The Establishment of Private Interest Foundations in the

Republic of Panama

(2012)

The Republic of Panama

Where is Panama located ?

Historical Background The Isthmus of Panama was discovered in 1501 by Rodrigo de Bastidas and Vasco Nuñez de Balboa, who had a leading part in the establishment of Santa Maria La Antigua del Darien in 1510, the first permanent settlement on the mainland of the Americas. In 1513, Balboa led an expedition, in Panama, which discovered the Pacific Ocean. Pedro Arias Davila founded Panama City on August 15, 1519, almost a hundred years before the foundation of Jamestown, the first permanent English settlement in North America. Panama was a Spanish colony until 1821 when it became part of the Gran Colombia of Simon Bolivar. In 1903, with U.S. backing, Panama broke its alliance with Colombia and became an independent republic. Afterwards, Panama promptly signed a treaty with the U.S. allowing for the construction of a canal and granting the U.S. sovereignty over a strip of land on either side of the structure (the Panama Canal Zone).

The Panama Canal was built by the U.S. Army Corps of Engineers between 1904 and 1914. On September 7, 1977, an agreement was signed for the complete transfer of the Canal from the U.S. to Panama by the end of 1999. Certain portions of the Canal Zone and increasing responsibility over the Canal were turned over in the intervening years. With U.S. help, dictator Manuel Antonio Noriega was deposed in 1989. The entire Panama Canal, the area supporting the Canal, and remaining U.S. military bases were turned over to Panama on December 31, 1999. As a solution to the Panama Canal’s growing traffic demand, the current Panamanian Goverment has recommended it’s expansion, a project that was submitted to the population’s approval, by means of a national referendum. The initiative recieved overwhelming support and was approved in October of 2006. An expanded canal will benefit the people of Panama and world trade. The expansion will help maximize Panama’s strategic geographic location by enabling it to become an international maritime hub at the center of global trade. Expansion will also improve the flow of international commerce and facilitate the movement of goods through several important markets. It will increase capacity at one of the world’s critical trade arteries; allow the vital “All-Water Route” to continue to grow; create more efficient service at the Canal, which would tighten the global supply chain and help goods get to markets faster, thus saving time and money for both producers and consumers.

Historical Background

General Information about Panama Surface and Limits: With an area of approximately 78,200 sq km, Panama is located in Central

America, bordering both the Caribbean Sea and the North Pacific Ocean, between Colombia and Costa Rica. It forms the narrowest and lowest portion of the isthmus that links North and South America. It’s position on the eastern end of the isthmus made Panama into a strategic location for the construction of the Panama Canal, which links the Caribbean Sea and the North Pacific Ocean.

Population and Language: Approximately 3.4 million, about 52% of which are in the urban areas.

Spanish is the official and spoken language. English is also spoken widely in urban areas and is used in commerce and international trade.

Currency and Government: It’s official currency is the Balboa (PAB) and the US Dollar (USD).

Furthermore, the country has no exchange control provisions. Panama’s government type is a constitutional democracy and the

country maintains a legal system based on the Spanish civil law system with many common law influences.

Economic Overview Panama’s dollar based economy rests primarily on a well-

developed services sector that counts for four-fifths of the GDP. Services include operating the Panama Canal, banking, the Colon Free Zone and other Free Trade special areas, insurance, container ports, flagship registry, and tourism. A slump in business in the Colon Free Zone (second largest Free Trade Zone in the world after Hong Kong) and agricultural exports, the global slowdown, and the withdrawal of U.S. military forces held back economic growth between 2000-2003. Financial growth picked up in 2004 and 2005 led by export-oriented services and a construction boom stimulated by tax incentives. The government has been backing tax reforms, reform of the social security program, new regional trade agreements, and the development of tourism.

What is a Private Interest Foundation ? The Republic of Panama, following its tradition as an International

Financial Center, has incorporated into its legislation an innovative legal vehicle that now is an example to follow in many other jurisdictions: The Private Interest Foundation, an entity regulated by means of Law 25 of 1995 and which has become a very useful instrument in heritage planning and assets protection.

