The private interest foundation
("PIF") was created in the Republic of Panama by Law No. 25 of June
12, 1995, which is the main specific legislation governing said legal
entities. In a mere decade it has
become a favorite vehicle for investments due to its simplicity and
flexibility. Although the law of Family and Mixed Foundations of the
Principality of Liechtenstein was taken into consideration at the time of
drafting the bill, the Panamanian legal entity was given certain unique
features that made it more attractive.
In addition to this, its establishment and annual maintenance charges
amount to considerably less than the Liechtenstein counterpart. Undoubtedly, the Republic of Panama’s
long-standing tradition as a haven for investors played a key role in
establishing the Panamanian PIF among the investment capital community, and in
turn, it has reinforced Panama’s preeminent position as a leading global
offshore center for the 21st century.
Essentially, a PIF may be created by
any one or more natural persons or legal entities referred to as the
founder(s), either on their own or through a third party, by complying with few
and simple formalities stipulated in the Law. This means that it is perfectly
possible for a Founder to act through third parties (fiduciary founders), with
a view to preserving confidentiality.
It is necessary to constitute an initial
patrimony of at least an amount equivalent to US$10,000.00 (ten thousand U.S.
Dollars) destined exclusively to the objectives or purposes expressly set down
in the foundation charter. However, the initial patrimony may be subsequently
increased by any person.
The foundation charter is the instrument through which the
PIF is created and it is executed by the Founder in a public deed entered in
the protocol of a Panamanian notary public, and subsequently recorded in the
Panama Public Registry. Upon completion of this registration requirement, which
usually takes around two business days, the PIF obtains the status of an
independent legal entity. As such, it may acquire and own property, incur
obligations, and participate in any judicial or administrative proceedings, but
it has to limit itself to non-profit activities. Nevertheless, PIFs may carry
out commercial activities from time to time when deemed necessary in the
pursuit of its objectives and purposes, which may include holding an investment
portfolio. This limitation, however, does not extend to companies or businesses
owned by the PIF.
The foundation charter may be
drafted in any language with letters of the Roman alphabet. However, if drafted
in a language other than Spanish, it has to be translated into Spanish by a
certified public translator in the Republic of Panama, in order to be in proper
form for recordation.
PIFs may be created either to have
effects as from the moment of their creation or after the death of their
founder, and they may be tailored to meet individual needs and requirements,
because of its remarkable flexibility.
Notwithstanding the fact that in a
PIF there are no shareholders or members, it has beneficiaries, who are the
persons for whose benefit the foundation is organized and for whom its purposes
are to be achieved.
The administration of a PIF is
entrusted to a foundation council, the body that is responsible for managing
the assets of the foundation in accordance with the foundation charter and regulations.
The foundation council should be
formed by at least one juridical person or three natural persons who need not
be Panamanian citizens or residents.
The foundation charter or the regulations may provide for the
establishment of supervisory organs formed by either natural o juridical
persons, such as accountants, protectors and the like, whose powers and duties
should be set out in said documents. In addition, the foundation charter or the
regulations may provide that the members of the foundation council may only
exercise their powers after first obtaining the written authorization of a
protector or supervisory body designated by the founder. Through these means the founder obtains
additional assurance that the purposes of the PIF will be fulfilled by the
members of the foundation council, and enables him to have a more direct
control over the affairs of the PIF.
Advantages and uses
Having considered the inherent structural advantages
of a PIF, we shall now describe a number of its possible uses and practical
Some clients feel very much at ease in the light of
the degree of confidentiality that may be obtained and maintained through a
Although the names and addresses of the members of the
foundation council should be indicated in the foundation charter, which as
previously mentioned is a document requiring recordation in the Panama Public
Registry and, consequently, is available to the public in general, the identity
of the beneficiaries (who may include the founder) or of the protector(s) need
not be reflected therein. The beneficiaries or the protector(s), if any, may be
appointed in the regulations, which is a document of a private nature, not
subject to registration. In addition, it is possible to use fiduciary founders.
All of these possibilities ensure the degree of
confidentiality, which is usually welcome in offshore transactions.
Furthermore, disclosure of confidential matters
concerning a PIF is punishable with a 6-month jail sentence and a fine of US$50,000.00
(fifty thousand U.S. Dollars), without prejudice to enforceable civil
Asset management and protection
For the wealthy and for the managers of wealth, it is
always attractive to seek some sort of protection against the uncertainties of
life and to try to establish financial security for themselves and their
The structure of the PIF makes it particularly
attractive for asset management and protection. In fact, it is commonly used as
instruments for holding shares and equity interests in subsidiary companies and
to own real estate. In addition to this, PIFs are also used as an investment
vehicle and even to handle bank accounts.
