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.

 

Creation

 

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.

 

Administration

 

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 advantages:

 

Confidentiality

 

Some clients feel very much at ease in the light of the degree of confidentiality that may be obtained and maintained through a PIF.

 

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 liability.

 

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 family.

 

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 PIF.

 

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 been disinherited.

 

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.

 

Tax Planning

 

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 Panama.

 

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 Panama.

 

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.

 

Estate Planning

 

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 reduction.

 

 

Contact

 

Please do not hesitate to contact the author by email at quijano@quijano.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.

 

IMPORTANT: 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.