The Panamanian Foundation is basically a donation of goods with the objective of the creation of an autonomous legal entity endowed with a new estate totally separate and different from the Founder's patrimony. The Foundation, just like any other corporate body, has the capacity to acquire and possess any kind of assets, to enter into obligations and take part in administrative and judicial proceedings.

The intention of this legal figure is the handling of assets in favor of the beneficiaries indicated by the founder(s), which is the person that provides the assets and funds for this estate.

The Private Interest Foundation may be constituted to enter into effect from the moment of its creation and/or after the death of the Founder.

How is a Foundation Incorporated? The process of incorporation of a Private Interest Foundation is as simple as

that for a Panamanian Corporation. A Private Interest Foundation may be created by one or several individuals, including a corporate body, by means of a private document subscribed by the founder(s) or directly before notary public of the place of constitution, in any language. The signature of the incorporator(s) must be attested by the notary public of the place of constitution.

After constitution of the Foundation, it will have the capacity to acquire and possess assets and goods of any kind, and to hold rights and contract obligations.

The Foundation is incorporated through a document called Foundation Charter, which is converted into a public deed and recorded at the Office of Public Registry, obtaining its legal personality thereby.

Besides the Foundation Charter, Private Interest Foundations are governed by specific Regulations. This private document is the main component of the Foundation since it establishes the provisions regarding the management and disposition of the founder’s patrimony during his life or after his death. The possibility of including provisions with effect to the founder’s death makes this vehicle the ideal for planning legacies and inheritances.

Included in the Foundation Charter

1. Name of the Foundation; 2. Initial Capital: The minimum initial foundation capital must be no less

than ten thousand dollars (US$10.000.00); 3. The appointment of the Members of Foundation Council: composed of a

minimum of three (3) members if they are natural persons, or of one (1) member in case of juridical person. Its purpose is to carry out the businesses of the Foundation;

4. The Domicile, which will be the place where the Foundation’s assets are managed;

5. Name and domicile of the Resident Agent: Is the law firm through which the Foundation is incorporated.

6. The Foundation’s purposes or objectives; 7. The method in which the beneficiaries of the foundation will be chosen; 8. The reservation of the right to amend the Foundation Charter when

deemed convenient; 9. The lifetime of the Foundation. 10. The destination of the assets of the Foundation and the procedure for

liquidating the estate in case of dissolution; 11. Any lawful clause that the founder(s) deems convenient.

Components of the Panamanian Foundation

The Founder The Founder of the Private Foundation is the individual or corporate body

who creates the Foundation and arranges the manner in which the Foundation will administer its assets. The Founder has the right to assign powers to himself, at his discretion. The Founder may be a nominee in some cases, for confidentiality purposes.

The Foundation Council It is the managerial body of the Foundation, in charge of its administration

and responsible for the fulfillment of its objectives and purposes. The Foundation Council may be composed of a minimum of three (3) individuals or one (1) corporation. In case of individuals, the founder has to appoint three (3) individuals of any nationality, and in case of corporations, the Foundation Council may be composed of one sole member or several. In both cases, it is not required to be Panamanian, or to be domiciled in Panama. Furthermore, the Founder may be part of the Foundation Council. The founder may reserve, pursuant to the Foundation Charter, the right to appoint and remove the members of the Foundation Council. The members of the Foundation Council will be designated completely and clearly, as well as their addresses.

The Foundation Council has to render account of its actions annually, to the beneficiaries or to the supervisory body, if any.

Components of the Panamanian Foundation (Cont.)

Obligations and Duties of the Foundation Council 1. To manage and deliver the foundation assets

according to the Foundational Charter and / or the Regulations.

2. To carry out acts, contracts or lawful businesses which are necessary to accomplish the purposes of Foundation.

3. To inform the beneficiaries of the Foundation of the economic situation of the same, at least once year.

4. To carry out all such acts which are allowed to the Foundation by Law 25 of 1995.

Components of the Panamanian Foundation (Cont.) The Beneficiaries The Beneficiaries are the individuals or corporate bodies designated to

receive the benefits of the Foundation, pursuant the provisions established by the Founder in the Foundation Charter, or by the Regulations. The beneficiaries hold a present and future right over the economic benefits of the Foundation. Moreover, the beneficiaries have the right to be informed about the management of the Foundation, ask for the removal of the Members of the Foundation Council and object acts of the Foundation.

