Panama places no restriction on the location of any members of the council or officers of a private foundation and any underlying corporation.

By Chris Zollinger

Does Panama have more than this? The best answer is that Panama is a low tax jurisdiction, where the use of asset protection, tax planning and wealth and estate planning is a very common agenda for professional attorneys, accountants, private banks and investment advisers.

94% of all lawsuits in the world are filed in the United States & the United Kingdom.

Asset protection, which is a very important aspect in a financial analysis, merits a brief comment. All first world countries are subject to extensive litigation cases. However, in statistical terms, some 94% of all lawsuits in the world are filed in the United States of America and the United Kingdom. 70% of the world’s lawyers reside in the United States and the United Kingdom. In 2000, the US and UK had thirty times more lawsuits per person than Japan. There are more lawyers in West Los Angeles, California than in all of Japan. Almost thirteen lawsuits are filed every minute of every working day in California. Product liability lawsuits, malpractice, race and age discrimination employee cases and pregnancy discrimination cases represent the highest risks, averaging a staggering US$4 million per each jury verdict.

The reality in UK, Canada, Australia and New Zealand is not so different. As to tax burden, interest earned in savings bank accounts are subject to a withholding tax of around 30%, and capital gains tax on securities is around 16%. Inheritance tax can easily go up to 50%. Probates and succession proceedings can be a real financial problem for heirs. Trusts are commonly used in common law jurisdictions to manage these problems.

...revenue authorities have been “targeting inheritance tax and other taxes.”

Tourists and their attorneys may well recall cases of courts and revenue authorities in Europe and North America declaring open war on asset protection, estate planning and tax planning trust settlements. In other words, revenue authorities have been “targeting inheritance tax and other taxes.” The need for care, prudence, professional integrity and above all, a detailed knowledge of alternative lawful and effective ways of planning, structuring and administering a client’s affairs has never been more important for the modern-day family.

Failure to recognize, consider and perhaps utilize alternative vehicles to those traditionally employed, could well lead a head of a family and his heirs towards unwelcome and expensive litigation. The divisions between jurisdictions, especially common and civil law jurisdictions have diminished and wealth management and estate attorneys providing services to clients moving to tourist areas as retirees must now accept the true international nature of their profession. Failure to accept this fundamental principle will undoubtedly lead to many practitioners facing a potential charge of negligence by their clients and possible litigation from revenue authorities seeking to destroy traditional structures employed.

A growing number of common law jurisdictions have either enacted, or are considering enacting, private foundation legislation and, therefore, one has to ask the question, “why is this so”? One must first revert to the fundamental question of what a trust is and then proceed to examine how the foundation differs from this.

The Trust is a relationship formalized via a trust deed. It is imperative for all the parties involved, namely, the Arbitrator, Trustee and Beneficiaries, to understand the legal basis of their relationship. Establishing the trust but failing to do so may well result in a ‘sham’ or voided trust. It is not surprising that many civil law jurisdictions have found the principle of trust difficult to embrace. The ultimate clarification of certainty within a Trust Settlement still rests upon a decision of the court.

The attorney and, perhaps more importantly, the client, must at the outset ensure that nothing occurs that can expose a trust structure to attack or an accusation of fraud.

In Panama it has been widely used since 1995. It is accepted that this does not address the efficiency or effectiveness of a foundation; however, it is fact in law that the entity exists, unlike the simple relationship of trust. In Panama, under Law No. 25, of 12th June 1995 on Private Foundations, it is stated that “The registration of the Foundation Charter of a Private Foundation at the Public Registry shall confer upon it juridical personality without the need for any other legal or administrative authorization. Registration at the Public Registry shall in addition constitute a means of publicity with regard to third parties.

Consequently, a foundation may acquire and own assets of all kinds; incur obligations and be a party to administrative and judicial processes of all kinds, in accordance with any applicable provisions”. Additionally, “for all legal purposes, the assets of a foundation shall constitute an estate separate from the founder’s personal assets. Therefore, they may not be seized, attached, or be subject to any lawsuits or precautionary seizures, save for obligations incurred or damages caused by virtue of the fulfillment of the purposes and objectives of the foundation or on the basis of legitimate rights of the foundation’s beneficiaries. In no case shall such assets be used to respond for the personal obligations of the founder or of the beneficiaries”.

Whilst a foundation enjoys many of the features and benefits of a company, it is not a company in the factual sense. It has no shareholders, beneficial owners or directors. Similarly, a private foundation can act like a trust, but is not a trust. Therefore, one has a vehicle with no beneficial owner, but one which can act in a restricted corporate manner, holding title to assets in its own right. The enhanced flexibility of asset management and administration via a foundation is far greater than that which can be attained via a trust, and practitioners would be well advised to consider the implications of this and the benefits that this may offer them and their clients moving to tourist areas abroad.

Like most corporate structures and entities, the choice of location for management and control of a foundation rests with the practitioner and client. Panama places no restriction on the location of any members of the council or officers of the private foundation and any underlying corporation.

Most foundation jurisdictions allow flexibility regarding the appointment of beneficiaries (the tourist retiree). Likewise, the rights and benefits appertaining to beneficiaries are that, and purely that, which is enshrined in the regulation or rules of the foundation. It is clear, therefore, that whilst the common law practitioner may view the private foundation with trepidation and a degree of skepticism, to ignore such an entity may well prove disastrous.

In Panama, it is perfectly acceptable to transfer properties and funds to Panamanian corporations. These corporations can be placed under the umbrella of a private foundation, which is a tailor made, asset protection, living will with legal personality. In Panama, there are no withholding taxes on savings bank accounts, securities investment earnings or stock exchange capital gains. Profits received in Panama from money invested outside of Panama, is tax-free. Using a corporation combined with a private foundation can well suit a scenario where financial advantages can be obtained in the field of optimizing assets, planning a suitable inheritance scheme or ordering wealth for the benefit of children and beloved relatives.

Real estate taxes can be reduced in Panama using the alternatives provided by the law, and property transfers can be performed through the correct use of corporations and private foundations. As long as the control and management of assets under a foundation structure is located within Panama, minimization of the tax burden and the protection of assets can be taken to a comfortable level.

Panama’s attractive features consist not only of its splendorous mountains, sandy beaches, birds and seas, but also the financial advantages easily obtained by making use of local Panamanian legal products.