1. 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 that 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. Pardini & Associates has 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.

2. Advantages:

Significant advantages are offered by the Panama Private Interest 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 Interest 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 Interest Foundation shall at all times be 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 without limiting the respective civil liabilities arising therefrom.
• 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 capitals 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 members 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 Interest Foundations incorporated in other countries can be redomiciled or continue existing as Panama Private Interest Foundations and viceversa following a simple continuation procedure.

3. Differences Between Private Interest Foundations and Trusts:

There are certain similarities between Private Interest Foundations and Trusts due the fact that the foundation council enjoys considerable decision and control powers over 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 Interest Foundation and the Panama Trust:

• The trust is a legal act by means of which a person called the settlor 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 settlor. 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 agreements. 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 settlor 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 settlor 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 Interest 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 Interest 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 Interest 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 owner of corporations.

4. Practical Uses Of Private Interest Foundations:

• To protect family business providing continuity to second and third generations.
• To protect defenseless persons such as minors, disabled and persons incapable of managing their assets.
• To manage payments of money or the distribution of assets to members of the family or to provide for the education, housing, maintenance or profit sharing of members of the family.
• To carry on scientific, philanthropic, religious, humanitarian purposes, or to manage funds or assets for the benefit of these activities.
• To manage profit sharing as well as pension plans to employees.
• As a sophisticated and efficient substitute of the testament or will.
• As a holding of shares, participations or interests in private or public corporations.
• As a vehicle for the collection of royalties.
• As a vehicle to invest in shares, bonds, mutual funds, bank deposits or other assets.
• As a vehicle to own real estate or other assets of considerable value such as art works.
• As a vehicle to protect assets against excessive taxes, claims by creditors, political instability or forced heir ship.
• To operate bank accounts in any part of the world.

5. Formation Requirements For Panama Foundations:

A Private Interest Foundation is established when a Charter of the Foundation has been drafted and filed at the Public Registry. This information, which must be officially registered in order to establish a Foundation, is largely a matter of procedure and does not jeopardize privacy in any way.

The name may be in any language and must include the word “Foundation.” The objectives of the Foundation may include anything except the generation of profits. The Foundation Council is charged with task of administering the Foundation assets in a manner consistent with purpose of the Foundation as articulated in the Charter of the Foundation. The Foundation Council is composed of at least three natural persons, which may include the founder. These persons are not required to be Panamanian. The registered agent must be either a Panamanian lawyer or law firm.

A Private Interest Foundation also includes a body of Regulations, which are like by-laws. Unlike the Memorandum of Foundation, the Regulations remain private and confidential, they are not filed in any public registry. Therefore, it is within the Regulations that individuals typically articulate their wishes regarding beneficiaries and distribution of Foundation assets. Additionally, in this private document, a Protector may be named whose role is to oversee the activities of the Foundation Council. The Regulations may be amended at any time.

The range of benefits offered by a Foundation spans from tax advantages to asset protection. Foundations do not pay taxes on any income that is derived from investment activity outside of Panama. Assets used to fund the Foundation are considered under the law to be separate from the assets of the founder. Therefore these cannot be reached in the event of a lawsuit against the founder or beneficiaries. Similarly, these assets cannot be reached to satisfy debts owed by the founder or beneficiaries. Foundations only incur liability to the extent that they have dealt with a party directly. Therefore, if a Foundation conducts no activity beyond owning assets, it will never suffer liability of any kind.

A Foundation is established by a Founder, who may be one or more individuals or corporations. It may be created either directly or through a third party, such as a resident agent. The Foundation may be established during the Founder’s lifetime or post-mortem. It is legally established when a Charter of the Foundation (which may alternatively be referred to as a Memorandum or Deed) has been drafted and filed at the Public Registry. The items that must be filed include:

• Name and Purpose of the Foundation;
• Name of the Foundation Council Members;
• Address of the Foundation;
• Appointment of a Registered Agent; and
• Patrimony

The name may be in any language and must include the word “Foundation” to distinguish it from other kinds of juridical persons. The objectives of the Foundation may include anything except the generation of profits.

The Foundation Council must be comprised of three natural persons, or a single juridical person, and its duties are set forth in the Memorandum of Foundation. These persons are not required to be Panamanian. The Council is similar to the board of directors of a corporation. It makes all the decisions, for the benefit of the Foundation and is charged with the responsibility of ensuring that the Foundation’s purposes, as stated in the Memorandum of Foundation, are fulfilled. The council has the obligation to administer the Foundation’s assets for the benefit of the Beneficiaries, who have the rigth to object to the actions of the council. The Council must deliver to the beneficiaries the assets of funds to which they are entitled, as set forth in the Memorandum of Foundation.

