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  Offshore Private Foundations

PANAMA PRIVATE FOUNDATIONS

Introduction

Definition

Advantages

Most Common Uses of Private Foundations

Differences between Private Foundations and Trusts

Differences between Private Foundations and Corporations

Differences between Liechtenstein Foundations and Panama Foundations

Introduction

It well known within the offshore services industry that a major step forward was taken by the Principality of Liechtenstein with the adoption of the Law on Persons and Companies of January 20, 1926 which created the Family Foundations (for the private benefit of members of one or more families) and the Mixed Foundations (for the benefit not only of family members, but also of other persons or institutions). The family foundation as a legal entity also exist in Austria without much international recognition, however, due to the fact this country is not deemed as an offshore centre.  Additionally, there are the Luxembourg foundations with substantial differences to Liechtenstein and also of reduced international recognition.

The Republic of Panama inspired in the laws of Liechtenstein adapted the European model to create a Private Interest Foundation more modern and flexible, with clear advantages for the protection of assets and international tax planning and empowered to carry on transactions in an effective fashion.  We have prepared this document to assist our clients in the evaluation of alternatives offshore structures for the better planning of their assets, estate and business transactions.

Definition

A Private Foundation (“Foundation “) is created when one or more natural persons or legal entities (“Founder(s)”) formalize a document known as a “Foundation Charter”, which is registered at the Public Registry of Panama, through which the parties undertake to make a donation (“Foundation Assets”) not less than the equivalent to US$10,000 (which sum may be subsequently increased by other donations), to be managed by a “Foundation Council” under the supervision or not of “protectors”, for the benefit of one or more “beneficiaries”.

The obligation to contribute donations, whether in money or in kind, is not subject to a limited period of time and there is no legal requirement to publicly or officially advise its delivery.

Once registered at the Public Registry in the Republic of Panama, the Foundation Charter creates a new legal entity without need for any further legal or administrative endorsement.

A Private Foundation is the combination of a corporation and a trust.  In general, a Foundation has similarities with a corporation in as far as it is registered at the Public Registry, the assets of this new legal entity are separate from those of its creators, it is constituted to maintain confidentiality on the ownership of assets and in order to obtain fiscal benefits., and it has similar administrative bodies.  It differs from a corporation in that the Foundation has no owners, as it does not issue share certificates nor any other participation title, and a Foundation may be created as a testamentary instrument and may not have profit aims.

Likewise, a Foundation has similarities with a trust:  It is a juridical institution that requires specific formalities; some of the Founder’s assets are transferred, contributed or “donated” to the Foundation; a Foundation may be revocable; it may be created inter-vivos or mortis-causa by means of testamentary provisions; it is usually created with the purpose of managing, preserving, administering or investing assets for the benefit of the donor’s close relatives, as well as to obtain confidentiality and fiscal benefits,.  It differs from a trust in as far as the Foundation is the owner of its own assets since it possesses its own legal personality and there is no “trustee” but rather the figure of a “Foundation Council” which combines the functions of the “Board of Directors” (of a corporation ) and the functions of a “trustee” (of a trust); a Foundation is registered at the Public Registry and is subject to an annual fee that is identical to that of corporations in Panama (US$150.00).  It is important that these differences be clarified in order to better understand the features of a Panamanian Private Foundation, for which we shall describe this in more detail in Section F.

Law No. 25 of 12th June 1995, which governs Private Foundations, defines in detail how Foundations are established and how they operate.  The provisions set forth in this law were regulated through Executive Decree No. 417 of 8th August 1995, which created the Private Foundation Section of the Public Registry and regulated the registration of the constitution, modifications and revocation of such Foundations.

A Private Foundation may, at the client’s option, issue Regulations that need not be registered at the Public Registry, and therefore absolute confidentiality is always maintained.  These Regulations contain, among other features, the designation of beneficiaries and the manner in which the Foundation Assets are to be distributed.

Advantages

Significant advantages are offered by the Panama Private Foundation.  The following are some highlights.

·   Total exemption of taxes in the Republic of Panama, including without limitation, income tax, wealth tax, real estate tax, inheritance tax, sales and transfer tax and others.

