Offshore Foundations Explained

The Basics Concerning Offshore Foundations

What is a Foundation?

A Foundation is a hybrid between a Trust and a Corporation. Its functions are simply asset protection. It affords this protection by legally owning assets, which cannot be attacked by creditors, or frivolous lawsuits. However, the Foundation cannot conduct day-to-day business, so in the structure that we provide for our clients, the Foundation own Corporations which can conduct day-to-day business.

How to Establish a Foundation

To establish a Foundation, a Founder must fund the entity with assets, which are known as the patrimony. Assets can be anything (real estate, shares, monetary earnings, etc.), including present or future assets. Once this has been done the Foundation becomes irrevocable until the Founder dies or otherwise has expressly provided. For that reason, many offshore investors utilize the Foundation as a "will". In so doing, they are assured of their bequests and prevent their assets from going into probate.

The Founder

The Founder or a third person can make transfers of assets to the Foundation, unless the Founder has expressed otherwise. The Foundation can be used to hold any type of assets and can accumulate income from any type of legal business. These assets will be held as a separate estate from those of the Founder and any beneficiaries that the Founder may have added. They are held separately for the purpose of not being able to be seized or levied upon by personal creditors. Please note that it is not possible for the assets of the Foundation to be used for the personal obligations of the Founder or any of the beneficiaries.

In most cases the Founder retains control of the Foundation through the Power of Appointment from the Foundation Council. The Founder can be a natural or legal person. If desired, the Founder can serve as a member of the Foundation Council, as a Beneficiary or as a Protector (i.e., an official who is not required to have his name appear in the Public Registrar). As Founder has the power to remove all the above or to assign these powers to someone else in the Foundation. If you wish, a nominee may be appointed as the Founder, so that your name need not even appear in the entities' Memorandum of Constitution.

In short, your assets will be legally protected, and out of reach from the frivolous lawsuits, creditors, and/or disgruntled ex-spouses. Moreover, the anonymity that you may be seeking will be provided for you through the Private Interest Foundation.

The Panamanian Foundation

The Panama Private Foundation (also known as PIF) has its origins in the Law 25 of 1995, which in turn was inspired in the PGR or better known as the "Liechtenstein Persons and Company Act", that contains one of the first references to the private non profit foundations. In Panama, this and the most recent innovations in the Anglo-Saxon Trust enabled the creation of the Private Foundation utilizing the best features and characteristics of both worlds.

A PIF is a legal entity that can be created by either a natural person or a corporation that later transfers part or all of his/her assets to the Private Foundation so they can be managed and protected in favor of the Beneficiaries.

The Panamanian Foundation In Action

With regards to uses that can be given to a PIF one can find the following:

• Family support
• For Tax purposes
• For the protection and management of assets
• For educational purposes
• Testamentary purposes
• For life annuity purposes
• For charitable purposes
• To receive and manage capital and titles
• For the purpose of serving as guarantee or collateral
• For the management of insurance.

It is important to comment on several or all uses mentioned above can be given to a particular PIF, there are no restrictions as to the objects or uses one PIF can be given. For example, one PIF can be created to protect assets, but also with a testamentary use or in any case, with all the above-mentioned uses. However, a PIF cannot engage in commercial or for profit activities as a day-to-day activity.

Advantages of the Panamanian Foundation

PIF's may be successfully used to achieve the goals you have set out for, with the following advantages:

• They provide a fiduciary structure for the orderly transfer and disposition of assets to beneficiaries upon the death of the Founder, keeping control of the assets during lifetime.



• They may be established to have effects from the date of their constitution or after the death of the Founder.
• According to Law 25 of 1995, inheritance laws that apply in the domicile of the Founder or the Beneficiaries, shall not be effective against the Foundations assets nor may these laws affect the validity or performance of the Foundations objectives.



• Foundations are established to carry the specifics goals set out in the Foundation Charter and may additionally undertake sporadic commercial activities, exercise rights pertaining to their holdings, own property, contract obligations and take part in administrative or judicial proceedings.