Being a legal entity, it maintains an independent
legal existence from that of its founder.
Consequently, for all legal purposes the PIF’s assets constitute a
separate and independent patrimony, and may not be seized, attached or used to
answer for personal obligations or liabilities of the founder or of any other
person, beneficiaries included. In other words, the foundation assets are
segregated from the personal assets of the founder and beneficiaries of the
An individual will often transfer assets to a PIF in
order to minimize financial vulnerability, as well as to protect and preserve
said assets against possible future claims and legal actions that may arise
against him in a high-risk occupation (malpractice in case of doctors) or in
case of a business disaster (financial collapse), or simply from frivolous
litigants, and a host of other risks.
In addition, as we may see further on, an individual
living in a country that stipulates “forced heirship” rules may want to isolate
some assets from potential claims arising from hostile family members that have
Creditors of the founder or of third parties shall be
entitled to contest and set aside the contributions or transfers made in favor
of a PIF, only when said transfers constitute an act of fraud against creditors
(fraudulent conveyance). However,
the rights and actions of said creditors shall be subject to a statute of
limitations of three (3) years to be counted as from the date of the
contribution or transfer of the assets to the foundation.
In its taxation legislation Panama
adheres to the principle of territoriality, meaning that income is subject to
tax in Panama only when it originates from operations and/or activities carried
out within the territory of the Republic of Panama. Any income made from operations abroad is not taxable in
Taking this principle into
consideration, Panamanian legislation on private interest foundations
stipulates that the acts of constitution, amendment or extinction of a PIF, as
well as the acts of transfer, transmission or encumbrance of the assets of the
foundation and the income originating from such assets or any other act
concerning them shall be exempt from any taxes, levies, duties, encumbrances or
imposts of any kind or amount, provided that the such assets are:
1. Located abroad.
2. Monies deposited by natural or
juridical persons whose income does not derive from a Panamanian source or is
not taxable by Panama under any circumstances.
3. Stocks and securities of any
kind, issued by corporations the income of which does not have a Panamanian
source, or when the income is not taxable for any reason whatsoever, even when
such shares or securities are physically held or deposited in the Republic of
The only charge payable to the
Panamanian government would be a US$300.00 annual franchise tax, to keep the foundation
in good standing in respect of any services provided by the Office of the
Public Registry. A PIF would even
be exempt from preparing and filing tax returns or financial reports in Panama
in respect of income derived from operations offshore. It is worth mentioning that interests
generated by monies deposited in banks located in Panama are tax exempt.
PIFs may be created either to be
effective since the moment of their creation or after the death of their
founder. In the latter case, the
formalities stipulated for making a will need not be followed. Furthermore, if
the foundation is established to have effects mortis causa, the heirs
of the founder shall have no right to revoke the creation of the foundation or
any transfers made to it.
The Panamanian PIF is often used for
estate and inheritance planning, since they can be effectively used in lieu of
a will, and free from a will’s shortcomings and probate requirements. Through a
PIF an inheritance may be divided confidentially and expeditiously, without any
of the drawbacks of costly and complicated inheritance proceedings or the
possible need to pay inheritance tax.
On the other hand, PIFs do not cease
to exist merely because of the death of their founder. The founder may specify
in the regulations any and all the instructions deemed appropriate by him
concerning the assets of the foundation while he is still alive and likewise
indicate to the foundation council what must be done with said assets in the
event of his demise.
Furthermore, the existence of legal
provisions in the domicile of the founder or of the beneficiaries concerning
inheritance matters shall not affect a PIF or its validity, and will not
preclude the attainment of its objectives as provided in the foundation charter
or in its regulations.
As a result of the above, “forced
heirship” rules of other countries should not be enforced against a PIF or
against the wishes of the founder stipulated in the foundation charter and
regulations, which shall prevail at all times.
In conclusion, Panamanian private interest foundations are excellent
vehicles for tax and estate planning, as well as for asset protection or risk
Please do not hesitate to contact the author by
email at email@example.com,
should you require assistance in regard to the matters discussed in this
article. Further or alternatively, please visit www.quijano.com for general information
about Quijano & Associates.
This article does not constitute professional legal or investment advice and,
therefore, it should not be regarded as a substitute for suitable professional
advice in individual cases.