PANAMA: WORLD CLASS TAX HAVEN

PART 5 of 9 - Excerpted from 'Tax Havens of the World' - by Walter H. & D.B. Diamond.

Panama Trusts

Panama continues to be an important site for trust operations. Revised trust regulations amending the outmoded rules of 1941 were approved by Executive Decree No. 16 of October 3, 1984. The legislation amends the tax treatment of trusts so that income on property and on transfer of assets is exempt from taxation where a resident trust has foreign source income and/or foreign situs assets.

A trust deed must specify that the trust is Panamanian and when and where it was created. Documents should also designate: the settlor, who does not have to be a Panama resident and who can be a beneficiary; the beneficiary or the class of entities that may be beneficiary; and a trustee as well as that person's authorities and duties and any limits to abilities. If a trust has two trustees, they must manage jointly, whereas if more than that number, the trustees will manage by majority vote. Documents should appoint a Panamanian attorney or law firm to be the trust's registered agent. Trust deeds should define property, land and valuables included in the trust, as well as how assets will earn income and how the income will be distributed, although there is no limit to the ability of a Panama trust to accumulate income. Trustees must register any real estate in their name and as the trustee in the Public Registry. Income and assets assigned to a minor's trust that is managed by the national savings bank (Caja de Ahorros) may not be legally attached by the settlor's creditors, unless those assets are specified in a final court judgment. Although the country does not have either a forced-heirship law or an asset protection law per se, there are laws that protect the assets of a trust from attachment by either a settlor's or trustee's creditors unless fraud can be proven by the creditor on asset transfers. There is no time limit for creditors to bring such suits. Confidentiality rules in Panama are very strict. Anyone involved in the trust, including trustees, the people who work for them and official organizations, who divulges information unlawfully is subject to a 50,000 balboa ($50,000) fine and time in prison for up to six months. No time limit is placed on the life of a Panamanian trust or its right to acquire income.

Since trust property is distinct from assets belonging to the settlor and trustee, it is therefore protected from legal actions unless the property was placed in the trust under fraud. Trustees may move a trust and all its property to another country just on the basis of a declaration and as long as all laws are complied with, a trust may stipulate in its documents that it is liable to the laws of a different country as well as to Panama's laws. It may be revocable or irrevocable and substitute beneficiaries may be named by the grantor, who also may change the beneficiaries at any time. Establishing a trust in Panama requires a document that clarifies the following:

The trust is created in Panama, as well as the date and place of establishment of the trust;
Designation of settlor, trustee and beneficiary or the class of entities that may be a beneficiary, delineation of the trustee's authority and duties and any limits to the trustee's abilities;
Definition of property, land and valuables included in the trust, as well as how income from the assets will be earned and distributed;
Name of a Panamanian attorney or law firm to be the trust's registered agent; and
If a private deed is the manner in which the trust is established, then the document must be witnessed by a Panamanian notary public.

Beneficiaries must receive an accounting from the fiduciary not less than once a year, unless the time frame is stipulated differently in the documents. A trust may be governed by either Panamanian law or the law of another country, as declared in the trust deed. In addition, a Panamanian trust may be transferred to another country or a foreign trust may be transferred to Panama. Any changing of governing law for a trust requires a legally notarized document. In addition, cases where a private deed establishes the trust the document must be witnessed by a Panamanian notary public or a notary public from any country as permitted under Decree Law No. 5 of July 2, 1997. This amendment supplanted the previous requirement confining the witness to a Panamanian.

All juridical and natural persons involved in trust operations are subject to the Panamanian National Banking Commission, which means that banks are able to manage trust without posting extra guarantees or acquiring additional licenses. On the other hand, all other trustees must have a lawyer represent them in the licensing procedure and pay a 1,000 balboa ($1,000) fee, although Panamanian nationals must pay $2,000 to obtain a trust license.