PROTECTIONS

A nominee may fulfill the role of Founder. This makes it possible for the individual’s name not to appear in public record.

The Founder´s heirs do not have the right to revoke the creation of the Foundation, nor do they have the rigth to object the transfer of assets to the Foundation.

The Founder may retain control of the Foundation by retaining the power of appointment of the Foundation Council.

The assets of a Foundation comprise a separate and independent estate from that of the Founder. Once the assets have been transferred to the Foundation, such property does not belong to the Founder. Therefore said estate cannot be attached, seized or be subject to any lawsuit or legal actions as a result of obligations and liabilities of the Founder or the beneficiaries of the Foundation.

The creditors of a Founder have the right to contest the creation of a Foundation, or the transfer of assets to a Foundation, when either activity represents a fraud against their legitimate claims. The creditor’s right to contest the creation of a Foundation expires three years from the date that the Memorandum of Foundation is filed at the Public Registry.

The Founder may serve as a member of the Foundation Council, as a Beneficiary or as Protector.

The Founder has the power to remove council members, beneficiaries or a protector if he desires or he can assign these powers to another person in the Foundation.

Only the persons involved in the creation of the Foundation know the identities of the beneficiaries, as established in the by-laws. The by-laws are private and not available to the Public Registry. In order for a third party to identify the beneficiaries, he must have a court order to “pierce the veil” of the Foundation.

This is extremely rare in Panama because this would contravene the Republic’s campaign to become recognized as a safe haven of secrecy.

All persons involved in any activities, transactions or operations related to the Foundation are required to maintain full secrecy and confidentiality at all times. The penalty for breach of this obligation is a jail term of six months and a US$50,000.00 fine, with the possibility of an additional civil penalty. The secrecy provision applies broadly to all persons involved in any transaction associated with the Foundation.

In the event of political instability, a Panamanian Foundation may relocate to another jurisdiction.

The assets of a Foundation may be obtained as a result of any lawful act or transaction and may consist of properties of any nature, present or future, either real estate, monetary instruments, securities or chattels of any kind. The assets of a Foundation may be increased at any time.

The Founder or any other party may transfer assets to the Foundation.

Although the Council must inform the beneficiaries of the Foundation’s financial status annually, no reports need be filed with panamanian authorities or agencies.

The creation, the modification and the extinction of a Foundation are not taxable events. Transfers and encumbraces of Foundation assets are not taxable events. Income generated by a Foundation is exempt from tax in the Republic of Panama. All of the foregoing are not only exempt from tax, but from all assessments, ,rates and liens of any kind or description. These exemptions apply when the patrimony consists of assets located outside of Panama, and shares or securities of a company whose source of income is outside of Panama or where such income is otherwise not taxable in Panama.

6. Frequently Asked Questions about Panama Foundations:

1. Who needs a foundation for asset protection?

Every individual who has sufficient wealth to consider establishing a foundation as part of a traditional estate plan must consider asset protection as one of the primary design objectives. Life is full of unintended, unexpected and unforeseen risks. Ignoring them doesn’t mean they go away. Planning for them is good risk management.

2. What is an asset protection foundation?

All foundation arrangements are for the preservation of assets. A Panama foundation structure enables property to be held in a favorable legal environment. As a legal structure, a Panama foundation can hold assets anywhere in the world so long as those assets are freely alienable. In effect, an asset protection foundation is an integral part of a traditional estate plan which is intentionally settled in a beneficial legal environment.

3. Who may form a Panama foundation?

One or more individuals or corporations, acting in their own name or through another (i.e. the client’s attorneys in Panama), may constitute a Panama foundation. In other words, the foundation can be incorporated directly by the client or by fiduciary agents or offshore companies acting on his behalf. Our firm may act and provide the fiduciary agent or offshore company.

4. Is there one ideal comprehensive asset protection foundation plan?

No. Every person has different sorts of assets and different estate objectives. There is no one-size, all encompassing plan to deal with every component of a person’s financial life. Planning for a total estate will always be a compromise of factors.

