Estate planning in Panama
Since the fall of the evil military dictator Noriega more than 20 years ago, Panama is putting itself on the map as the business centre of Central America. Dozens of banks established themselves in Panama City, a city with one of the fastest growing skylines throughout Central and South America. Panama has a steadily growing diversified economy and is hardly affected by the economic crisis. In fact, Panama benefits from the decline of the United States by offering cheap alternatives to pensioners and US companies. In addition, the economic pillar of the country, the Panama Canal, is currently being expanded at a cost of more than USD 5 billion in order to make it accessible to the latest generation freighters. Amid the dubious regimes and socialist states of Latin America, Panama is a beacon of stability. The president, supermarket magnate and millionaire Ricardo Martinelli, wants to put Panama even more on the map as a business hub, through the establishment of more free trade zones, the conclusion of trade agreements and the protection of the territorial tax system.
The Panamanian Private Interest Foundation is affordable, discreet, flexible and can be a very good planning tool in the context of estate planning. As is generally known, the Panamanian Private Interest Foundation (PIF), which has existed since 1995, is almost an identical copy of the mother of all foundations, namely the Liechtenstein Foundation. The Stiftung (or non-profit foundation) was conceived in this unsightly mountain state, then first copied in Panama, and is now slowly but surely conquering the world and is actually an answer to the trust (a legal concept used in common law countries) by the civil law countries.
Common law versus civil law countries
Common law countries versus civil law countries? Most countries follow one of the two legal systems: common law or civil law. A country with a common law system has no comprehensive compilation of legal rules while a country with a civil law system does have such a comprehensive and continuously updated legal code. The common law system emerged in England and was applied in the British colonies around the world. The civil law system developed in continental Europe and was applied in the colonies of European countries such as Portugal and Spain. A common law system is largely based on judicial decisions that have already been made in similar cases. In each new case, the presiding judge then has to determine which precedents have to be applied in order to make a decision. As such, judges in a common law system play an important role in shaping common law. In civil law countries, judges have to establish the facts of the case and then they just have to apply the provisions of the applicable legal code. The decisions made by judges in civil law countries are less crucial in shaping civil law than the decisions of legislature and legal scholars who draft and interpret the legal codes in civil law countries.
Own legal personality
As with the Curaçao SPF or the Luxembourg SPF, the Panamanian PIF has its own legal personality, in contrast to a trust (which will be explained later on), for example. Therefore, potential creditors can’t easily break into the assets of the PIF. Potential creditors do have the right to contest the transfer of assets into the PIF in the case they think the founder or any third party transferred the assets into the PIF to defraud them. However, potential creditors have to act fast because their rights lapse at the end of a 3 year time span, counting from the date of the transfer of the assets into the PIF. The Panamanian PIF is therefore safe from tsunamis of claims and is the ideal legal entity for divorce fights.
A foundation is excellent if you love discretion. For example, it’s a good idea to use a foundation as a holding entity of your shares in an offshore company – even more discreet and even better protected. In other words, you can also hold or maintain an anonymous shareholding in a company by using the foundation as a holding entity. It’s an alternative to bearer shares, which now have been abolished in various countries.
Of course, there might be much nobler goals underlying the establishment of a foundation such as various good causes. The foundation can be used to manage the assets for the benefit of scientific, philanthropic, educational and humanitarian purposes. You can then transfer assets into the foundation which will serve to financially support any well-described good cause. Basically, a Panamanian PIF cannot carry out any commercial activities (but it can hold the shares of a commercial company, of course).
Each Panamanian foundation has a founder (can be both an individual or a legal entity such as a company) who establishes the foundation by registering the foundation charter at the Public Registry of Panama. The minimum capital for the establishment of the foundation is USD 10,000 and depending on the needs of the founder, a local law firm can act as a nominee founder. Furthermore, the founder has no influence or control over the foundation ‘as such’ because at the time of incorporation of the Panamanian PIF, he/she has to appoint a foundation council.
The foundation council
Each Panamanian foundation has an appointed council (a governing body similar to a board of directors in a company) which has the responsibility to (1) carry out the objectives of the foundation and to (2) manage and administer the assets of the foundation according to its charter and regulations. The council has to consist of not less than three members in the case of natural persons or of only one member in the case of a legal person such as a company. None of its members has to be Panamanian. It’s also possible for a founder to appoint himself as a member of the foundation council (but this could be disadvantageous for tax planning purposes, depending on the founder’s country of residence). Frequently, a nominee council is provided by a local law firm which acts as the foundation council on paper, while others are actually in charge behind the scenes. So very discreet.
The powers and responsibilities of the foundation council are determined in the foundation charter and/or the regulations. Depending on the wishes of the founder, the foundation charter and/or regulations may limit or expand the powers of the foundation council.
Panamanian law requires that a foundation charter has to be registered at the Public Registry of Panama in order for the foundation to be officially established. The legislation requires that certain basic information has to be provided in the charter because the foundation will have rights, obligations and various assets. This charter must contain certain elements and the most crucial ones are the following: The name of the foundation, the name of the founder, the objective(s) of the foundation, the initial capital of the foundation (usually USD 10,000), the period of establishment of the foundation (a definite or indefinite period) and the name and address of the members of the foundation council.
To summarise: the names of both the founder and the members of the foundation council are publicly accessible in the Public Registry of Panama (often a local law firm or fiduciary service provider will act as nominee founder and foundation council).
The regulations is an optional and completely private document. Any information not required by Panamanian legislation to be included in the publicly accessible foundation charter, and which the founder would rather keep confidential, can always be written in the regulations. As a consequence, the names of the beneficiaries and how distributions are going to be made to them out of the foundation assets can be specified in the regulations. There are practically no restrictions which means these regulations are very flexible and open to creative arrangements.