Under the 1984 law paid-in capital had to be at least $1 million because the Trust Law fell under the jurisdiction of the National Banking Commission, which requires a minimum capital of 1 million balboas ($1 million). This relatively high sum caused considerable criticism among various trade and professional associations and the business community banded together to have the capital requirement reduced. Its contention was that the amount of trust business in Panama did not warrant such a large outlay, which should come under the "bracket of banking business." The Panamanian Government considered the possibility of lowing the paid-up capital requirement in order that a larger share of the trust business be administered by separate trust organizations rather than almost exclusively by the banking industry. As a result, the 1984 Executive Decree was amended by Executive Decree No. 53 of December 30, 1985, modifying the $1 million capital requirement called for by banks under the banking regulations by inserting Article 14 in Chapter II on Guaranties. This states that every trust enterprise engaged in the trust business, which specifically includes trustees other than banks, in or from Panama must maintain at all times in the Republic of Panama at the disposal of the National Banking Commission a guaranty of 250,000 balboas ($250,000) for the due performance of its obligations. Not less than 10% of the guaranty must consist of deposits in the Banco Nacional de Panama or the Caja de Aborros. In addition to cash deposits, the guaranty may include Government bonds, bank guaranties or checks issued or certified by local banks. Panama's Law 31 of December 30, 1991 declared no fee for creating a trust, a thus repealed the previous 100 balboa ($100) charge due at the time of trust creation and once a year thereafter, as well as the 20 balboa ($20) penalty for not paying the tax on time. However, all trusts are subject to an annual tax of 100 balboas ($100) paid within three months of the anniversary date. Arrears in payment are subject to a 20 balboa ($20) surcharge.

The December 30, 1985 amendment added a number of restrictions on the settlor's activities. Trust enterprises are prohibited from investing the trust's assets in the shares of the trust enterprise or in other property owned by it and in shares of stock or properties of an enterprise in which directors, officers, partners, consultants or administrative managers, with some exceptions, participate. The trust may not make loans from trust funds to officers, stockholders, employees, subsidiaries or other affiliates. Neither may it acquire for itself or through an intermediary the properties in trust.

Private Foundations

In an effort to further expand Panama's offshore services, the Government adopted Law No. 25 of 1995 allowing the establishment of Private Foundations. Regulated by Executive Decree No. 417, the Panamanian foundation resembles a corporate body and operates similarly to a trust but offers numerous other advantages besides normal trust services. It is patterned after similar entities available in Liechtenstein, Aruba and the Netherlands Antilles.

Private foundations, which pay a $150 annual registration fee, are exempt from all taxes, liens and imposts on their assets, including assets located abroad; money deposited by natural or juridical persons whose income does not arise in Panama or is not taxable in Panama; and all securities including shares issued by companies whose income does not arise in Panama or is not taxable in Panama even though securities are deposited in Panama. Tax exemption extends to transfer of immovable property and of cash, certificates and securities assigned to the founder's spouse or close relatives. To prevent abuse of private foundations, they are subject to all Panama anti-money laundering legislation.

Asset Protection

The most important feature of the foundation is the creation of an asset protection vehicle that provides strong safeguards against overly ambitious creditors. It is easy to form, with minimum organization requirements, and it builds blocks against foreign successor laws. Confidentiality is broadly protected as well as providing 100% income tax exemption for transactions outside of Panama. Like corporations, foundations may carry out business activity on an overall basis in order to obtain profitable advantages to beneficiaries, who may be clients, spouses, children, companies and charitable organizations.

Panamanian private foundations resemble trusts, except that they own outright assets placed in them, they are separate from the donor's estate and may not be attached, seized, levied on, or otherwise invaded to satisfy the founder's or beneficiaries' debts. Creditors may challenge a donation to a foundation on grounds of intent to defraud them but only within three years of the date the assets were transferred. Beneficiaries of private foundations will be approved by Panama's courts even if their nomination is contrary to laws of heirship in beneficiaries' or the donor's country of origin.

A foundation may not engage in commerce as its main activity but may carry out business transactions as needed to protect its property and may exercise rights conferred by shares of business corporations it owns. The initial donation to a private foundation must be 10,000 balboas ($10,000) or more expressed in any currency.

Creating a Foundation

Founders of Panamanian private foundations may be companies or individuals. Foundations are governed by a Council consisting of at least three members (who may include the founder) unless the founder is a juridical person, in which case the founding entity may act as Council. The foundation must have a resident agent in Panama, either a Panamanian attorney or law firm. Creation of the foundation is accomplished by filing its charter, countersigned by the resident agent, in the Public Registry. The charter may be written in any language using the Latin alphabet as long as it is registered with a Spanish translation. This document must contain:

The foundation's name, including the world Foundation;
The amount of the original donation, which can consist of money or any kind of property;
Names and addresses of Foundation Council members;
The foundation's address, along with the name and address of its resident agent;
The foundation's purposes;
Manner of designation of beneficiaries, who may include the founder;
Reservation of the right to modify the charter;
The foundation's duration; and
Uses to which assets will be put and the manner of liquidating them upon dissolution.