Estate planning, and in particular estate planning focusing on the objective of the protection of assets, is greatly influenced by the skill, knowledge and biases of the professionals who are planning and drafting the documentation. Most recommend only those procedures with which they are familiar, even though those techniques may be less effective that others. Asset protection planning is dependent upon two significant variables. Firstly, the specific situation in which the clients find themselves in; and secondly, the abilities of the professional they choose in guiding them through asset protection strategies. If both are in harmony, then there can be some excellent results.

5. Historically, why has foundation planning been so popular?

The private foundation structure has traditionally been the most flexible and useful means of establishing an estate plan for Continental Europeans and Latin Americans. Estate planning is generally defined as the process of planning the accumulation, protection and distribution of an estate. Foundation planning enables the owner of assets to efficiently and effectively achieve personal objectives, as well as minimize the imposition of taxation. It enables the founder to establish management responsibility for assets and to secure investment advice.

A foundation arrangement allows the founder to be assured that the right assets will go to the right persons at the right time. An estate plan utilizing a foundation is the fundamental international mechanism for enabling the intergenerational transfer of wealth efficiently, effectively and securely.

6. Can a Panama foundation be profit oriented?

Panama foundations shall not be profit oriented, but they may nevertheless engage in commercial activities in a non-habitual manner or exercise rights deriving from titles representing the share capital of corporations really dedicated to business, provided that the economic result or proceeds from such activities are used exclusively towards the foundation’s objectives. The key concept here is to think of the foundation as a holding company.

7. What are the minimum requirements to incorporate a Panama foundation?

The main information required is:

• Name and Purpose of the Foundation;
• Names of the Foundation Council Members;
• Address of the Foundation;
• Appointment of a Registered Agent; and
• Patrimony.

8. What are the formalities to constitute a Panama foundation?

It is worth noting that the foundation charter as well as any amendments may be drafted in any language and must comply with the regulations regarding the registration of acts and titles at the Public Registry for which purpose, it must first be protocolized by a notary public of the Republic of Panama.

If the foundation charter or its amendments are not written in Spanish, the same shall be protocolized together with its Spanish translation made by a certified public translator of the Republic of Panama.

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 additionally constitute a means of publicity with regard to third parties. This is an extremely important concept of the Panama foundation legislation.

9. Is the Panama foundation managed like a corporation?

The same way a corporation is administered by a board of directors, the Panama foundation is managed by a Foundation Council whose powers and responsibilities shall be established in the foundation charter or its regulations. Unless the Council is a juridical person (i.e. offshore company), the number of individual members of the foundation council shall be no less than three (3). From a practical point of view, a bank, fiduciary or attorney may form an offshore management company to act as the foundation council of multiple foundations.

10. Which are the statutory powers and duties of the foundation council?

The foundation council is responsible for carrying out the purposes or objectives of the foundation. Unless the foundation charter or its regulations provide otherwise, the foundation council shall have the following general obligations and duties:

• To administer the assets of the foundation in accordance with the foundation charter or its regulations.
• To carry out acts, contracts or lawful business which are convenient or necessary to advance the purposes of the foundation.
• To inform the beneficiaries of the economic situation of the foundation as stipulated in the foundation charter or its regulations.
• To deliver to the beneficiaries of the foundation the assets, properties or resources designated for them by the foundation charter or its regulations.
• To carry out all such acts or contracts which are permitted to the foundation by the Foundation Law and by other applicable legal or regulatory provisions.

These foregoing powers and duties are merely those provided by default in the Foundation Law. Please note that the law expect the founder of the foundation to expressly detail all powers, obligations and duties of the foundation council and any supervisory bodies in the respective charter or its regulations.

11. May the founder create and appoint any supervisory bodies over the foundation council?

The foundation charter or its regulations may provide that, in order to exercise their powers, the members of the foundation council must obtain the previous authorization of a protector, committee or other supervisory entity appointed by the founder or the majority of the founders.

The figure of the protector or supervisory body is typical of the trust. The protector may be one individual or corporation, or an auditing firm, or a law firm or others. Identical to the powers and duties of the foundation council, regarding the protector, the Foundation Law expects the founder to establish clear parameters, but in default or as a compliment thereof, it sets several general duties and obligations of such protectors.

