Panama

Panama Private Interest Foundations, incorporated under Panamanian Law 25 of 1995, are an ideal alternative to Anglo-American common law trusts as a means of protecting assets and investments offshore for asset protection and inheritance planning. This article explains more about this flexible legal vehicle that can help you protect the fruits of your labor on behalf of your chosen beneficiaries.

The law governing Panamanian foundations is based on the law of the Principality of Liechtenstein. A Panama Foundation, however, is cheaper to set up, cheaper to maintain, more private and – perhaps most importantly – offers the utmost flexibility. While this structure is therefore a fairly new entity for Panama, the idea itself is not new. Foundations have been used as a family inheritance planning and asset protection tool in Continental Europe for more than a century so the nature of the Panamanian foundation is understood and appreciated by many continental Europeans.

The Panamanian Foundation offers some of the best benefits of both the trust structure and offshore corporation or IBC rolled into one. But in order to understand the idea and benefits of the foundation structure, you first need to be clear on the difference between a common law trust and a corporation.

It is important to note the difference between English speaking countries that use Common law (like the USA, UK, Canada, Australia etc) and many non-English speaking countries that use Civil Law or Napoleonic Code (for example France, Spain, Germany… and Panama).

Most businesspeople and investors understand the idea behind a corporation. Corporations are more commonly referred to as ‘Companies’ in British English, but it’s the same thing. Corporations are used everywhere in the world and operate along broadly similar lines. They are designed for doing business (not so much for holding assets, though they can also be structured for that purpose.)

The principal idea behind a corporation is that it is a separate legal entity, different from its owners or managers. It is what can be termed a juridical or legal person. Although of course it is not a human being, it has all of the rights and responsibilities of a human being under the law. It can, for example, sue or be sued in its own name. It can also sign contracts or take on debts in its own name, without creating a liability for its owners. The liability of the owners is limited to what they have agreed to put up as share capital.

That is the key point that we are interested in here: the assets and liabilities of the corporation are separate and distinct from those of the shareholders. Basically no court in the world can argue with that.

The trust, however, is a different kind of vehicle. Trusts are not designed to engage in business activities. They are designed for holding assets in safe keeping for a designated person or group of persons. The trust does not have a separate legal personality – instead the assets are registered in the name of the trustee. Common law recognizes, however, that the trustee is holding those assets for someone else. For example, if the trustee goes bankrupt, the assets he holds as trustee will not be involved in the bankruptcy proceedings. They will be kept separate.

There are two major problems with trusts:

? Problem number one is that as the Trust is a Common Law concept that does not exist in Civil Law, there can be conflicts of legal systems. If a country where assets are located interprets trust law differently from the country of residence of the person who created the trust, for example, you don’t need a wild imagination to see that the results could be catastrophic. With more and more people choosing to live, invest, retire and do business in more than one country, this problem is becoming more prevalent.

? The second problem is that trusts have also been attacked from all sides in recent years, even in Common Law countries. You may have heard about this in the news. Recent court cases in the USA, for example, have proven in my opinion that US judges either do not understand the essence of what a trust is meant to be or – more likely – have simply chosen to disregard the centuries-old trust law altogether in favor of public policy decisions like supporting the government, IRS, or greedy ex-spouses.

For this latter reason (in my humble opinion), any trust structure that is a domiciled in the US and some other common law countries is really not worth the paper it is written on. This is not to say that the laws in these countries are poor regarding these structures. The laws are good. The problem is one of interpretation and of courts not respecting the law. When your opponents don’t play by the rules, serious preparations are required. All in all, trusts are not the great asset protection vehicle they once were.

That is not to say there is anything inherently wrong with offshore trusts. On the contrary, they are an ideal vehicle for tax and inheritance planning in some circumstances. But with the number of jurisdictions in the world offering trusts, and all having tailored their laws and jurisprudence in slightly different manners, I will not enter into a comparison of good and bad types of trust here. Suffice to repeat that the main difference between trusts and corporations is that trusts are designed for holding and preserving assets, while corporations are designed for doing business.

Where, then, does the Panama Private Interest Foundation fit into this picture?

The Panamanian foundation offers the best features of a trust and the best features of an offshore corporation. Since there are no shares in a Panamanian foundation, it has no owners. The founder does not own the foundation and as such gains important tax reporting and asset protection benefits.

While the foundation cannot technically engage in business activities, it can own the shares of a company engaged in business activities. It is also permissible for the foundation to engage in any activity designed to increase the value of assets. This means that a foundation can be the owner of bank accounts, securities brokerage accounts and real estate holdings, for example.

Because many judges have taken the route of “re-interpreting” the law in such a way that Trusts are not as secure as they once were, the Panamanian Private Interest Foundation is worthy of consideration as an alternative. Foundations have some attributes that make them superior to trusts.

Clients who ask me in individual consultations about Panamanian foundations have many questions… but I have found that the most frequently asked question is: What’s the difference between a trust and a Panamanian foundation?

A Panama Foundation acts like a trust but operates like a company. It is, in essence, a company with beneficiaries instead of shareholders. Rather than trustees, the foundation is managed by a council which acts more like a board of directors.

Another way of describing it would be “an incorporated company without participating shareholders but still having limited liability.” The foundation is the owner of its own assets and functions in a codified legal system, which is less open to interpretation than common law (in other words, you know in advance the deal you are getting!)

Like a Panama company, the Panamanian foundation must have a local Registered Agent (lawyer or law firm) in order to establish its legal domicile in Panama. It also has the flexibility to move in and out of Panama in a similar way to companies that are able to change domiciles.

A Foundation is created by a charter, which is registered with the Public Registry in Panama, in the same way as a company. The terms of the foundation charter can be made as loose or as rigid as the client desires. The charter is typically written in such a way that its provisions can be easily altered to meet contingencies by means of ‘regulations.’

The charter is the only public document, and will typically include the names of nominees who serve as the Foundation Council. The typical (and most private) structure then appoints one or more ‘Protectors’ who might be the client or a trusted friend or professional etc. Typically, the Protector is responsible for the day-to-day operations, and operates through a Power of Attorney. The Protector is therefore the ‘main man’ who has sole signatory power over the bank and brokerage accounts.

The Protector is then responsible for appointing the Beneficiaries, in a private document. You might or might not choose to tell the beneficiaries directly. With suitably drafted statutes, the Protector is free to change the Beneficiaries – and pretty much anything else for that matter – at any time and without informing anybody. This in itself offers much greater flexibility than a typical trust.

All in all, therefore, it could be said that the Panama Private Interest Foundation offers better privacy, security and asset protection than a trust or fiduciary arrangement.