Managing a family business, investment portfolio, and real estate across several countries within a single succession plan is not easy. Placing all your assets under a Panama Private Interest Foundation’s umbrella is smart, but who will make the important decisions and be supported? How will the founder of the business be treated after they die?
This guide explains how to form a Private Interest Foundation in Panama and compares it with alternative structures such as trusts and joint stock corporations. The key issues relating to the ongoing management of a private interest foundation, the degree of confidentiality that it offers, and its cost are also detailed, together with the principal tax matters that will need to be addressed before any property is transferred to it. We would be pleased to assist with the structure that you propose and to quote for the formation of a Private Interest Foundation.
What Is a Panama Private Interest Foundation?
Panama Private Interest Foundations (PIFs) were established by Law No. 25 of June 12, 1995. As a registered, Panama-based foundation, the PIF is an independent legal entity. Property may be held in the name of the PIF (foundational property), and such property is not considered to be the property of the founder(s) or settlor(s). A PIF does not have any shareholders.
The Panama Private Interest Foundation is an extremely efficient tool for individuals and families. This is NOT a charitable structure. It is completely different from an offshore company set up to trade. Article 3 refers to non-habitual commercial activities and the right to exercise any of the rights attached to shares of companies, always and whenever the object of the activities or rights so exercised is to be used for the purposes stated in the Foundation’s statutes and bylaws and within the scope thereof.
Panama Foundation vs Trust
Typically in a common law trust, a trustee or trustees manage assets held in trust for the benefit of other people (the beneficiaries of the trust) in accordance with the terms of the Trust Deed. A Foundation is a separate legal entity that holds its own assets and is managed by a governing body.
| Feature | Panama Private Interest Foundation | Conventional common law trust | Corporation |
|---|---|---|---|
| Legal status | Separate legal entity | Generally a legal arrangement | Separate legal entity |
| Title to property | Held by the foundation | Held by the trustee | Held by the corporation |
| Participants | Founder, governing council, beneficiaries; optional protector | Settlor, trustee, beneficiaries; optional protector | Shareholders and directors |
| Main purpose | Family asset holding and succession | Administration under a trust deed | Business operations or investment holding |
| Distribution rights | Governed by charter and regulations | Governed by deed and applicable law | Governed by shares and corporate rules |
| Public documents | Charter filed with the Public Registry | Depends on jurisdiction and trust type | Depends on jurisdiction and entity type |
Note that while Law 25 governs the establishment of a foundation, trust, and corporate entity legislation varies by jurisdiction. The above is a comparison of the legal structures of the two entities and does not deal with their foreign tax classification.
Structure and Key Roles in a Panama Foundation
When a structure is established under foreign management for the benefit of third parties, a clear distinction must be made between establishing the structure, administering the underlying property under the foundation documents, and third parties using that property. It should also be addressed how to deal with participants who die or are unable to act anymore.
- A founder or group of founders can be natural persons or legal entities, acting singularly or in unison and/or by means of one or more representatives. Said founder or group establishes the main goals of the structure(s) and sets the initial contributions of capital. All of the founder(s) can be included in the Founder Council as established by the governing documents of the structure(s) and any amendments or appointments thereto. Third-party contributions are allowed, and the founder(s) do not acquire any shares of a newly established legal entity (the new structure).
- The Foundation Council consists of all the members of the Foundation established in accordance with the governing documents of the Foundation. The members of the Foundation Council may be three or more natural persons or one or more legal entities. All founders of a foundation may be members of the foundation council. All members of the Foundation Council shall be advised of the approval requirements for signature and of the scope of actions of the members and of the administrators of the Foundation with respect to the beneficiaries of the Foundation and of the duties of the administrators.
- Protector: An optional supervisor (or several supervisors) composed of one or several natural persons or legal entities. In a number of cases, the approval of the Protector is required (e.g., the information of the Foundation to be distributed, removal of administrators or founders, etc.). However, being a supervisor of a protector does not necessarily imply that this party is in control.
- Beneficiaries: Any individual(s) and/or corporation(s) that may receive distributions and/or any other kind of assistance or be served by the Foundation. A founder may also be a beneficiary of a foundation. The information with respect to the rights of a Beneficiary and any modifications thereto must be reflected in the documents of a foundation. Beneficiaries are not shareholders of a foundation.
While joining roles may seem convenient, such an accumulation of power in the hands of the founder would conflict with foreign legislation and pose problems for foreign participants. All natural persons managing or representing local as well as foreign participants in Panama must be disclosed. In the case of local participants the managing representative (professional) must also be identified and reported to the respective authorities.
Main Uses and Benefits of a Panama Foundation
The structure is typically used by entrepreneurs, investors, and families with assets that need to be managed over a period of time. The benefits depend on the assets transferred and how the arrangement is set up.
Estate Planning and Holding Family Assets
A private foundation can also hold shares of a company as well as real estate, investment portfolios, and cash. Families with a business often also wish to keep the business in the family’s hands while at the same time distributing money to all family members in accordance with the rules of the private foundation.