Panamanian legislation ensures the confidentiality of these regulations by imposing heavy penalties for breaching the duty of confidentiality. Breach of confidentiality results in both a substantial fine of USD 50,000 and up to six months imprisonment. These sanctions apply to members of the foundation council, to supervisory bodies and to employees of both the private and public sector having knowledge of the activities, transactions or operations of the foundation.
Traditionally, the regulations are drafted by a lawyer or notary who is assisting the founder. In these regulations, the founder states how the assets should be managed, what is to be done with the investment revenues, what should happen with the assets when he/she no longer has legal capacity or is demented, whether the foundation should continue to exist after the death of the founder, and so on. The regulations should also state what should happen after the death of the protector, for example – should a new protector be appointed and how is the new one to be selected – or is the foundation simply to be dissolved? Obviously, the existing regulations can always be adjusted in due course. When drafting the charter and regulations, one should always make a careful analysis of the countries of residence of the founder and the beneficiaries.
The protector (supervisor)
The founder may always establish other special arrangements in order to retain control or supervision over the foundation assets. The founder may appoint a protector to supervise the actions of the foundation council (in order to check whether the actions are in line with the charter and regulations) prior to or after his/her death. The concept of a protector has been widely used in common law jurisdictions when settling a trust. This is yet another innovation of the Panamanian legislation which further ensures the safety of the Panamanian PIF and, thus, makes it even more attractive as an estate planning instrument.
Appointing a protector is optional and the protector is ultimately the one who has everything under control – and therefore also the assets of the foundation. The foundation council appoints the protector at the time the foundation is established. The great strength of the protector is that he can substitute members of the council at any time, without the consent of the other members of the council. It’s important to realise that – and this is what we appreciate so much – the protector, unlike the members of the council, can be appointed discreetly without being made public. Thus, a so-called private protectorate document, signed by the foundation council, can appoint the protector. Who reads between the lines will see this is a crucial element for tax planning purposes: the founder can remain in control as protector but without anybody realising it. The protector can perform his/her function without being publicly known. But for those who are paranoid, it’s also possible to work with a nominee protector.
Interestingly, the foundation has no shareholders (read no owners) – nice and safe for creditors such as money-guzzling governments. No, a foundation only has beneficiaries who benefit from the assets transferred into the foundation. These beneficiaries (in most cases the founder and his family or charities) are traditionally appointed in the private regulations. Keeping in mind that a certain beneficiary could die unexpectedly in the future, other beneficiaries (a second reserve layer) can already be identified – there are many options. One starts from a blank page and all the rest is legal creativity.
Forced heirship provisions
Forced heirship is actually a restriction to an individual’s freedom to write a will. Essentially it means that a percentage of a person’s assets (and in some countries the gifts done during his/her life) must be transferred in equal parts to his forced heirs at the time of that person’s death. As forced heirship is part of the legislation in certain countries, any will ignoring these forced heirship rules is null and void. The only way for a founder to circumvent forced heirship rules in his country of residence is to transfer his assets abroad and to create an asset protection structure in a foreign country which doesn’t recognise forced heirship rules. In other words, the foundation and its assets should be located in a jurisdiction that rejects any order made by a judge from the founder’s country of residence…
Now what states Article 14 of the Panamanian Private Interest Foundation Law? It states that forced heirship laws of another country shall not affect the foundation or its validity and shall not prevent the attainment of its purpose as provided in the foundation charter or its regulations.
If the foundation charter or regulations specify that any disputes arising in respect to the foundation may be resolved by arbitrators, then it’s possible to choose for arbitration proceedings instead of litigation through the judicial system of Panama. The parties involved can then choose professionals from all over the world as arbitrator(s). The main advantages of arbitration proceedings are flexibility, speed, efficiency and confidentiality (these proceedings take place in private and not in court). Article 36 of the Panamanian Private Interest Foundation Law states that any controversy arising in respect to the foundation may be resolved by arbitrators. The arbitration process may take place in any location and may be subject to any procedure established by the founder or any other authorised body of the foundation. Panama has an efficient arbitration regime (arbitration is commonly used in Maritime and Transport law, as well as in commercial and foundation matters) and the possibility to opt for arbitration proceedings was already introduced in 1999!
Creativity is allowed
In Panama alone, there are more than 40,000 foundations registered. A foundation isn’t required to file annual financial statements, so everything can remain discreet. There’s no required nationality – the founder and the members of the council can even be companies from another country. Creativity is the order of the day. Good, right? This is entrepreneurship, away with the straitjacket of all sorts of regulations! It’s a public secret that this flexibility is the reason why Liechtenstein lost (and is still losing) a major part of its foundation business to Panama. No meetings are required, and if there’s a meeting, it can take place anywhere in the world, possibly with a power of attorney, or by e-mail, fax,…
To complete the fairytale – the foundation pays no taxes. Nada, niente, rien, nichts, nothing… a big fat zero. However, each year there’s a small modest annual renewal fee to be paid: we can live with that. If you have a foundation in Liechtenstein, Austria or Switzerland, then you can always move to Panama (by setting up a new one in Panama or by re-domiciling your existing foundation) to get away from the stuffy environment in Europe.
The Panamanian banking secrecy is embedded in various laws. Everyone who violates the Panamanian banking secrecy will be severely punished by fines as well as by prosecution. Persons violating the banking secrecy face an imprisonment of up to 2 years and even the inability to practice their occupation, employment, profession or activity for not more than 2 years. Only with a special request of the court and after a demanding procedure, access to someone’s bank account may be requested in some specific cases. Apart from that, everything is top secret, even the correspondence between the customer and his bank.