I. CONCEPT - MAIN USES

For those readers who are not familiar with the concept of a foundation, it consists of the endowment of a patrimony for a specific purpose or object as stipulated in the document by which the foundation is created and internally organized, known as the FOUNDATION CHARTER. An appointed body known as the FOUNDATION COUNCIL is entrusted with the pursuit of the object of the foundation. The person(s) who creates the endowment is known as the FOUNDER and the persons who benefit from the endowment (traditionally the founder and/or members of his family) are known as the BENEFICIARIES.

Once the foundation charter is registered at the Public Registry, the property endowed or to be endowed becomes a separate estate from that of the founder by acquiring a legal identity of its own, thus becoming a private foundation.

The information regarding the names and justifys of the beneficiaries of the foundation is usually provided to the foundation council by means of a private and confidential document (that is to say a document which does not need to be registered at the Public Registry) known as the REGULATIONS.

Contrary to the traditional corporation, the private foundation does not have shares, it does not recognize shareholders and the founder does not acquire any such justifys in relation to the foundation's property. The law does recognize, however, the beneficiaries or the persons for whose benefit the foundation is created, which can include the founder.

The possible uses of a private foundation are so broad that we can safely conclude that practically all of the objectives which can be achieved by the widely used "trusts", can also be accomplished by properly structuring a private foundation.

Private foundations are mostly utilized as the ultimate holder of a given patrimony administered by professionals for the benefit of the founder and/or other appointed beneficiaries, allowing the founder, at the same time, to plan in advance (in the Regulations) for the transfer of the benefit or the orderly succession of such patrimony in case of his sudden demise.

II. PURPOSE OR OBJECT OF THE FOUNDATION

It is important to explain that, as in Liechtenstein, a Panamanian private foundation, as stipulated in Article 3 of the Law, cannot be simply profit oriented or be used to carry on a particular business.

Although the private foundation shall be used more as a holding company, it can sporadically perform certain business transactions when these are desirable or advantageous to the foundation and only if the proceeds of such transactions are destined exclusively for the non-commercial purpose or object of the foundation.

Therefore, the purpose of a private foundation shall be along the following lines: to contribute to the costs of upbringing, education, aid, as well as general maintenance or other similar purposes of one or more members of one or several families, as established in the Regulations. In addition to the members of one or several families, the foundation may benefit other individuals or legal entities, including institutions of any kind, and it may make the necessary provisions for the orderly disposal or succession of its patrimony. To achieve its object the foundation council is authorized to preserve, administer, and invest the foundation's assets in an appropriate manner, be they of whatever kind, particularly real estate and holdings in other entities, and to conduct any business and legal transactions, which serve the pursuit and realization of said object.

III. FOUNDATION DOCUMENTS

Two main documents make up a foundation: the Foundation Charter and its Regulations or By-laws.

A. THE FOUNDATION CHARTER

As mentioned above, Panamanian law requires that a foundation charter be registered at the Public Registry in order for the foundation to acquire a legal identity. Like any other legal entity which will have justifys and obligations and which will acquire and own assets of all kinds, the law requires that certain basic information be provided in the charter in order to constitute a valid foundation. The information required is:

1. The name of the foundation, which may be in any language using the characters of the Latin alphabet, and which, to avoid confusion, shall not be identical or similar to that of any other foundation previously registered in the Republic of Panama. The name shall include the word "foundation" to distinguish it from another individual or from a different kind of legal entity.

2. The initial capital of the foundation, expressed in any currency of legal tender, which shall in no case be less than an amount equivalent to US$ 10,000

3. A complete and clear designation of the name and address of the member or members of the foundation council, of which the founder may be a member.

4. The domicile of the foundation.

5. The name and domicile of the resident agent of the foundation in the Republic of Panama, who must be an attorney or law firm. The resident agent must countersign the foundation charter prior to its registration at the Public Registry.

6. The purposes or objects of the foundation.

7. The manner of appointing the beneficiaries of the foundation, which may include the founder.

8. The reservation of the justify to modify the foundation charter when deemed appropriate.

9. The duration of the foundation.

10. The destination to be given to the estate of the foundation and the manner of liquidating said estate in the event of dissolution.

11. Any other lawful clauses, which the founder may consider desirable.

Unlike some Liechtenstein foundations and Common Law trusts, the fact that the foundation charter needs to be registered in Panama offers it more judicial safeguards: it gives the Public Registry the necessary elements to issue a "Public Registry Certificate", thus ensuring the true existence of the foundation. This document may be legalized by apostille, and it has been proven to be a great tool for the prompt opening of bank accounts in the name of the foundation.

B. REGULATIONS

1. Any information not required by law to be included in the foundation charter and which the founder would rather keep confidential can always be written into the Regulations. As in Liechtenstein, the Regulations are a private document and, as such, do not need to be registered at the Public Registry or anywhere else. Traditionally, then, any information containing the names of the beneficiaries and their justifys over the foundation property is written into the Regulations. Consequently, the beneficiaries' identity and any successive provisions need not be revealed to any government agency, not even to the attorneys organizing the foundation.