Distribution of capital to various beneficiaries at different stages of their lives can be fixed (e.g., children’s education, beneficiaries’ income whilst at university, and distribution of capital after completion of education). Furthermore, the following have to be arranged: loss of capacity of beneficiaries, decision-making by others in respect thereof, and predeceasing of beneficiaries.
During the lifetime of the founder of a structure, assets held by the structure in the structure’s name are held by the structure. These assets are not part of the founder’s personal estate and therefore do not need to be dealt with by way of probate on the founder’s death. However, as with any other asset, the structure needs to consider the requirements with respect to title to the asset and the way in which it will pass on the founder’s death. The guarantees of Article 14 and the foreign inheritance provisions of domestic law with respect to forced heirship do not, however, guarantee recognition of such assets in all jurisdictions.
In addition to establishing a structure, the founder will also need a comprehensive estate plan. Signing the documentation to form a structure is more than establishing a structure — it requires all assets currently held by the structure member to be transferred to the newly formed structure. This will in turn require a will, a new constitution for the company, or other document and possibly even more for other assets. Local legal advice would also need to be taken for other assets.
Asset Protection and Its Limits
Separation of Assets for a Panama Asset Protection Foundation. The above structure establishes that separating property is the core of the asset protection strategy for a Panama asset protection foundation. In the documentation of a Panama Asset Protection Foundation, Article 11 outlines the obligations (or liabilities) of the Panama entity and the rights of its beneficiaries.
Article 15 outlines the means and limitations for challenging improper or fraudulent contributions and sets a 3-year period to challenge contributions by the founder or beneficiaries, counted from the date those contributions were documented.
It will vary greatly from case to case and can depend on several other factors. As mentioned before, there is a major difference between transferring assets before a dispute and properly documenting them, and transferring assets after a dispute has occurred in a foreign jurisdiction with vastly different insolvency laws and enforcement.
Consider the transfers of all of your other assets prior to establishing a structure to protect them and gather all evidence as to how you acquired those assets (e.g., documents to prove ownership, appraisals, etc.) and also all documentation that adequately proves the lawful origin of the funds that you plan to contribute to the structure.
Privacy and Public Disclosure
Information qualified to be confidential within the scope of the founding of a foundation is, e.g., the information in the foundation charter with respect to the governing council (members’ names and addresses, etc.), the domicile of the governing council, and the purpose(s) of the foundation, etc., in the foundation charter to be stated in the foundation statutes to be made public.
Typically, the private regulations of a trust contain information as to the beneficiaries of a trust and the terms and manner in which distributions of capital or income are to be made to individual beneficiaries. Such information is generally not required to be disclosed in any public filings made with respect to the trust. Such information is typically subject to confidentiality as provided by statute and can be disclosed as required to any official authority.
Such beneficial owner information can be retrieved by a local service provider for a non-public registration but then also has to be checked by the banks, other than through the public register information. Information on private individuals available for search in a public register can be retrieved only by official or statutorily regulated bodies, such as the OECD, in accordance with their internal rules and authorization to receive such information.
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How to Set Up a Panama Private Interest Foundation
Before forming a Panama Foundation, it is helpful to establish the foreseeable assets, beneficiaries, and organizational structure (decision-making, etc.). It is often helpful to fix these before incurring formation costs, which can subsequently change.
Formation Requirements and Documents
Prepare the following:
- Foundations can be created under different names containing the word 'foundation,' and their domicile and local address can be anywhere in the world.
- Founder, Foundation Council, Beneficiaries, or alternative name(s) to reference them (i.e., a trust or similar vehicle), and also Protector (if any).
- Resident Agent or Law Firm: Name of Panamanian lawyer or law firm that will act as resident agent for and/or countersign the Charter of the Foundation.
- An initial patrimony of $10,000 must be committed for transfer to the new foundation after it acquires legal status.
- A foundation charter, stipulating the goals of the new Foundation, setting out its term and manner of management, and regulating amendments and also the dissolution of the said Foundation.
- Private regulations that outline the rights of the beneficiaries and the manner by which distributions shall be made, as well as the rules pertaining to the succession of a beneficiary or of the Foundation itself, and any required approval by a third party, whether an individual or an authority.
Article 10 requires a $10,000 endowment to be transferred into the account of the newly incorporated Foundation. The funding method, the incorporation timeline, and the transfer of other property to fund the endowment can all be agreed with the lawyer and the client’s counsel.
Additional documents to identify the participants (such as current address, tax resident status, etc.) and additional information about the participants (e.g., source of funds) may be required. Additional documents might also be required to confirm the disposal of funds by natural persons or by companies in relation to which the participant acts in his capacity as managing director or as representative of said companies. The risk assessment process may also require further references or evidence. Corporate entities will also be required to provide a certified copy of the relevant company document(s) together with a resolution(s).
Registration and Transfer of Assets
The process normally involves four stages:
Conduct adequate due diligence to discuss the proposed structure(s) and scope(s) of service(s).
We will then draft and execute the incorporation documents. Execution of the incorporation documents requires signature authentication (notarization), and incorporation documents authorized for use overseas require a Spanish translation.
The charter is then protocolized before a notary and registered with the Public Registry to record the incorporation of the newly formed entity.
