations. As a general rule, the foundation
council shall be responsible for carrying out the objects
of the foundation.
Unless otherwise provided in
the foundation charter and/or the Regulations, the general
obligations of the foundation council shall be as follows:
1. To administer the assets of
the foundation according to its Charter or its Regulations.
2. To perform any acts, contracts,
etc., which are appropriate for the attainment of the foundation's
objects, as permitted by the law and by the Regulations.
3. To inform the beneficiaries
of the foundation as to its economic situation as provided
in the foundation charter or the Regulations.
Please bear in mind that the
foundation charter and/or the Regulations of a foundation
may also limit or expand the powers of the foundation council
to suit the wishes of the founder. Additionally, the founder
may appoint himself as a member of the foundation council
and require that certain decisions be taken unanimously.
All such acts may need to be
previously authorized by a protector or other supervisory
body. Moreover, the founder may reserve for himself/herself
or for any other person the justify to remove the members of
the foundation council. This provision must also be expressly
established in the foundation charter.
V. REGISTRATION FEES AND TAXES
V. A. LOW SETTING-UP COSTS
AND MAINTENANCE FEES
Private foundations in Panama
only pay registration fees and annual taxes equivalent to
those applicable to Panamanian corporations. The Panamanian
foundation is therefore considerably less expensive to set
up, maintain and dissolve than its European counterpart.
As in the case of corporations,
the amount of the registration fees will depend on the foundation's
original capital. The annual franchise tax is US$250. The
penalty for late payment of the annual franchise tax is U.S.$50,
applicable if the annual tax is not paid within three months
of the registration or of the anniversary date of said registration.
V. B. TAX ADVANTAGES
Panama, like many other international
tax havens, only taxes income produced or generated by economic
activities carried out within the country, and even inside
the country there are certain incomes which are tax free (e.g.
the interest generated by monies deposited in banks in Panama).
Consequently, someone who utilizes a Panamanian private foundation
outside Panama will not have to worry about taxes within the
country of Panama, with the exception of the annual franchise
tax mentioned in the preceding paragraph.
Article 36 of the Law makes it
clear by statutory provision that any dispute arising in connection
with the foundation may be resolved by arbitration, thus avoiding
the need to litigate through the Panamanian judicial system.
Arbitration may take place in any location and may be subject
to any procedure established by the founder or any other authorized
body of the foundation.
VII. PROTECTOR - SUPERVISORY
The founder may also establish
other special arrangements in order to retain control or supervision
over the foundation's assets during his or her lifetime. The
founder may appoint protectors, auditors or other supervisory
bodies to supervise the acts of the Foundation Council prior
to or after his/her death, since article 25 of the Law expressly
authorizes the creation of such additional entities or supervisory
The figure of the protector has
been widely used in Common Law jurisdictions when settling
a trust. This is yet another innovation of Panamanian law
which further ensures the safety of the instrument and thus
makes it even more attractive as an estate-planning tool.
VIII. FORCED HEIRSHIP PROVISIONS
Following a recent trend adopted
in the trust legislation of some Common Law jurisdictions
like BVI, Belize, Grand Cayman and the Bahamas, as well as
Jersey and Guernsey, Panama's Private Foundation Law (Article
14) specifically provides that the forced heir ship laws of
another country shall not affect the foundation or its validity
and shall not prevent the attainment of its purpose as provided
in the foundation charter or the Regulations.
Moreover, inasmuch as the foundation's
assets will not be part of the founder's testamentary estate
-having become legally autonomous - the legal norms of his/her
personal law cannot restrict or limit in any way the structuring
of the justifys of the beneficiaries of the foundation.
Formalities required for the
execution of wills shall not be applicable to Panamanian private
foundations (Article 4).