Panama’s Foundations Explained by an Expert

On our website, we have talked a couple of times about the foundations in Panama. We know that their main characteristic is that they are legal entities established for the purpose of managing an asset or patrimony (and must comply with the goals assigned to them during their creation).

It is not a new structure; it has a history that dates back many years. In fact, it is said that one of its main fundamentals is in the “foundations” that were created by wealthy families in Europe to protect their money and secure their assets.

Today, however, they have evolved. To explain to our readers how Panamanian foundations work today and what are the advantages of choosing this legal device, we have contacted one of our expert partners on corporate services in Panama. We will let her be the one to clarify your doubts about private interest foundations.

Q. It is a pleasure to have you with us today. Thank you for being here. Can you please tell us about your career and your experience working in corporate services in Panama?

A. I have a degree in Law and Political Science from the University of Panama, I have worked in one of the most important law firms in Panama for more than 10 years as Legal Assistant, Corporate Officer, and Trust Officer. I have experience in corporate, banking, and trust services, as well as compliance and AML policies. I have worked with several jurisdictions, to mention a few: BVI, Bahamas, Seychelles, Nevis, United States, Niue, Samoa, Vanuatu, Belize, Uruguay, Malta, UK, Ireland, Scotland, Panama, and Costa Rica, and I currently serve as Head of Corporate and Trust Services for NTL Trust Ltd.

Q. Can you please tell us the general advantages of a Panamanian foundation?

A. It is an excellent tool for estate planning and protection of assets, it offers confidentiality since the information of the beneficiaries and specific details of the management of the foundation remains in a private document, and it constitutes an autonomous patrimony that cannot be seized or embargoed. There is no opposability of law in hereditary matters, it is exempt from the payment of taxes in Panama for the assets that are outside the national territory and has a Prescription of 3 years in case of Fraud of Creditors.

Q. We understand that a Panamanian foundation is a hybrid entity between a foundation and a trust, can you please explain this to our readers? Why can this be a benefit?

A. The Panama foundation is very similar to a trust in a practical sense. However, unlike a trust, which is a contract between the trustee and settlor, the private interest foundation is a legal entity. A trust is a contract under which a settlor puts his/her assets under the custody of a trustee. A foundation, on the other side, is an entity which is formed, and which will own the assets.

Q. Our readers are usually looking for a country where they can safely save their wealth and keep their names confidential. We understand that the foundation in Panama is a very confidential structure. Can you explain why?

A. Private Interest Foundations have the highest levels of confidentiality, taking into consideration different aspects: the foundation regulations are not registered before any authority and they contain the information about the beneficiaries, protector and distribution of the assets under the foundation.

The Private Interest Foundation Law enshrines the foundation secret, that is, the duty of confidentiality (under penalty of civil and/or criminal sanctions) to the Members of the Foundation Council and the supervisory bodies, if any, as well as the public or private servants who had knowledge of the activities, transactions or operations of the foundations. The provisions of this article shall apply without prejudice to the information to be disclosed to the official authorities, and the inspections to be carried out by them in the manner established by law.

Q. But the Panama foundation’s bank accounts are obliged to report under CRS? How does this work? As we understand, the bank account is under the FBO name.

A. The bank account will appear under the foundation name; however, the person who maintains control of the foundation is reportable as the controlling person, although this may depend on the bank’s policies. In foundations there are some limitations to receive the benefit itself, that is to say, a trigger event that makes the distribution of the assets to take place, such as the death of someone, for the purposes of CRS the person who has control of the structure must be reported.

For these particular inquiries, I recommend asking for a private consultation so we can revise the specific case.

Q. How much control does the FBO hold over the assets of the foundation? Can companies be the FBO? Are these subject to the public record?

A. In Private Interest Foundations, there is the figure of the protector who is the person appointed to supervise the acts of the foundation council and ensure compliance with the provisions of the founding regulations. The protector is named in the founding regulations, so his or her information is kept private. This figure is protected by Panama’s Foundations Act, which establishes the possibility of having a protector, committee, or any other supervisory body, to control the acts of the founding council.