12. How are foundation assets protected from creditors?

The assets of the Panama foundation shall constitute an estate separate from the founder’s personal assets for all legal purposes, and may not be seized or attached or be subject to any precautionary action or measure, except in case of obligations incurred, or damages caused by virtue of actions taken fulfilling the purposes or objectives of the foundation, or of legitimate rights of the beneficiaries of the foundation. In no case shall such assets be affected or used to respond for the personal obligations of the founder or the beneficiaries.

This does not mean that a foundation is not subject to litigation. It does mean that if there is litigation, it will have to be brought in that specific jurisdiction and will have to meet the legal requirements of the causes of action which are recognized in that jurisdiction. In some cases, even where a cause of action could be brought, the specific jurisdiction may restrict the time period during which this can happen. Once that statute of limitation period has passed, the right to bring a legal action is legally extinguished.

13. What kind of assets may be transferred into a foundation?

Virtually, any kind of assets which are capable of being transferred free and clear can be settled into a foundation. Cash, securities, partnership interest, and real estate are typical of some of the types of property which can be suitable placed into foundation. The highest degree of protection is afforded to those kinds of assets which can, in times of legal duress, be physically located away from the jurisdiction or physically transferred away do require additional planning strategies and techniques.

14. Do fraudulent transfer provisions prohibit the transfer of assets into a Panama asset protection foundation?

The fraudulent transfer provision contained in the Foundation Law is a remedy, not a prohibition. It does not create new liability, but allows a creditor to follow the assets. The fraudulent transfer laws are simply a means by which creditors, under very specific circumstances, can proceed against property which has been transferred, or against the person who now holds the property which has been transferred.

These laws do not prohibit or limit the free transfer of any asset. In fact, their operation is entirely dependent upon the assets being transferred. However, article 15 also clearly states that the rights and actions of such creditors shall lapse at the expiration of three (3) years, counted from the date of the contribution or transfer of the assets to the foundation. A special conveyance proceeding is a separate legal action by the creditor to obtain a legal determination that declares a transfer void, but only if properly filed within the three (3) years mentioned before. The remedies available under the transfer provisions are then applicable, but are limited to the property itself or on persons who hold the property. Until there is a legal prohibition against transfer, anyone may freely transfer his or her own property.

15. Apart from creditors, are the transferred assets safe and secure from other risks?

Planned safety and security of the assets held under foundation are the hallmark of this type of planning. The foundation council which manages the foundation is approved by the founder and is normally a company or person which engages in foundation business as a professional fiduciary. As an additional security, a foundation protector can be appointed with power to oversee the administration of the foundation operations. This protector is a person or company chosen by the founder, the founder’s attorney or accountant, or can be a professional company which is retained to serve this purpose.

The foundation assets can be invested with an investment advisor as authorized by the foundation council. Assets themselves can be located in whatever financial institution the foundation council designates, but normally the choice is in favor of one of the well-regarded financial institutions related to our firm.

16. What sort of controls can the founder retain after the creation of the asset protection foundation?

Under the Panama foundation, the founder can exercise different levels of powerful direct or indirect control over the foundation council, the protector, any committees, the beneficiaries or the assets. Nevertheless, control must also be balanced against the desired level of protection to be afforded. More control, less protection.

17. Is holding property in joint tenancy better than establishing a Panama asset protection foundation?

A joint tenancy is dependent upon both parties staying alive to maintain the protection of assets. If one of the joint tenants should die, then the joint tenancy is broken and the protection is eliminated. Basically, any plan which depends on someone staying alive is a bad method of estate planning. Additionally, there have been some rare court decisions which have broken the joint tenancy or tenancy by the entireties so as to render that form of ownership ineffective for asset protection purposes.

18. Is establishing a Panama asset protection foundation for a client ethical for a professional?

The general rules of ethics provide that a professional has a 100% duty of loyalty to a client. There is no ethical duty to a non-client except that a professional may not “defraud” any other party by his conduct. Fraud in this context does not mean fraudulent conveyance. Fraud connotes deceit and means an intentional misrepresentation or omission made by one party to induce another party to change their position, with the other party justifiably relying upon that misrepresentation or omission, and doing so to their damage. Fraudulent conveyance is a remedy statute and has none of the elements of deceit.

In summary, any client has a right to establish an estate plan which would include a foundation. Any asset can be transferred into an estate planning foundation providing there is no restriction on its free alienability. The fraudulent conveyance laws do not create or establish alien or security interest in another person’s assets. All they provide is a right in the creditor to pursue assets held by a third party. Excepting some very specific criminal statutory requirement such as, for example, those found in UK bankruptcy law, there is no legal or ethical problem for a professional to establish an estate planning foundation for any client at any time. In fact, to do less may very well be malpractice.