The Protector The Founder may appoint a supervisory body, which will be in charge of

ensuring the compliance by the other bodies of the Foundation of their duties. This supervisory body may be also called Auditor or Professional Advisor. The Protector may be the Founder of the Foundation, thus keeping control over the Foundation.

Components of the Panamanian Foundation (Cont.)

Attributions of the Protector 1. To ensure the fulfillment of the foundation’s purposes by the Foundation

Council and protect the rights and interests of the beneficiaries. 2. To require the Foundation Council to render accounts. 3. To modify the objects and purposes of the Foundation when their fulfillment

becomes impossible or too burdensome. 4. To appoint new members of the Foundation Council by reason of temporary or

permanent absence, or for the expiration of the period which they were appointed.

5. To appoint new members of the Foundation Council in replacement of existing members in the event of temporary or accidental absence of any of them.

6. To increase or reduce the number of members of the Foundation Council. 7. To approve the acts done by the Foundation Council pursuant to Foundation

Charter or the Regulations. 8. To act as custodians of the assets of the foundation and to oversee the

application thereof to the objects or purposes contained in the Foundation Charter.

9. To remove beneficiaries of the Foundation and to add new beneficiaries and to add others in accordance with the provisions of the Foundation Charter or the Regulations.

Documents

Foundation Charter It is the Public Deed that, once registered at the

Office of Public Registry, gives rise to the Foundation. It may be drafted in any language with characters of the Latin alphabet, and must be protocolized by a notary public of the Republic of Panama for its registration. In case the Foundation Charter has been drafted in any language other than Spanish, the document shall be translated by a Certified Public Translator.

Documents (Cont.) Regulations of the Foundation

It is the document that indicates the assets and the beneficiaries of the Foundation. It does not require registration at the Office of Public Registry, nor its insert in a Notary Public protocol, which guarantees its privacy.

This document may serve as testament, if necessary. Accordingly, the Founder may stipulate that he will be the only one having benefits of the patrimony of the Foundation while alive, and designate who shall be the beneficiaries of the foundation after his death. When the Founder of the Private Interest Foundations dies, the distribution of the Foundation’s assets is carried out pursuant to the Regulations, serving the latter as a testament and transferring said assets exempted of any transfer tax provided that the assets are located outside the Republic of Panama, or otherwise exempted by law.

The Foundation’s Estate The Foundation’s estate is composed of the assets that the Founder agreed to

transfer to the Private Interest Foundation once the transfer has been formalized. The estate may be expressed in any legal tender; although it must be valued at no less than ten thousand dollars (US$10,000.00). It is not necessary for the assets to be transferred at the moment of constitution and the contribution of assets may be done by the Founder or third parties.

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

The estate may be composed of assets of any nature, present or future. Sums of money or other properties may be incorporated on a regular basis, by the Founder or third parties. The transfer of property to the Foundation’s patrimony may be carried out through public or private documents. The transfer will be executed pursuant to the laws regarding transfer of real assets.

Tax Advantages The Private Interest Foundation enjoys the same taxation privileges as the

Corporation, regarding the application of the Panamanian Tax Law under the territorial principle. The Foundation will be exempt of any kind of tax, contribution, duty, or fee resulting from the acts of constitution, amendment or dissolution of the Foundation, as well as from the acts for the transfer of assets of the Foundation and from the income or revenue from said assets, provided that the assets constitute the following:

1. Assets abroad 2. Money deposited by individuals or legal entities whose income does

not come from Panamanian source, or is not taxable in Panama under any circumstance (e.g., interest from bank accounts in Panama do not pay taxes), or

3. Shares or securities of any kind, issued by corporations whose income does not come from Panamanian sources, or when the income is not taxable under any circumstance, even when said shares or securities have been deposited in the Republic of Panama.