A charter may include other provisions deemed necessary by the founder as long as they are not contrary to Panamanian law. The resident agent countersigns the foundation charter before it is registered in the Public Registry.

The administration of a foundation may be governed by Foundation Regulations. A protector may be appointed to review distributions or Council activities. The founder may designate auditors to verify accounting practices. Under strict rules of confidentiality, Foundation Council members or public officials or private persons who breach secrecy can be fined 50,000 balboas ($50,000) and imprisoned for six months. The Foundation Council must render accounts to beneficiaries annually or at other intervals specified in the charter. If no objections are raised to the accounts, they are automatically approved 90 days from the date of receipt. Foundation members then become exempt from liability for their administration, unless they have neglected to act like a diligent pater familias or are charged with damage claims for fraud or gross negligence.

Beneficiaries

The foundation Charter describes how beneficiaries (who may include the founder) are to be chosen. Later it is up to the Foundation Council to distribute the assets and resources being settled in favor of beneficiaries. A supervisory body, either a protector or auditor, has the right to exclude beneficiaries and to add others. A dissatisfied beneficiary can bring a complaint charging violation of rights to the attention of the protector or other supervisory body. In the absence of a supervisory body, the beneficiary can appeal to a court in the foundation's domicile.

Removing Foundation Members

Removal of foundation members can be performed by the founder or, if charter and regulations do not cover removal procedures, by the court. Grounds for judicial dismissal include failure to exercise due diligence, incompatibility of interests with the beneficiaries or founder, and a criminal conviction. The court may act upon a request from the founder and beneficiaries.

The founder has the right to revoke the foundation. The foundation is dissolved on the date specified in the charter, or when its goals are met, or in case of insolvency, bankruptcy, or total loss of assets. A foundation established abroad may be redomiciled to Panama with complete continuity of all legal rights and duties created by it. This is accomplished by filing a Certificate of Continuation accompanied by a copy of the original charter of the foundation and a power of attorney enabling a Panamanian lawyer to register the foundation in the Public Registry. A Panamanian private foundation's charter or regulations may provide for transfer of the foundation and its assets to another jurisdiction.

Tax Accounting

Under the Temporary Incentives Tax Law 109 of December 30, 1974, industrial, service, agricultural and livestock companies may receive accelerated depreciation of fixed assets, dividend tax exemption if accumulated profits from previous years are reinvested, and a 25% deduction for reinvestments in assets used in producing income up to 30% of total tax payable.

Operating losses may be carried forward for three years in certain cases through manufacturing contracts under the Investment Incentives Acts (Cabinet Decrees No. 413 of December, 1979 and No. 172 of August, 1971) when companies are producing entirely for local consumption.

Capital gains on existing properties of owners are exempted from tax if a new investment amounts to four times the amount of capital gains. When less than four times, there is a 20% deduction of the difference between the gain and investment.

Interest paid on loans used to purchase dwellings is exempt from taxation up to 14,000 balboas ($14,000). Profits reinvested in real estate are exempt from income tax. Individuals who purchase dwellings for themselves may be exempt from the real estate tax for 15 to 20 years from the date that construction began. The exemption period is from ten to 25 years depending upon the rentals for individuals and companies constructing dwellings for leasing. Interest paid by individuals on mortgage loans granted for construction, improvement or acquisition of dwellings occupied by the taxpayer is exempt from tax up to 15,000 balboas ($15,000).

Also exempt from income tax are interest and commission fees earned by banks and financial institutions on loans and financing for the agriculture, stock raising and agro-business sectors.

Individual retirees may qualify for import duty exemptions on $5,000 worth of household goods, tariff exemptions on imported motor vehicles, exemption from inheritance and donation taxes and visa procurement fees. Executives of multination corporations receiving a minimum of $1,000 monthly are eligible for a $3,000 import duty exemption on household goods and for visa procurement fees.

Panama's long-awaited privatization law, signed by former President Endara on July 14, 1992, requires that at least 45% of shares of State firms be sold on the securities markets. A coordinating unit for the privatization process has been established by the Ministry of Finance. The 1991 Bilateral Investment Treaty with the United States offers additional protection and an alternative for foreign investors. Moreover, the country is in the process of joining the General Agreements on Tariffs and Trade.