19. Are Panama foundations subject to foreign forced heirship rules?

The existence of legal provisions regarding inheritance at the place of domicile of the founder or of the beneficiaries shall not affect the foundation or its validity and shall not prevent the attainment of its purposes in the manner provided in the foundation charter or its regulations (Art. 14). This provision is vital from the point of view of asset protection and protects the founder and beneficiaries from forced heirship rules contrary to the wishes of the founder.

Within reasonable possibilities, all foundation assets should be transferred to the jurisdiction of the foundation or to a country without forced heirship legislation. It is important to express, however, that this Panamanian provision will govern only if the rules of the Panama foundation are enforced. Careful attention and planning should be given to this aspect and our experience in providing solutions should be of interest.

20. What is the taxation of a Panama foundation?

The acts of constitution, amendment or extinction of the foundation as well as the acts of transfer, transmittal or encumbrance of assets of the foundation and the income arising therefrom, or any other act in connection therewith, are exempted from all taxes, contributions, duties, liens or assessments of any kind , provided they are related to:

• Assets located abroad.
• Money deposited by natural or juridical persons whose income is not obtained from a Panamanian source or is not taxable in Panama due to whichever reason.
• Shares or securities of any kind issued by corporations which income is not derived from a Panamanian source or which are not taxable for whatever reason, even when such shares or securities are deposited in the Republic of Panama.

This is the full text of Art.27 of the Foundation Law, which at the same time, save some small changes, is from the recently enacted Panamanian law on trusts. It is well known that the tax system in Panama is territorial, which means that only transactions or activities producing effect within Panama are subject to Panama taxes, also excepting some cases like the ones mentioned above and others. Since the 1930s, the territorial rule of taxation has prevailed in Panama’s fiscal law. Accordingly, all income from domestic business is taxable, while income from foreign sources remains exempt and freely transferable. This applies both to individuals and to corporations. Panama has not signed any agreements on juridical or information assistance with foreign countries on tax matters.

The only tax payable by a Panama foundation are US$ 150.00 as a fixed annual tax.

21. Can a foreign foundation change jurisdiction and continue as a Panama foundation?

Indeed, foundations organized pursuant to a foreign law may continue as a Panama foundation by fulfilling the flexible requirements of the Foundation Law. As a result of this simple procedure, multiple Liechtenstein foundations have already elected to change their jurisdiction and continue as Panama foundations.

22. Are the Panama foundations protected by secrecy and confidentiality?

All members of the foundation council and of the supervisory bodies, if any, as well as public or private employees, who have any knowledge of the activities, transactions or operations of the foundations, must at all times the same in secret and confidentiality. Breaches of this duty shall be sanctioned with imprisonment of six (6) months and a fine of US$ 50,000.00, without prejudice to the corresponding civil liabilities (Art.35). The requirements for maintaining and the sanctions for breaching the secrecy are strong.

Information already of public access like the Public Registry is obviously outside the secrecy rule. However, this secrecy provision should not serve as an excuse against legitimate inquiries through pertinent channels regarding specific criminal actions, such as drug trafficking and money laundering, for which the Republic of Panama has implemented specific legal procedures, in a major effort to improve and protect Panama’s international offshore centre.

While not providing any specific legal or tax counsel, nevertheless for some individuals or companies, offshore companies may offer specific tax advantages over other jurisdictions. Any potential client seeking legal or tax advise should consult with their individual legal or tax advisor.

Notwithstanding these previous articles and considerations, it is important to refer you to our standard charter and regulations of a Panama foundation since you will find therein the answer or treatment to many questions and potential scenarios. A complimentary copy may be requested to our offices.

7. Panama Foundation Law, Law 25 Of 1995:

While this is not an official translation of the law, it is intended to be a convenient reference guide to understanding each of the articles.

ARTICLE 1

A private Foundation may be constituted by one or more natural or juridical persons, acting in their own name or through another. An endowment, or patrimony, must be made at the time of creation, which is provided for in the Foundation charter. The original endowment may be supplemented by the Founder, or by any other person.

ARTICLE 2

A Foundation shall be governed by its charter and its regulations, as well as by the provisions of Law No. 25, and any other relevant legal and regulatory provisions. The provisions of the Title II of Book I of the Civil Code shall not apply to private Foundations.