Tax Advantages Panamanian Private Interest Foundations have to pay a

sole registration fee at the moment of constitution at the Office of Public Registry, in accordance with the amount of the estate, and an annual fee of four hundred dollars ($400.00) for each subsequent year while the foundation exists.

After the death of the Founder, the beneficiaries or heirs

shall obtain their heirship immediately. This eliminates the need for an expensive and risky inheritance or probate proceeding; the inheritance is transmitted privately since it is not necessary to probate a will before a judge.

Irrevocability

Private Interest Foundations are irrevocable, except: 1. When the Foundation Charter has not been registered

at the Office of Public Registry. 2. When the Foundation Charter affirms otherwise. 3. When any cause of revocation applicable to

donations, in accordance with Panamanian law, has resulted.

4. When Foundations constituted to be effective after the death of the Founder, are dissolved by the Founder before dying.

Change of Domicile Foreign Foundations may domicile in Panama, for which a Certificate of

Continuation of the Foundation must be registered at the Office of Public Registry. This Certificate of Continuation must be issued by the corresponding body or organ of the Foundation according to its own internal organization. Said Certificate must indicate the name of the Foundation and date of its constitution, data about the registration at the country of origin, along with a brief statement indicating its intention to continue its legal existence as a Panamanian foundation. The Certificate of Continuation should have an attached copy of the original Foundation Charter and a Power of Attorney extended to a Panamanian lawyer to carry out the respective procedures to effect the continuation of the foundation in Panama.

In the same way, Panamanian Private Interest Foundations, as well as the assets which constitute their patrimony, may be transferred or become subject to the laws and jurisdiction of another country, as may be provided by their Foundation Charter or their Regulations.

Confidentiality The management and operation of the Private Interest Foundation

are not subject to governmental supervision and the Foundation Council is not required to present reports to the authorities regarding the Founder, the beneficiaries or the patrimony of the Foundation.

In the case of criminal investigations, related particularly to drug trafficking or money laundering, said members and employees are compelled to provide the information and documentation required by the Panamanian authorities.

Prior to the creation of the Foundation the Resident Agent must request and keep in records the basic information about the identity of the Founder and the Beneficiaries, including personal and commercial references which shall be provided to the authorities in case of a criminal investigation, pursuant to the formalities established by our legislation.

Confidentiality Article 35: All members of the Foundation Council and

of the supervisory bodies, if any, as well as the public or private employees, who have any knowledge of the activities, transactions or operations of the foundations, must at all times hold the same in secret and confidentiality. Breaches of this duty shall be sanctioned with imprisonment of six (6) months and a fine of fifty thousand Dollars (B/. 50,000.00), without prejudice to the corresponding civil liability.

The provisions of this article shall apply without prejudice to the information that must be disclosed to official authorities and the inspections the latter must carry out in the manner established by the law.

Features of Panamanian Private Interest Foundations

Fast constitution. It is an asset protection vehicle. This protection is guaranteed by the

constitution of an estate separate from the Founder’s personal assets. Nonetheless, the Founder does not need lose control over it.

The Foundation’s estate may derive from any lawful business and may consist of assets of any kind, present or future.

The Foundation may be used for inheritance planning since the Regulations may be regarded as a private will in which the founder disposes of the foundation’s assets.

Great tax advantages, since Panama only taxes income produced or generated by economic activities carried out within the country. In other words, someone who utilizes a Panamanian Private Foundation outside of Panama will not have to worry about taxes within the country of Panama.

The Private Interest Foundation possesses all the characteristics inherent to legal entities, such as capacity to contract, to take part in administrative and judicial proceedings, among others.

The Foundation’s patrimony may not be subject to seizures or attachments, to respond for personal obligations of the Founder or of third parties; unless proved at a court of law that the transfer of assets was made in fraud of creditors. This right to object or contest the transfer has a statute of limitations of three (3) years from the date of the transfer of assets.

Uses of Private Interest Foundations

The Private Interest Foundation may be used for the basic purpose of protecting the family estate. The Foundation is allowed to perform any legal activities save for acts of commerce. It is permitted to carry out incidental commercial activities for the sole purpose of protecting and managing the estate of the foundation.