·   Total confidentiality and anonymity.  The law on Private Foundations state that the Foundation Council, the protector and the resident agent and any persons or institutions which by reason of their function obtain information related to the activities, transactions or operations of the Private Foundation shall at all times by obligated to maintain strict secrecy, even after its liquidation.  Violation of this rule shall be fined with imprisonment of up to six months and penalties of up to US$50,000 with limiting the respective civil liabilities arising there from.

·   There is no legal requirement to disclose the name of the real founder, beneficiary or protector.

·   There is no requirement to file any annual tax return or financial statement.

·   There is no obligation to hold an annual meeting of the foundation council, the founders or the protectors.

·   Fast incorporation.

·   Simple administration and management procedures.

·   Reasonable incorporation and maintenance fees.

·   There is no legal requirement of maximum authorized capital.

·   The payment of the foundation capital is not required for the incorporation of the foundation and there is no maximum time or deadline to make such contribution.

·   There is no limitation in respect of perpetuities, accumulation of capital and other restrictions which are required in similar structures in other jurisdictions, such as the anglosaxon or common law trust.

·   The private interest foundation can engage in any business or civil transactions (only in exceptional cases) in part of the world and in any currency.

·   The founders, members of the foundation council, beneficiaries and protectors may be individuals or corporations of any nationality.

·   The members of the foundation council need not be founders.

·   The founders, the protectors and the members of the foundation council may be beneficiaries of the foundation.

·   There is no limitation on the maximum permitted number of founders, members of the foundation council, beneficiaries or protectors.

·   The founders and the member of the foundation council may hold their meetings in any country and may be represented by proxy.

·   The foundation books and accounting books may be maintained in Panama or abroad.

·   The foundation charter can be signed by an attorney in fact or by a trustee without the need to disclose the name of the founder.

·   Private Foundations incorporated in other countries can be redomiciled or continue existing as Panama Private Foundations and vice versa following a simple continuation procedure.

Most Common Uses of Private Foundations

Private Foundations are commonly used for the following:

·          To protect the weak.  One of the classic uses of a Private Foundation is to protect persons at a disadvantage due to minority, incapacity or incompetence to manage their assets or the risk of losing same.

·          In cases where family businesses are passed to second and third generations, there is a possibility of such business becoming fragmented and outsiders gaining control.  In these cases, a Private Foundation insures and conversation and continuity of the family businesses.

·          To guarantee payment of individual sums of money or individual asset distribution to members of one or more families for their subsistence, education, clothing and other living expenses, or as a mechanism by which their children/grandchildren may partake in their parents’/grandparents’ earnings.  In Europe, private foundations for the aforementioned purposes are known as “Family Foundations.”

·          To carry out scientific, humanitarian, philanthropic, religious or charitable activities or to manage funds reserved for these activities.

·          For a combination of all of the above, that is, for the benefit of family members and other persons and institutions.  This type of multiple purpose private foundations is known in as a “Mixed Foundation.”  The Standard Foundation Charter creates this kind of Private Foundation.

·          As a Panamanian Private Foundation need not be exclusively circumscribed to benefits for family members, it is typically used to distribute assets or earnings to other individuals (either friends or loved ones) designated as Beneficiaries of the Foundation, either upon its incorporation, subsequently at a specific time designated by the Founder, or in the event the Foundation is dissolved.

·          To act as the administrator of employee profit distribution plans and employee pension plans.

·          As a substitute for a will, thus avoiding complicated inheritance procedures, for which the Foundation Council would distribute the estate assets.  With regard to the matter of successions, and as subsequently explained more fully in detail, it is noteworthy to mention that Panamanian Law sets forth that the provisions on forced heirs of the Founder’s domicile or of the Beneficiaries’ domicile do not affect the validity of the Foundation created in Panama nor the transfers made to the Foundation, as same can not be revealed or declared null by alleging inheritance rights.

·          As a substitute for marriage articles or pre-nuptial agreements.

·          To own shares, interests and stocks of private companies.  In this case, the Private Foundation acts as a holding company.  This is one of the basic and most common uses of Panamanian Foundations.

·          As a vehicle for collecting royalties and other types of returns.

·          As a vehicle for investing in time deposit accounts, stocks, bonds or other securities.

