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I. BRIEF OVERVIEW The Panamanian Foundation of Private Interest, passed into law by the Panamanian legislature as Law No. 25 of June 12, 1995, is a legal entity that was developed based on the Private Interest Foundation models from three different jurisdictions including the Principality of Liechtenstein, Switzerland, and Luxembourg. The Panamanian Government carefully designed the Panama Private Interest Foundation with the intentions of creating a more modern, more flexible, and more affordable estate-planning vehicle for people from around the globe.  Since becoming law in Panama in 1995, many financial planners, both domestic and international, have begun incorporating Panamanian Foundations into planning and estate structures as a means of increased asset protection and confidentiality for assets based in the U.S. and other jurisdictions.  There is no ready definition acceptable to U.S. persons that describes with clarity what a Panamanian Foundation is. It can be best described however, as what it is not. It is not a trust, revocable or irrevocable, domestic or foreign. Neither is it a corporation, either for-profit or charitable. It is not a “private foundation” as defined pursuant to Internal Revenue Code, Section 509(a), (an organization funded by contributors unrelated to its purpose and which makes grants to organizations that conduct charitable activities), not performing the activities itself). The Private Foundation may be defined as a legal entity that, in simplistic terms, connects two operations: 1) a donation plus a trust, with, 2) formation of a legal entity similar to a corporation pursuant to Panamanian law. It is, however, an entity that may qualifiy as sui juris (i.e., it can own and hold title to property in its name and can sue and be sued). In other words, the Foundation is considered a legal person whose existence and identity are entirely separate from that of its founder or of any other person; consequently, the legal identity and property, including real estate, of a Foundation are separate and independent from those of any Founder or any other person.  Putting it another way, the dual nature of the entity, (i.e., a trust and a corporation), allows the beneficial aspect of each hybrid part to work to the benefit of the entity as a whole. As an example, its trust nature would allow it to manage bank and securities accounts, distribute present and future income as well as effect transactions on a stock market. Its corporate nature allows it to be a holding vehicle of subsidiary companies, to control and exercise the rights of shareholders and to own real property it its own name. It gains “its life” or legal recognition as an entity through the filing of a Foundation Charter (analogous to Articles of Incorporation for corporations) in the Panamanian Public Registry (Oficina de Registro Publico de Panama).

A Private Interest Foundationbrings balance to your offshore structure - It is the essential part that creates a more substantial and protective entity of your offshore presence - Used in harmony with other established entities (corporations, trusts, partnerships, holding companies, etc.) asset and estate planning are given a more stronger arm with the use of Panamanian Foundations.

  There are no minimal capitalization requirements. Although under Panamanian law the stipulated amount found in most charters of US$10,000 , a Foundation can be capitalized with any amount of cash and/or property.
¨ The assets placed in the Foundation are not subject to attack by beneficiaries, creditors, third parties and cannot be seized, attached or encumbered.
¨ There are two types of Foundations: Irrevocable and Revocable; virtually all foundations created from a U.S. perspective are irrevocable. 
¨ The parties to the Foundation may form a Supervisory Committee or “Protector” which operates as the “watchdog” of the managing committee of the entity on behalf of the Founder.
¨ The Foundation is similar to a corporation to the extent that its duration is perpetual; however, there are no shareholders, officers or directors to a Foundation.
¨ Used in harmony with other established entities (corporations, trusts, partnerships, holding companies, etc.) asset and estate planning are given a more stronger arm with the use of Panamanian Foundations. 
¨ As of the preparation date of this summary (November, 2003), the U.S. Internal Revenue Service has not specified Foundations of Private Interests as an entity to which reporting requirements for interests, income, establishment or beneficial ownership are mandated. Needless to say however that in an appropriate case, the service will argue that, by analogy, U.S. persons must report (on forms yet to be designated) their involvement with foundations in the same manner that involvement in other foreign entities require . From a planning aspect for those desiring non-reporting criteria, creative structuring should strive to minimize U.S. contacts with the foundation. 

III. FORMATION AND ORGANIZATIONAL STRUCTURE

The following elements that form the foundation and its structure are as follows:

¨ THE FOUNDER – may be a natural person or entity that gives that is deemed the creator of the foundation and who provides the corpus (patrimony) for the entity through the charter documents and for the benefit of third-party beneficiaries or for his/her own advantage. From a U.S. planning perspective, it is advisable for a non –resident alien to be the founder of the entity due to the reporting requirements established by the Service for the establishment of and transfer of assets to a foreign entity. The U.S. person (technically referred to as the “Fundor”) provides the corpus (patrimony) for the Foundor in order to establish the foundation.

¨ THE PATRIMONY – (or, in U.S. terms, the “corpus”) the assets that the Foundation receives, manages and administers through the Foundation Council. It may be in cash, in kind, hard assets, securities or other items of value. It is not necessary for the assets to be transferred at the moment the foundation is constituted – it may be capitalized in the future.