These are some common uses for Private Interest Foundations: 1. As a holding entity for corporations’ shares. 2. As a private will with respect to the Founder’s assets. 3. For managing Private Retirement Funds, the education of the

children, and other types of family savings. 4. As a vehicle for controlling the transfer of a corporations’ shares.

Comparison with Panamanian Corporations Panamanian Corporation Private Interest Foundation

Articles of Incorporation may be amended by the Subscribers or by the majority of Stockholders.

The Founder may reserve the right to be the only person empowered to modify the Foundation Charter.

It is a legal entity independent from its Stockholders and Directors.

Unlike a common Trust, which operates as an independent patrimony, in the case of the Foundation, a new entity with an independent legal personality is created.

The main objective of a Corporation is to conduct commercial businesses.

It is established so as to create a separate estate.

Stockholder’s Creditors may legally oppose the acts performed in fraud of creditors.

Founder’s Creditors have a three (3) year period for impugning the acts performed in fraud of creditors.

A Corporation is managed by a Board of Directors composed of a minimum of three (3) members, may be natural or juridical persons.

The Foundation is managed by the Foundation Council, which may be composed of three (3) natural persons or one (1) Corporation (or any other legal entity).

There are no specific provisions regarding the violation of corporation’s secrecy. This is regulated by the rules of common commercial law, and by those regarding protection of commercial/industrial secrecy.

There are imprisonment penalties, fines, and even civil liability for members of the Council and public and private employees who violate the confidentiality and secrecy involving Foundation's activities.

There is no specific legal provision regarding the attachment or seize of corporation’s assets.

Foundation’s assets may only be seized or attached as a result of judicial claims arising directly from the Foundation’s activities.

Dissolution The Foundation shall be dissolved:

1. Upon the date on which the foundation must come to an end in accordance with the Foundation Charter.

2. Upon the accomplishment of the ends or purposes for which it was created or if their fulfillment becomes impossible.

3. Upon its revocation by the Founder. 4. If it becomes insolvent, or it has been judicially declared to

be subject to bankruptcy proceedings. 5. Upon the loss or total extinction of the assets of the

Foundation. 6. Due to any other reason established in the Foundation

Charter.

MORENO & ARJONA - BUREAU Legal Fees

Our rate includes all legal expenses and professional fees including the drafting of basic Regulations . The most common expenses are as follows:

ESTABLISHMENT OF THE FOUNDATION: US$ 1,595.00

Includes our fees, and the legal and registration expenses in relation to: Draft of the Foundation Charter, basic set of Regulations and further

discussions regarding its content, registration with the official notary, recording at the Office of Public Registry.

Translation of the Charter into the English Language. Single Annual Tax for the first year. Resident Agent Fee for the first year. Services of Nominee Founder and/or Nominee Members for the

Foundation Council, if applicable. Courier to the place of destiny of the documents. Preparation, study and drafting of extensive and complex Regulations,

including multiple sessions for additional amendments, are negotiated as a separate rate.

MORENO & ARJONA - BUREAU Legal Fees

The Panamanian Private Interest Foundations pay an annual single tax of US$ 400.00 provided that they do not carry out activities taxable in Panama. Hence, these foundations must pay the following rates from the second and subsequent years in concept of renewal:

Annual Single Tax

US$ 400.00

Resident Agent

US$ 250.00 + 7% VAT

Banking and Other expenses

US$ 60.00 + 7% VAT

TOTAL US$ 731.70

MORENO & ARJONA - BUREAU Legal Fees

In case of using our Nominee

Members service for the Foundation Council, the

renewal rate will be:

Annual Single Tax

US$ 400.00

Resident Agent

US$ 200.00

Other expenses

US$ 60.00

Nominee Members

US$ 300.00

TOTAL US$ 999.20

For further information, please contact: Mr. Jan Christian Brewer (Tax Partner) MORENO & ARJONA - BUREAU

Attorneys at Law

Samuel Lewis Ave. and Gerardo Ortega St. Central Building, 5th Floor

Panama City, Republic of Panama P.O. Box 0819-05618 (Panama)

Tel. (507) 297-5566 - Skype: jbrewer.mab

Email: jbrewer@mab.com.pa