·          As the owner of real estate or valuable movable property such as art work.

·          To insure assets against different adverse situations, such as excessive taxes for those who reside where the assets are located, future claims by creditors, forced heirs or political or economic instability in the country where the client resides.

·          To manage bank accounts, whether numbered or not, as this is a discreet and safe vehicle.

·          For any specific asset protection plan.  It is important to note that, if assets are transferred to a Panamanian Private Foundation with the purpose of evading creditors, such creditors shall have the right to object to such transfers, but they shall have only three(3) years in which to do so.

Differences between Private Foundations and Trusts

There are certain similarities between Private Foundations and Trusts due the fact that the foundation council enjoys considerable decision and control powers owner the foundation assets by reason of the lack of ownership of the foundation.  This fact creates a requirement of absolute confidence between the client and the foundation council, which is a fundamental similarity of the confidence between the client and the trust company.  However, there are substantial distinctions between the Panama Private Foundation and the Panama Trust:

·          The trust is a legal act by means of which a person called the settler transfer assets to a person called the trustee, who will manage or dispose of them in favor of a beneficiary, who can be the same settler.  The trustee is normally a firm or company engaged professionally and customarily in the business in managing properties, investing liquid assets and transferring assets which are legally under the ownership of said trustee, but subject to the provisions of the trust instrument.  On the contrary, the registration of the foundation charter at the Public Registry of Panama grants independent legal personality to the Private Interest Foundation and, as a consequence, the foundation can purchase and hold assets of any kind and can enter into any arrangements.  The foundation, different from the trust, is the owner of its own assets which are managed by the foundation council, which has the function to fulfill the objectives and purposes of the foundation.

·          The use of the foundation as a structure or vehicle for the ownership of any movable or immovable assets is not applicable to trusts due to the fact that trusts per se do not form a legal entity different from the trustee.  In order to transfer the authority of the settler over the trustee and over the assets managed by the trustee, it is required to execute other formal documentation with the same requirements to that by means of which the settler transferred the assets to the trustee.

·          The control and administration of the assets given in trust is the power of the trustee.  In the Private Foundation, this power of control and administration is in the hands of the foundation council.

·          The trust allows the appointment of one or more trustees without a minimum or maximum.  The foundation council requires a minimum of three (3) individuals or one (1) corporate director.

·          The trust law does not contain provisions for asset protection against future claims from creditors.  The Private Foundation legislation has very clear provisions limiting legal claims against the founder.

·          The trust is used mainly to substitute wills and to execute commercial transactions such as purchases of real estate, opening an administration of bank accounts, investment in stock markets and mutual funds, and the entering into international agreements.  On the contrary, the Private Foundation is a discreet vehicle to open an operate bank accounts and are created principally for testamentary protection, to manage and administer the distribution of moneys and families properties, to act as philanthropic or ecclesiastic institutions, and to become holding entity that operate as owners of corporations.

Differences between Private Foundations and Corporations

We renders continuous and nearby support to our clients in the creation and maintenance of offshore International Business Corporations and related services.  And this is because these companies have always been the cornerstone of fiscal havens.

The new Private Foundations do not seek to replace offshore companies but to complement them, hence Foundations are used primarily for charitable purposes, to serve as the owners of companies (in which capacity the Foundation is generally called a “holding company” or a “parent company”) and for family and/or inheritance purposes.

To avoid any confusion or misunderstanding for our clients, we list below the main differences between Panamanian Private Foundations and corporations:

·          A corporation issues shares that represent the participation of the owner in such institution.  The shares issued by a company (securities) are transferred by endorsement in the case of nominative shares and by simple delivery in the case of bearer shares.  Therefore, the ownership of a corporation is transmitted by the transfer of the title to the corporation’s shares.

·          In contrast, the Foundation does not issue titles that represent participation in its ownership.  Once the Founder creates the Foundation, the name of such Founder is registered at the Public Registry of Panama and may not be replaced.  The Founder is perpetually the same person and has all such powers as may be indicated in the Foundation Charter.