2. The Law places practically no limits upon the structuring of the beneficial interests of a foundation. One of the more common scenarios is for the founder to designate himself/herself as beneficiary for life and to provide successive beneficiaries upon his or her death.

3. The Law further enhances the confidentiality of this instrument by creating in article 35 severe penalties (fines of up to US$50,000 and imprisonment for up to six months) for breach of the duty to keep the information confidential. This obligation applies to members of the foundation council and of the supervisory bodies, if any, as well as to public or private employees having any knowledge of the activities, transactions or operations of the foundation.

4. Furthermore, the Regulations may be kept outside the country in the hands of the founder, his fiduciary agent, the protector or any other person or institution vested with the confidence of the founder. For all of the above-mentioned reasons, plus some additional ones which will be explained in other parts of this newsletter, the Private Foundation has been called the perfect living will. There is no need to open public proceedings if the founder dies, and his wishes regarding the use, transferal and final destination of his assets can be carried out privately by the foundation council.

IV. FOUNDATION COUNCIL

The foundation council shall be appointed at the time the foundation is constituted. It shall be made up of no less than three (3) members in case of private individuals or only one in the case of a legal entity. The Law does not require any of its members to be Panamanian.

The powers and responsibilities of the foundation council shall be established in the foundation charter or in the Regulations. As a general rule, the foundation council shall be responsible for carrying out the objects of the foundation.

Unless otherwise provided in the foundation charter and/or the Regulations, the general obligations of the foundation council shall be as follows:

1. To administer the assets of the foundation according to its Charter or its Regulations.

2. To perform any acts, contracts, etc., which are appropriate for the attainment of the foundation's objects, as permitted by the law and by the Regulations.

3. To inform the beneficiaries of the foundation as to its economic situation as provided in the foundation charter or the Regulations.

Please bear in mind that the foundation charter and/or the Regulations of a foundation may also limit or expand the powers of the foundation council to suit the wishes of the founder. Additionally, the founder may appoint himself as a member of the foundation council and require that certain decisions be taken unanimously.

All such acts may need to be previously authorized by a protector or other supervisory body. Moreover, the founder may reserve for himself/herself or for any other person the justify to remove the members of the foundation council. This provision must also be expressly established in the foundation charter.

V. REGISTRATION FEES AND TAXES

V. A. LOW SETTING-UP COSTS AND MAINTENANCE FEES

Private foundations in Panama only pay registration fees and annual taxes equivalent to those applicable to Panamanian corporations. The Panamanian foundation is therefore considerably less expensive to set up, maintain and dissolve than its European counterpart.

As in the case of corporations, the amount of the registration fees will depend on the foundation's original capital. The annual franchise tax is US$250. The penalty for late payment of the annual franchise tax is U.S.$50, applicable if the annual tax is not paid within three months of the registration or of the anniversary date of said registration.

V. B. TAX ADVANTAGES

Panama, like many other international tax havens, only taxes income produced or generated by economic activities carried out within the country, and even inside the country there are certain incomes which are tax free (e.g. the interest generated by monies deposited in banks in Panama). Consequently, someone who utilizes a Panamanian private foundation outside Panama will not have to worry about taxes within the country of Panama, with the exception of the annual franchise tax mentioned in the preceding paragraph.

VI. ARBITRATION

Article 36 of the Law makes it clear by statutory provision that any dispute arising in connection with the foundation may be resolved by arbitration, thus avoiding the need to litigate through the Panamanian judicial system. Arbitration may take place in any location and may be subject to any procedure established by the founder or any other authorized body of the foundation.

VII. PROTECTOR - SUPERVISORY BODIES

The founder may also establish other special arrangements in order to retain control or supervision over the foundation's assets during his or her lifetime. The founder may appoint protectors, auditors or other supervisory bodies to supervise the acts of the Foundation Council prior to or after his/her death, since article 25 of the Law expressly authorizes the creation of such additional entities or supervisory bodies.

The figure of the protector has been widely used in Common Law jurisdictions when settling a trust. This is yet another innovation of Panamanian law which further ensures the safety of the instrument and thus makes it even more attractive as an estate-planning tool.

VIII. FORCED HEIRSHIP PROVISIONS

Following a recent trend adopted in the trust legislation of some Common Law jurisdictions like BVI, Belize, Grand Cayman and the Bahamas, as well as Jersey and Guernsey, Panama's Private Foundation Law (Article 14) specifically provides that the forced heir ship 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 the Regulations.

Moreover, inasmuch as the foundation's assets will not be part of the founder's testamentary estate -having become legally autonomous - the legal norms of his/her personal law cannot restrict or limit in any way the structuring of the justifys of the beneficiaries of the foundation.

Formalities required for the execution of wills shall not be applicable to Panamanian private foundations (Article 4).