The Forgotten Trust
Juan F Pardini details the advantages of the Panama trust
In these times of uncertainty about the future of certain centres, Panama is coming back as a jurisdiction of choice.
Moreover, Panama has been recently awarded 'Investment Grade' by major international rating agencies, evidencing that the country has excellent legal, tax, economic and financial fundamentals.
By the time this article is published, Panama should have negotiated nine of the 12 double taxation agreements (DTA) required by the OECD. In fact, these DTAs will enhance the tax planning advantages of Panama.
Traditional structures such as Panama companies and foundations continue growing despite the current turmoil, but one that has been almost forgotten is the Panama trust, not much used and for such reason not yet spoiled.
Perhaps we should begin by noting that Panama has regulated trusts since 1925 when Law No. 9 of 1925 was approved.
Panama became the first nation in Latin America that embraced the common-law trust by adapting it to its civil-law system. However, due to some misconceptions, it had little application and practical value in the business world and was later subrogated by Law 17 of 1941.
But Law No. 17 of 1941 also lacked essential features and thus failed to generate interest from the international financial and business community. For example, it did not allow the creation of revocable trusts; testamentary trusts by private documents were only possible by means of a valid will.
43 years later, the trust in Panama became regulated by Law No. 1 of 1984, still in force today, which finally fixed the roadblocks created by its predecessors. Currently, trusts and the trust business in Panama are regulated by: • Trust Law No. 1 of January 5, 1984 (the Trust Law).
• Executive Decree No. 16 of October 3, 1984, as amended by Decree No. 53 of December 30, 1985 (the Executive Decree).
• Resolution No. 201-982 of July 26, 1990 (the Resolution).
• Agreement No. 12 of December 14, 2005 (the Agreement).
• Law No. 6 of 2 February 2005 (which was in turn briefly amended by Laws No. 34-2005, No. 5-2006 and Law No. 18-2006), which approved what is known as the Fiscal Reform. Such Fiscal Reform has been regulated by virtue of Executive Decree No. 143 of 27 October 2005 (Official Gazette No. 25, 419 of 1 November 2005).
Panama became the first nation in Latin America that embraced the commonlaw trust
Being a civil-law country, statutory law is the main source for interpreting the Panama trust. Panama does not follow common-law jurisprudence.
Panama is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, however, the Trust Law complies with the trust concepts expressed therein.
1. Persons: The need for the participation in the trust of three parties is eliminated. The settlor is permitted to be, simultaneously, trustee in the case of legal entities, or beneficiary; for example, when he transfers his assets to a bank for administration and he receives the income. The parties may be corporations or private foundations.
2. Express trust: The express declaration of the intent to create a trust is required in order to avoid the so-called verbal, constructive or resulting trusts.
3. Purpose: The need to specify the purpose of the trust has been removed due to the fact that, according to the law, the consideration is presumed to exist in acts and contracts, even though it is not expressed.
4. Revocability: The Trust Law establishes that a trust is presumed irrevocable, but 'revocability can be agreed upon'.
5. Simplification of formalities: The trust can be executed in a private document. The parties can sign in different countries. It is permitted to create trusts even with effects mortis causa, by means of a document, without the need of a will, if the trustee is a person authorised to engage in the trust business.
6. Partial nullity: It is established that the nullity of a clause does not entail nullity of the entire trust, except when performance of the trust becomes impossible.
7. Separate patrimony: For all legal purposes, among them fiscal purposes, it is established that the trust assets form a patrimony separate from the patrimony of the trustee.
8. Appointment of new beneficiaries: It is established that the settlor or other authorised person may appoint new beneficiaries.
9. Classes of beneficiaries and nonexistent beneficiaries: The designation of beneficiaries by classes (i.e., Jean's children) and of nonexistent beneficiaries at the moment of the trust is permitted, provided one or more of them come to exist during the validity period of the trust.
10. Plural trustees: The manner in which the plural trustees must act is regulated.
11. Transfer of assets to a substitute trustee: Regulations setting forth the manner in which this transfer should be done are established.
12. Not compulsory: Pursuant to the Trust Law, the trustee is not bound to accept the trust.
13. Trustee's resignation: The trustee's resignation is permitted, if so authorised by the trust deed or, in the absence of a clause to that effect, with court authorisation.
14. Accounts: Rules for rendering and approving accounts are established.
15. Final delivery of assets: When there is a lack of beneficiary and of provisions regarding the final delivery of assets, these shall be transferred to the National Treasury.
16. Tax exemption: For the purpose of establishing an incentive for international trusts, trusts not producing income derived from a Panamanian source are tax exempt.
17. Trust supervision: A special law regulates the trust business and the persons who customarily engage in trust management.
18. Confidentiality: The obligation to maintain secrecy on trust operations is established as well as penalties for violations.
19. Application of foreign law: Even when the trust may be executed in accordance with Panama law, the parties may agree that its effects will be subject to a foreign law. Likewise, the assets may be subject to a foreign law depending on the location and the trust can change its jurisdiction to another country.
20. Trust existing prior to the law: It is permitted that these be submitted to the provisions of the law.
21. Trust constituted pursuant to a foreign law: It is permitted that these be submitted to Panamanian law by means of a notarised declaration.
22. Procedure: Litigations are expedited by submitting them to summary proceedings, which are shorter and faster. Likewise, it is permitted to submit any controversy to arbitration either under the laws of Panama or any foreign law or rules such as ICC, IAAC, or others.
The Panama trust could be an excellent alternative for Continental European and Latin American clients
The trust is a private agreement between the parties, and thus there is no registration or any disclosure to third parties. Even when the signature of the parties must be legalised by a Notary, no copy of the trust must be filed with the Notary.
Pursuant to the Trust Law, the trustee and its personnel are bound to keep upmost confidentiality, except upon requirement from a court due to a criminal procedure.
The breach of confidentiality by the trustee or its personnel carries penalties of up to six months imprisonment and up to USD50,000 in fines.
International law issues
1. Conflict of laws – Panama is a signatory to the Treaty of Bustamante. Panama is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, however, the Trust Law complies with the trust concepts expressed therein.
2. Recognition of foreign trusts – A properly executed foreign trust will be recognised and enforced in Panama, provided that the settlor and the trustee agree to abide by the formalities and requirements of Panama law. The trustee individually can make this statement, if so authorised by the trust deed.
The income tax of Panama is levied only upon net income derived from operations within the territory of the Republic of Panama. Income obtained from operations consummated outside of the Republic of Panama is not income obtained from 'sources within Panama' and, therefore, is not taxable under Panama law.
The Panama Trust Law follows that same principle of territoriality and, specifically, states that the acts of creation, modification or termination of the trust as well as the acts of transfer or encumbrance of the trust assets are exempted from income, capital gains and all other taxes, contributions, levies or charges, provided that the trust is created upon:
1. assets located abroad
2. money deposited by individuals or legal entities whose income does not derive from a Panamanian source or is not taxable in Panama; or
3. shares or securities of any kind issued by corporations whose income does not derive from a Panamanian source, even if such monies, shares or securities are deposited in the Republic of Panama.
The Panama trust could be an excellent alternative for Continental European and Latin American clients (due to their civil legal background), moreover, when combined with Panama foundations and SPVs.
In these times when clients and professionals are seeking a new safe home for their assets and operations, Panama meets all requirements to become one of the premiere jurisdictions for trusts and trust management in the world.