·          Although in practice the Founder is considered to be the owner of the Foundation, he may not dispose of the Foundation itself by using the same transfer mechanisms as in a company limited by shares, as there is no “Registry Book” envisaged by the law that accredits the ownership of a Foundation.  However, we must bear in mind that whoever has the capacity to appoint and remove the members of the Foundation Council, which is the body entrusted with the attainment of the Foundation’s aims, shall in practice hold the ownership of the Foundation.

·          Consequently, the idea of making use of a corporation as a vehicle to be the owner of any movable or immovable good in order to indirectly transfer such assets through the transfer of such company applies also to Foundations, upon transmission of the authority or control over the Foundation Council.  In this regard, there are several simple mechanisms that may be used for the transfer of a Foundation, namely:  The Foundation may be created by a person who acts as a trustee, that is, who assigns assets that are in his power to the Foundation but subject to a Trust Agreement generally known as a “Declaration of Trust”.  Such trustee (the registered Founder) rigorously complies with the stipulations set forth in the Declaration of Trust and the instructions by the true owner of the assets, that is, the Settlor.  In this case, the change of the settlor in the Declaration of Trust transmits the Foundation’s ownership.  We offers trustee services for the purposes of creating a Private Foundation in Panama and subsequently transmitting same.

·          In cases where the registered Founder is not a trustee, the transfer of the Foundation is also feasible as follows:  If the Foundation Charter does not grant power to the Founder, that is, such Founder does not have the power to designate Beneficiaries, Protectors, auditors or members of the Foundation Council, nor power to amend the Foundation Charter, and such powers are vested in the Foundation Council, then the person who maintains a contractual relationship with the Foundation Council shall in practice be the owner of the Foundation.  We offer the services of nominee Foundation Council Members.

·          If the client wishes another arrangement, a special clause may be added to the Foundation Charter or the Regulations in order that it be a “Protector” (supervisory body) who has the power to remove and appoint the members of the Foundation Council.  Such “Protector” would, upon removing and appointing new members of the Foundation Council, be indirectly transferring the Foundation’s ownership.  We offers the services of nominee “Protectors”.

·          If the Foundation Charter grants power to the registered Founder to designate Beneficiaries, Protectors, auditors or members of the Foundation Council, as well as to amend the Foundation Charter, the Foundation Charter would first need to be amended in order that such powers be exclusively vested in the Foundation Council or the supervisory bodies.  Subsequently, the person who maintains a contractual relationship with the Foundation Council or with the supervisory bodies shall in practice be the owner of the Foundation, in which case what has been set forth in the above point would apply.

·          Corporations are formed with the signatures of two subscribers whose names are generally provided by the Panamanian registered agent.  In contrast, a Foundation is created with the signature of the Founder (who may be a trustee).  The person who acts as the Founder is provided by the registered agent only if a trust agreement is formalized before the creation of the Foundation.

·          The figure of the Protector is established in the Foundation law in order to supervise and safeguard the assets that are at the disposal of the Foundation Council.  In the corporation law, no supervisory figure is envisaged.

·          The control and administrative body of a corporation is called the Board of Directors.  In Foundations, such body is called the Foundation Council.

·          There is no legal obligation for corporations to render account annually to the shareholders.  Such annual obligation does exist for Foundations.

·          The corporation law does not set forth any provisions with regard to successions.  In the event of a shareholder’s death, whoever is the legitimate heir as provided for by the inheritance laws of the shareholder’s domicile shall inherit such shareholder’s shares in the company.  In the case of Foundations, there is a specific rule that protects the Founder’s wishes, as inheritance provisions of the Founder’s domicile are not opposite to the creation of the Foundation, nor to transfers made to the Foundation.  That is to say, legal heirs may not revoke the creation of a Foundation nor its transfers to the prejudice of the Foundation’s beneficiaries.

·          A Foundation is an instrument that replaces a will, unlike the case of corporations.

·          The corporations law has no specific rule obliging registered agents and public authorities to keep confidentiality regarding their documents.  The general rules on professional secrecy are applicable to Registered Agents.  In the case of Foundations, it is patently established that there is an obligation on the part of whoever acquires any knowledge of a Foundation’s activities to maintain reserve and confidentiality under penalty of fine and/or arrest.

·          There may not be fewer than three members of the Board of Directors in a corporation.  To the contrary, only one member is required for the Foundation Council if such member is a body corporate.