The information on the beneficiaries of the Private Interest Foundation is private since it is established in the Foundation Regulation, therefore, the beneficiaries are not exposed to public records.

In the same way, the final beneficiary owner has no control nor responsibilities over the assets. In this way, the Panama foundation works like a trust.

The law shows no restriction on whether the FBO is an individual or a company, but this has to be properly set up when establishing the foundation.

Q. As we understand, the foundation can hold both regular and brokerage accounts. Can you explain how this works?

A. The foundation can hold an account of any type. According to the Law of Foundations in its article No. 3, the Private Interest Foundation cannot carry out commercial activities, but it can carry them out in an unusual way, so, even if it is for the achievement of its purposes, commercial habit is prohibited. 

If the foundation owns an apartment, this apartment can be put out for rent, for tourists, for example, and this would not count as a commercial activity. But the foundation will not be allowed to carry out actual commercial activities such as services, trading, or buying and selling assets.

Q. Can a Panama foundation hold assets abroad? In this case, would these assets be free of tax in Panama? Does a person need a tax residency in Panama for this? Can you please tell us about this?

A. If the foundation has assets outside of Panama, it is exempt from the payment of taxes in Panama. There are no restrictions as to the nationality of the founder, beneficiary, foundation council, or protector. The Foundation’s Law establishes that they can be Panamanian or foreign. It is not strictly necessary to have tax residency in this case, but we recommend it, as a properly established tax residency is the best way to structure an asset protection strategy.

Also, although Panama won’t take taxes from the foreign assets owned by the foundation, other countries such as your original country of citizenship may ask at some point for a tax compliance document. This is especially necessary if you want to buy properties or other goods in other jurisdictions outside of Panama.

Q. What types of assets can Panama foundations hold? Are there any limitations?

A. Any licit asset can be part of the foundation. There are no limitations.

Q. What are the advantages of a Panama foundation over, let’s say, a Nevis trust?

A. The main difference is that the Private Interest Foundation is a legal entity while the trust is a contract, i.e., a legal act. The juridical person of the Foundation allows it to be subject to obligations and exercise rights, contrary to a trust, which is represented by a trustee who is the owner of the assets in trust, as well as the legal representation of this.

Q. Why is Panama a great place for wealth management and protection for wealthy families?

A. Many wealthy families choose Panama because of its confidentiality, tax optimization, and business advantages.

Another reason why they choose Panama is the foundation structure, which offers great wealth management advantages. The foundation constitutes a separate estate in relation to the assets transferred to it. Therefore, they cannot be seized, confiscated, or be the object of an action or precautionary measure, except for obligations incurred, or for damages caused by the execution of the aims or objectives of the foundation, or by the legitimate rights of its beneficiaries. In no case shall these assets be liable for the personal obligations of the founder or the beneficiaries.

Additionally, Article 15 of the Private Interest Foundation Law 25 of 1995 establishes that they will have the right to contest contributions or transfers of assets in favor of a foundation, the creditors of the founder or a third party, when the transfer constitutes an act of creditor fraud. The rights and actions of such creditors become statute-barred three (3) years after the contribution or transfer of assets to the foundation.

This offers a high level of asset protection. Also, Panama offers the possibility of excellent tax optimization because of the territorial tax system and great business opportunities. Panama also offers a great lifestyle from nightlife in a cosmopolitan city (Panama City), to touristic places like beautiful Caribbean islands (San Blas and Bocas del Toro), undiscovered paradises in the Pacific (Archipiélago Las Perlas), mountains and hiking (Boquete) and many entertainment activities (carnival and parades during the national holidays).

Panama offers the whole package for American and European wealthy families and also for families from anywhere in the world.

Are you ready to have a Panamanian foundation? The first step is to ensure that you have the backing and support of expert agents. At Mundo, we are at your disposal. We have over 20 years in the world of finance, working alongside professionals so we are confident that we can help you achieve your goals.

Do you need to protect your assets? Do you want to increase your profits? Mundo can help you. Contact us, our first hour of consultation is totally free.

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