ARTICLE 3

Private Foundation sahll not be profit oriented. They may nevertheless engage in commercial activities from time to time or exercise rights deriving from the ownership of business capital, when such capital constitutes a part of the Foundation’s assets. However, the economic consequence of the ownership of such business capital shall comply with the stated objectives of the Foundation.

ARTICLE 4

Private Foundations may become effective at the time that they are constituted or upon the Founder’s death if either one of the two alternatives below are satisfied:

1. The Founder constitutes the Foundation by private document, with his signature authenticated by a notary public at the place of constitution, or
2. The Founder constitutes the Foundation in a place other the place of constitution in the presence of a notary public.

If a Foundation is created to become effective after the Founder’s death, none of the formalities that accompany the execution of wills shall apply.

ARTICLE 5

The Foundation charter shall contain:

1. The name of the Foundation in any language with characters of the Latin alphabet. The names shall not be identical or similar to any other existing Foundation in the Republic of Panama. The name shall include the word “Foundation” to distinguish it from natural persons and other varieties of juridical persons.
2. The Foundation’s initial capital may be in any currency in an amount equivalent to US$ 10,000.00.
3. The name and addresses of the Foundation Council.
4. The domicile of the Foundation.
5. The registered agent’s name and address. This person must be a Panamanian attorney or law firm. The resident agent must countersign the Foundation charter prior to its registration at the Public Registry.
6. The purposes or objects of the Foundation.
7. The manner in which Foundation beneficiaries are named.
8. The reservation of the right to modify the Foundation charter when deemed convenient.
9. The length of time during which the Foundation shall endure.
10. How the foundation assets shall be disposed of at liquidation.
11. Any other lawful clauses which the Founder may consider necessary.

ARTICLE 6

The Foundation charter and amendments may be drafted in any languages using the Latin alphabet. Prior to filing at the Public Registry, the regulations regarding registration of acts and titles requires that such documents be notarized in the Republic of panama. If a Foundation charter or amendments are not in Spanish, they must be notarized and placed in deed form, with a certified Spanish translation.

ARTICLE 7

Amendments to the Foundation charter shall be executed and signed in accordance with the provisions of the Foundation charter. An amendment shall indicate the date of its execution, the names o the person or persons executing the amendment and te authenticated signature of such person or persons, authenticated at the place of execution.

ARTICLE 8

Private Foundations are required to pay registration fees and annual taxes at a rate equivalent to those for corporations, as set forth in articles 318 and 318 A of the Fiscal Code. Additionally, the procedure and form of payment, the surcharge for late payment and the consequences of non-payment apply to Foundations.

ARTICLE 9

The filing of the Foundation charter at the Public Registry is sufficient to give it juridical personality. The filing at the Public Registry also constitutes notice of its existence to third parties. A Foundation may own assets, incur obligations and be a party to administrative and judicial proceedings of any nature.

ARTICLE 10

At such time as a Foundation has acquired legal status, the Founder or any third party who has agreed to contribute assets to the Foundation, shall formalize the contribution of the promised assets. When the Foundation’s constitution is triggered by the Founder’s death, it shall be deemed to have existed prior to death, for the purpose of any donations that the Founder may have made to the Foudation before death.

ARTICLE 11

The assets of the Foundation shall constitute an estate separate from the Founder’s personal assets for all legal purposes. As a separate estate, Foundation assets cannot be seized, attached or made subject to any precautionary action or measure with respect to actions undertaken by the Founder, council or beneficiaries. Creditors and plantiffs may only reach Foundation assets when the Foundation has itself incurred obligation, or caused damage in attempting to fulfill the Foundation objectives. In no case shall such assets be affected or used to respond for the personal obligations of the Founder or beneficiaries.

ARTICLE 12

Foundations shall be irrevocable except in the following cases:

1. The Foundation charter has not been filed with the Public Registry;
2. The Foundation charter stipulates that it is revocable; and
3. For any of the reasons articulated in the Civil Code pertaining to revocations.

The transfer of assets made to Foundations shall be irrevocable by the person who made the transfer, unless it is expressly stated otherwise in the act of transfer of such assets.

ARTICLE 13

When a Foundation has been cosntituted to be effective at the time of the Founder’s death, the Founder shall have the exclusive and unlimited right to revoke it.