Execute separately the title formalities for the individual assets selected to be transferred under the charter in execution. Open a company banking account(s) plus investment accounts (e.g., a trading account) and set up administration of the property transferred under the charter.
The time taken by government registration services to complete incorporation applications is generally within 1-2 weeks. However, allowing time for KYC, document preparation and notarization held overseas, and for bank account applications and asset transfers will typically extend overall timescales. Where possible, we conduct all aspects remotely via our local rep. However, original(s) and/or authenticated (signed in front of a notary) copies of certain documents are sometimes required.
For opening of bank accounts (or investment accounts, e.g., for a trading account), we shall require the company’s governing documents, a copy of the registration documents at the public registry, the relevant bank account application form, and a completed due diligence questionnaire. The timescale for opening of bank account(s) will be in addition to the timescale for the registration process and cannot be guaranteed to be completed as part of the registration process.
Taxation and International Reporting
Adding a Panama foundation to other assets does not automatically trigger worldwide taxation of all such assets and of all income earned with them. The main factors on which taxation is based are the type of assets, their location, the type of income, and the way the participants in the foundation are set up.
Tax Treatment in Panama
The foregoing is true because of Panama’s territorial taxation. Article 27 of the Reformations of Tax Law contains exemptions of assets abroad and of certain transactions such as deposits and of stock of non-exempt securities of foreign companies. Article 27 has been amended by Article 70 of Law 6 of 2005, and thus must be read together with the subsequent amendments to such Article.
Therefore, reference has to be made to whether or not the exemptions for transfers of domestic property, Panama income, or other Panama transactions do not apply. This condition was introduced by the amendment of Article 27 by Article 70 of Law 6 of 2005. The former final paragraph of Article 27 was also amended, and the exemption for transfers between relatives has been abolished.
An annual government charge for the existence of the foundation continues to be payable even if it is otherwise exempt from transfer, income, and distribution taxes.
Tax Obligations Outside Panama
Tax advice will need to be obtained in the countries of tax residence of the founder(s) and the beneficiaries. This tax advice will cover the incorporation of the structure, the hold period of the structure, the distribution of the assets held by the structure (whether in respect of shares or otherwise), and the winding up of a foreign entity.
When you are seeking local tax advice on foreign entities, trusts, gifts, and overseas assets for tax and reporting purposes, it is helpful to outline the proposed residence of all parties involved, the directors’ reserved powers, and the proposed capital contribution. An exemption from tax in a country is in most cases not equal to an exemption from all taxes levied by another country.
Important Note for U.S. persons: The structure must be clearly defined as to the foreign entity that will receive the contributions. Any subsequent transactions (such as purchases and sales) within the structure, as well as the foundation’s ownership of assets in the foundation and all distributions of such assets by the foundation to any beneficiary, will likely require a Form 3520 and a Form 3520-A to be filed by the U.S. person(s) in such structure, in addition to such income being reported by such U.S. person(s).
A confidential structure will nonetheless still be subject to the tax-information exchange agreements of the countries where the founder(s) and beneficiaries are tax residents. Moreover, certain countries, such as the Cayman Islands, compulsorily require the reporting of financial accounts held by banks and account holders with financial institutions within such countries.
Setup Costs and Annual Maintenance
A Panama private interest foundation can be set up for as low as €5,450/US$6,350, depending on the complexity of the documents and other services required. Note that the minimum initial capital required for a Panama foundation is US$10,000, and this is a separate entity from the costs for the formation of the foundation, and therefore this is allocated as property to the foundation.
Ongoing annual maintenance fees start at Euro 3,750 plus disbursements (e.g., annual government charge, resident agent, administration, etc.), which are specified in the proposal. It is also very important that government and registry charges are clearly itemized.
For nominee representation, a minimum of €6,600 / €7,300 is required, with the scope of work to be agreed and the payment frequency in advance. Additional services required by you (e.g., bank representation, translations, apostille certificates, accounting, and tax consulting) are charged in addition unless otherwise stated.
Ongoing maintenance requirements include paying for maintenance and keeping participant information and the corresponding governing documents up to date. Additionally, you must retain accounting records and supporting evidence, which differ from the public financial statements required by law and should not be mistaken for the latter’s absence of requirements.
How Q Wealth Can Help with Your Panama Foundation
Q Wealth can first advise you whether a Panama Private Interest Foundation is suitable for your circumstances and then go on to establish the Panama Private Interest Foundation for you within Panama. Q Wealth can complete all of the Foundation documents for you and register the Panama Foundation for you. Q Wealth can act as your local representative for the Panama Private Interest Foundation and administer the affairs of the Private Interest Foundation on an ongoing basis. Q Wealth can also seek banking for you and open up accounts on your behalf, but account opening is at the absolute discretion of the bank.
Please provide Q Wealth with the tax residencies of yourself and the proposed beneficiaries of the Private Interest Foundation (PIPFI) as well as details of the assets to be transferred to the PIPFI and who is going to manage the affairs of the PIPFI. We can then outline the process for the establishment of a PIPFI and provide a detailed proposal that outlines all of the services to be provided on an ongoing basis, including the annual charges for such services as well as for any additional professional services that may be required from time to time.