¨ THE BENEFICIARY – may be natural persons or an entity and may also be the Founder or Fundor, although not recommended in the case of U.S. persons. The beneficiary(ies) need not be identified at the time of the initiation of the foundation and may be determined in a later publication but, under all circumstances, must be determined at some point. This is important in the case of U.S. persons with respect to gift tax issues in that the tax is not imposed upon incompleted (inchoate) gifts . Based on case law precedents in the U.S., gifts intended to beneficial interests are not completed if the beneficial holders are not yet named or if the Founder (Grantor) reserves the right to modify, change and/or remove beneficiaries. Creative planning through professional advisors would be instrumental in these types of strategies.

The foundation is not intended as a means of transferring or conveying property but as a means of conserving, managing and enjoying the assets. As such, the beneficiaries shall effectively be the title holders or owners of the assets in the foundations upon its termination or upon the occurrence of a stated event or date referred in the charter.

¨ THE ARTICLES OF INCORPORATION (CHARTER) – are the constitution clauses or articles propounded for the existence of the foundation. Panamanian law requires that the document must be registered by a Notary (Notario Publico) in Panama or a Panamanian Consul abroad, then registered in the public records as referred previously. The document must contain the basic clauses for the existence of the entity as are described in Article 5 of Law No. 25 and must also minimally state the following in any language using the Latin alphabet:

- the establishment of patrimony;
- appointment of at least three (3) initial members of the Foundation Council;
- the domicile of the foundation;
- the appointment of a Resident Agent in Panama who countersigns all acts;
- a listing of the foundation’s purposes;
- a designation or listing of beneficiaries;
- reservation of the right to modify the Articles of Incorporation;
- the duration of the foundation and causes for the foundation’s termination;
- rules, if any, for the return of the assets.

¨ THE FOUNDATION COUNCIL – is the main body of the entity and is obligated to act pursuant to the mandates as stated in the Articles, among which include the administration and management of the assets of the foundation, complying with the objectives of the foundation, preparing of an accounting at least annually for the benefit of the beneficiaries, represent and defend the interests of the foundation against third parties and to act with reasonable business prudence. The members of the council, which must initially be at least three (3) members, can be either natural persons or entities, operate in a fiduciary capacity to the Founder and is responsible for all business decisions with respect to the assets. Although not advisable, a U.S. person may serve as a member of the council in order to give the Fundor a sense of control over the transferred assets. 

¨ THE BYLAWS – are the means whereby the general clauses of the Articles are developed and is the document whereby the Founder perpetually controls and states his/her will as to what the foundation will do, specifically enumerating the objectives of the foundation. Unlike the Articles which are a public document, the bylaws is not a publicly recorded document and is privately maintained by the Foundation Council, serving thus as the “roadmap” which must be followed by the Council; in short, the intentions of the Founder must be stated with specificity in this private document. Further, it is in the bylaws where the beneficiaries are listed and named, as well as describing the mechanism to implement asset transfer instructions, the management and/or investment policies for the assets, the relationship between the Council and the beneficiaries and the manner in which the distribution of the assets must be established regarding the beneficiaries appointed by the Founder. Because it is not a publicly registered document, the confidentiality and privacy of the Founder’s intentions as well as the mechanics of the foundation are always maintained. 

¨ THE SUPERVISORY COMMITTEE (PROTECTOR) – The Foundation Council does not operate in an absolute manner and it may have limitations imposed on it by the Founder through the creation of a Protector or Supervisory Committee. Through this committee which may consist of natural persons or entities, the activities and actions of the Foundation Council may be reviewed and scrutinized as well as act as a “buffer” in disputes between beneficiaries and the Council. More importantly however, it is through this Protector or Committee that a U.S. person could achieve his/her demands for control over the transferred assets. To achieve this objective, U.S. persons are recommended to serve in this capacity. Usually the Fundor’s attorney, accountant, financial advisor, trust company, bank, or other trusted person (even the Fundor him/herself) may serve as Protector or make up the Committee and, are not answerable to the Council for the daily policies of the internal matters of the Foundation. Further powers may be granted to the Protector to provide for the removal of members of the Council.

The activity of serving in a Protector capacity is non-reportable from an IRS standpoint except where the persons are compensated for their services as Protector or Committee member.

IV. U.S. TAX INTERPRETATIONS

Prior to utilizing a foreign entity that is not part of the common law system of the U.S., it is important for a professional advisor of a multinational investor to ensure the entity's characterization under U.S. tax laws. 

Although the Panamanian Foundation “smells like a corporation but feels like a trust”, a determination must be made for U.S. taxing purposes as to what it may be classified for taxing purposes. The classification of an entity is not merely determined by what it calls itself; The Internal Revenue Code (“Code”) and Regulations determines and prescribes entity classifications under Federal law and no consideration is given as to whether the entity is recognizable under local law. Accordingly, the classification of whether an entity is domestic or foreign is also determined similarly. Thus, Panamanian Foundations can only be classified as one of the following recognized entities: 1) a trust, 2) as association treated as a corporation, 3) a partnership, or 4) an entity disregarded as separate from its owner. 
.

The above entity classifications apply to “business entities”, defined as any entity recognized for federal tax purposes that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code. It would appear that the regulations created a special niche for trusts by excluding it from the definition of business entities in that the traditional uses of trusts were not contemplated for the purposes of business but rather for the purpose of the protection and conservation of property for beneficiaries. However, for purposes of federal taxation, the fact that an entity may be characterized as a trust for local law purposes is not dispositive for the purposes of U.S. income tax treatment.

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