Following the death of the Founder, the Founder’s heirs shall not have the right to revoke the Foundation’s creation or transfer of assets to the Foundation. This shall hold true without regard to whether the Foundation has been registered at the Public Registry before the death of the Founder.

ARTICLE 14

The legal provisions regarding inheritance in the Founder’s or beneficiaries’ domicile shall have no effect or impact on a Foundation. The law of an outside jurisdiction shall no prevent the attainment of a Foundation’s purposes as they are articulated in the Foundation charter or regulations.

ARTICLE 15

The Founder’s creditors can contest a transfer of assets to a Foundation when the transfer has been made to defraud creditors. However, this right expires three (3) years after the date of the transfer in question.

ARTICLE 16

The patrimony of the Foundation may derive from any lawful trade or business an may consist of assets of any kind. The transfer of assets to the estate of the Foundation may be made by public or private document. However, in the case of fixed property, the transfer must satisfy with the requirements for the transfer of such property.

ARTICLE 17

The Foundation Council is responsible for ensuring that the purposes or objectives of the Foundation charter or in its regulations. Unless the Council is a juridical person, there shall be a minimum of three members of the Foundation Council. There need be but a single Council member if such member is a juridical person.

ARTICLE 18

The Foundation Council is responsible for ensuring that the purposes or objectives of the Foundation are accomplished. Except where the Foundation charter or regulations requires greater or lesser responsibility, the Foundation Council shall have the following general obligations and duties:

1. To administer Foundation assets in a manner consistent with the Foundation charter or its regulations;
2. To perform acts, enter contracts and/or consuct lawful business which advances the interests and accomplishes the purposes of the Foundation whithin the law;
3. To keep Foundation beneficiaries apprised of the Foundation’s economic health;
4. To make delivery of Foundation assets to the beneficiaries in the manner articulated in the Foundation charter or regulations, and
5. To carry out all such acts or contracts which are permitted to the Foundation by the present law and by other applicable legal or regulatory provisions.

ARTICLE 19

The Foundation charter or regulations may require that members of the Foundation Council must obtain pevious authorization of a protector, committee or other supervisory entity appointed by the Founder in order to excercise their powers. The members of the Foundation Council shall not bear any liability for damage or loss caused by their decisions, when such decisions have been made with prior authorization.

ARTICLE 20

Except when the Foundation charter or regulations indicate otherwise, the Foundation Council must keep beneficiaries informed of the council’s administration. If the Foundation charter or regulations contain no mention of the frecquency with which this shall be done, the rendering of accounts shall be made annually. When no objection is raised to the accounts within the time specified in the Foundation charter or its regulations, or, if the charter does not regulate the matter, such accounts will be deemed to have been approved ninety days fom the date the accounts were received. When the accounts have either been approved, or the ninety-day period has elapsed, the Foundation Council shall bear no liability for their administration, unless they had failed to act with the diligence. The above approval does not exonerate the Foundation Council in instances of negligence or fraud in the administration of the Foundation.

ARTICLE 21

The Foundation charter may reserve for the Founder, or other persons, the right to remove or add members of the Foundation Council.

ARTICLE 22

If nothing is articulated in the Foundation charter or regulation regarding the circumstances under which members of the Foundation Council may be removed, the law states that they be removed through a judicial proceedings for the following causes:

1. If council members’ interests conflict with the interests of the beneficiaries or of the Founder;
2. If council members do not administer the assets of the Foundation with the requisite diligence; or
3. If the council member is charged with a crime against private property or public faith, in which case the member shall be suspended for the duration of the trial;
4. If the council members lacks capacity or impossibility to carry out the objectives of the Foundation, from the time such causes arise.
5. For insolvency or bankruptcy proceedings.

ARTICLE 23

The Founder or beneficiaries may remove members of the Foundation Council by judicial proceeding. In an instance in which the beneficiaries are minors, they may act through a legal guardian.

The court judgment decreeing such removal shall also name replacement council members. The new members must be persons with capacity and qualifications for the position. Further, they must have demonstrable moral character to be entrusted with the Foundation assets.