• A Private Interest Foundation should be established with a patrimony destined to fulfill its objectives, which shall be no less than US$10,000.00. Said patrimony may be increased by additional contributions of the Founder or third parties and does not have to paid in part or in full before the incorporation;



• The assets of the Foundation become legally independent and do not form a part of the private estate of the Founder. Such assets are not sizeable and may not be subject to any precautory action or measure, unless such action or measure pertains to obligations incurred or damages arising from the fulfillment of the Foundations objectives. Notwithstanding the creditors of the Founder or of a third party shall have the right to contest the contribution or transfer of assets to a foundation when such transfer constitutes an act in fraud of the creditors. 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 was done.

According to article 27 of Law 25 of 1995, Private Interest Foundations are exempt from payment of any taxes, contributions, duties, liens or assessments of any kind arising from the acts of constitution, amendment or extinction of the same, as well as acts of transfer or encumbrance of the Foundations assets and the income arising thereof, when related to:

• Assets localized abroad.



• Money deposited by natural or juridical persons whose income does not derive from a Panamanian source is not taxable in Panama for any reason.



• Shares or securities of any kind issued by corporations which income is not derived from a Panama source, or which are not taxable for any reason, even when such shares or securities are deposited in the Republic of Panama.

The transfer of unmovable property, titles, certificates of deposits, assets, funds, securities or shares carried out by reason of the fulfillment of the objectives of the foundation or the termination of the same, in favor of relatives within the first degree of consanguinity or the spouse of the Founder shall also be exempted from all taxes.

Information of Public and Private Knowledge

The only information made public are the names of the Founder, the member(s) of the Foundation Council and the name of the Protector, this last if it is so established on the Foundation Charter, as the Protector can be appointed by means of a private and confidential document.

The Foundation Regulations are for internal purposes of the Foundation and are not a matter of public records. Information regarding names of beneficiaries and of the protector and method for distribution of assets can be contained within the Regulations, thus will not be publicly disclosed.

Confidentiality

Law 25 of 1995 innovates in this field when it stipulates on Article 35 that all the members of the Foundation Council, Protector, public or private servants that have knowledge of the activities, affairs, transactions and operations of the PIF must maintain reserve and confidentiality at all moments. Violation of these Articles carries a sanction of 6 months of jail time and a fine of Fifty Thousand Dollars (US$50,000), without prejudice to civil liabilities.

Private Foundations vs. Trusts

Although similar, Private Foundations and Trusts have very clear differences:

PIF's are based on Civil Law and they are constituted by means of a public legal document and filed for registration, it is in fact, an existing legal entity, whereas a Trust is based on Common Law and are established by means of a private contract that does need to be filed with any government agency, it is not an existing legal entity, it is in fact a legal contract.

The difference between the Civil Law and Common Law is that Civil Law is based on written laws, codes and can only be changed, modified or amended by means of a legislative act, it is less flexible than Common Law. The latter is based on common knowledge, court interpretations and rulings, therefore is more flexible, but more volatile.

Another difference is that the Foundation Charter does not need to specify the rights and obligations of every party involved that can be done by means of a private and confidential document, while a Trust deed has to be very specific and clear regarding the rights and obligations of the Trustee.

In a PIF the assets are placed to the Foundation's name at the time of the transfer, while in a Trust, it is the Trustee who receives the assets to his or her name.

As for administration fees, those of an estate in a Foundation are low, while in a Trust, the Trustee fees depend on the value of the estate: the heftier the estate, the bigger the fees.

We strongly recommend that before you initiate the incorporation process you seek the advise of an attorney or professional in estate planning and/or asset protection in your area so you can accurately ascertain that what you are about to do is not only legal but viable. Laws differ from country to country and we wouldn't like it if you get in trouble with the authorities of your country of residence or nationality. However, we feel that with the proper advise and a well structured Asset Protection and/or Estate Planning structure you can achieve all your goals.

Please contact us if you would like further details on Offshore Foundations.