·          The objects of a corporation may be any purposes of a business nature.  In contrast, Foundation’s range of action is limited to all activities for which no Commercial License, Industrial License or Professional Qualifications is required to carry them out, that is, being the owner of securities, real estate and bank accounts, as well as entering into contracts of any nature that does not imply the habitual practice of commercial business.

·          Corporations do not have any rules on the protection of assets vis-à-vis future claims by creditors.  The Foundation law has very clear rules restricting the claims that may be made against the Founder.

·          Paulian or revocatory action objecting the contributions or transfers of assets in favor of a corporation does not have any specific prescription date.  In contrast, as per the Foundations law such action prescribes three years after the transfers have been made.

·          Corporations are generally used to carry out commercial transactions, the most comm, , on of these being: the purchase of immovable property, the opening of bank accounts and the signature of international contracts to facilitate exchanges and avoid taxes.  Foundations, on the other hand, although a discreet mechanism for opening bank accounts or purchasing immovable property, are basically created for inheritance purposes, for managing the distribution of family money and properties,  for acting as charitable or church institutions, and for becoming holding companies that act as the owners of corporations.

·          The core idea of the Private Foundation Law is to create a legal instrument that acts as the owner of liquid or fixed assets and that it be such legal entity who transmits such assets following the strict wishes of the Founder, either during his lifetime or after his death.

Differences between Liechtenstein Foundations and Panama Foundations

      It is evident that the jurisdiction of Panama has taken an important step in its development by introducing the legal figure of a Private Foundation, adopting Liechtenstein’s initial idea to create a new model that includes the basic requirements of international asset planning.

      Thus, the Panama law has added a considerable number of innovations, among which the following are the most relevant:

·          In certain circumstances upon the death of the Founder, Liechtenstein Foundations are open to objections by heirs and creditors, which is limited in Panama because of the rules on the irrevocability of Foundations in matters of inheritance and the three year prescription of revocatory action in matters of creditors fraud.

·          A basic distinction between the two laws is that Panama Law does not differentiate between a “Family Foundation” (for the benefit of a family) and what is known as a “Mixed Foundation” (for the joint benefit of a family and other persons or institutions), as is done in Liechtenstein.  In Panama, the Foundation is called one of “private interest”, a concept that comprises any kind of Beneficiaries, whether members or not of a family, including natural persons and legal entities of any nature.

·          Another important difference is that in Liechtenstein, the Constitution Deed and By-laws of a Family or Mixed Foundation need only be deposited at the Public Registry.  In Panama, the Foundation Charter must be registered at the Public Registry (but not the Foundation Regulations, whose registration is optional) and obtains, consequently, a distinguishing registration number.

·          In contrast to Liechtenstein, an official, printed certification evidencing the existence of a Private Foundation which includes all and any information requested by the client (if available at the Public Registry) may be requested at the Public Registry of Panama.

·          Welfare Foundations in Liechtenstein may not be called Family Foundations, as they infringe the regulation on “truth of name”.  There is a full freedom of designation in Panama.

·          Liechtenstein Law requires the members of the Board of Foundations to fulfill certain requisites on nationality, residency and professional activities.  There are no such requirements in Panama.

·          Foundations in Panama are governed by an independent law plus applicable analogous provisions, while in Liechtenstein same are governed by a law that also envisages other figures (Title V of the Law on Persons and Companies).

·          In the matter of successions, Liechtenstein applies its Private International Law regulations in disputes where there is conflict of laws as to choice of governing law, the heir’s or principal’s law of residence or domicile being applicable in most cases.  In the event of conflict of laws in Panama, Panama Law will always be applied.

·          Panamanian Foundations are subject to one sole Annual Franchise Tax of US$150.00 regardless of the total of their assets.  In Liechtenstein, Foundations are subject to fees in proportion to their assets.

·          In general, Liechtenstein Foundations are subject to a flat SF1,000.00 (around US$650.00) tax per year.  In Panama, the Annual Franchise Tax is US$150.00.

·          Panama Law has introduced a new figure of a supervisory body or Protector, which has been taken from Anglo-Saxon Law on Trusts.

·          Panamanian Law does not require that the minimum endowment required for creating a Private Foundation be contributed in advance.

 


 
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