ARTICLE 24

The Foundation charter or regulations may provide for supervisory bodies. The supervisory bodies may be composed of natural or juridical persons, such as auditors or protectors. The Foundation charter or regulations shall establish the powers of the supervisory entities, which may be empowered to:

1. Ensure that the Foundation Council fulfills the Foundation’s purposes, and that it protects the rights and interests of the beneficiaries;
2. Require the Foundation Council to render accounts;
3. Modify the objects and purposes of the Foundation when their fulfillment becomes impossible or too burdensome;
4. Appoint new members of the Foundation Council in circumstances of temporary abscence or expiration of period of services;
5. Add or remove members of the Foundation Council;
6. Approve Foundation Council acts and decision pursuant to the Foundation
7. Act as custodians of Foundation assets and ensure that they are used in a manner consistent with the objects or purposes contained in the Foundation charter; and
8. Add and remove beneficiaries of the Foundation in accordance with the provisions of the Foundation charter or its regulations.

ARTICLE 25

The Foundation shall become dissolved:

1. On the date specified in the Foundation charter;
2. When the purposes or objectives of the Foundation have been fulfilled;
3. Upon insolvency or upon a judicial declaration of bankruptcy;
4. Upon the loss or exhaustion of Foundation assets;
5. Upon revocation; and 6. For any reason specified in the Foundation charter or in Foundation law.

ARTICLE 26

A beneficiary may object to Foundation activities that jeopardize his rights or interests by complaint to the protector or supervisory body. Where there is no protector or supervisory body, beneficiaries may initiate judicial action before in a court of appropriate jurisdiction.

ARTICLE 27

The acts of constitution, amendment or extinction of the Foundation are exempt from all taxes, duties ans assessments. Additionally, the following assets are exempt with regard to transfers, transmittal, encumbrance and the income arising therefrom:

1. Asset located abroad;
2. Money deposited by a person, whether natural or juridical; or
3. Securities issued by corporations which do not derive income from a Panamanian source, or which are not taxable in the Republic of Panama; and

The transfer or fixed property, titles, certificates of deposit, assets, funds, securities or shares which is consistent with the objectives of the Foundation in favor of relatives within the first degree of sanguinity or the spouse of the Founder shall also be exempted from all taxes.

ARTICLE 28

Foundations organized under the laws of other jurisdictions are permitted to relocate to Panama and become subject to the provisions of this law.

ARTICLE 29

Foundations which become subject to Panamanian law shall present a certificate of continuation, which shall contain:

1. The name of the Foundation and its date of constitution;
2. Information pertaining to the registration of the Foundation in its original place of constitution;
3. Declaration of desire to exist in Panama, under its laws; and
4. All of the items specified in Article 5 of the law of Panamanian Private Foundations.

ARTICLE 30

The certificate with the resolution of continuation must be accompanied by the following documents:

1. A copy of the Foundation’s original constitution any amendment thereto; and
2. A power of attorney for the Panamanian lawyer who shall effect the continuation of the Foundation under Panamanian law.

In addition to the two above requirements, the certificate of continuation and attached documents must be duly notarized and filed at the Public Registry.

ARTICLE 31

In the cases provided for in article 28, the responsibilities, duties and rights of the Foundation, which includes involvement in legal actions shall continue in effect. These rights and obligations are not affected by the change of jurisdiction.

ARTICLE 32

Foundations and their assets may be transferred to a foreign jurisdiction, when the laws of such other jurisdiction provide for the transfer of Foundations.

ARTICLE 33

Registrations of Private Foundations must be made at the Public Registry in the “Section of Private Foundations.” The Executive Branch of Government, acting through the Ministry of Government and Justice issues the regulations applicable to such section.

ARTICLE 34

Private Foundations are subject to the provisions of executive Decree No. 468 of September 19, 1994 as well as all other legal measures that regulate money laundering and proceeds of drug trafficking.

ARTICLE 35

All members of the Foundation Council, supervisory bodies and public or private employees, with knowledge of Foundation activities, transactions or operations must keep all aspects of the Foundation and its activities strictly confidential. Breaches of this duty shall be punishable by imprisonment of up to six months and a fine of US$50,000.00, without prejudice to the corresponding civil liability.

This article applies without prejudice to information that must be disclosed to authorities in offcial investigations pursuant to relevant law.

ARTICLE 36

In the event that a controversy arises which is not specifically addressed under this law, such controversy shall be resolved by summary proceedings. The Foundation charter or regulations may stipulate that controversies be resolved by arbitration, and what the rules for such arbitration shall be. If the rules have not been established, the prescribed rules for arbitration contained in the Judicial Code shall apply.

ARTICLE 37

This law shall enter into force after its promulgation. (June 12th, 1995 – as per Official Gazette No. 22,804 of June 14th, 1995).