Panama Private Interest Foundations, incorporated under Panamanian Law 25 of 1995, are an ideal alternative to Anglo-American common law trusts as a means of protecting assets and investments offshore for asset protection and inheritance planning. This article explains more about this flexible legal vehicle that can help you protect the fruits of your labor on behalf of your chosen beneficiaries.

The law governing Panamanian foundations is based on the law of the Principality of Liechtenstein. A Panama Foundation, however, is cheaper to set up, cheaper to maintain, more private and – perhaps most importantly – offers the utmost flexibility. While this structure is therefore a fairly new entity for Panama, the idea itself is not new. Foundations have been used as a family inheritance planning and asset protection tool in Continental Europe for more than a century so the nature of the Panamanian foundation is understood and appreciated by many continental Europeans.

The Panamanian Foundation offers some of the best benefits of both the trust structure and offshore corporation or IBC rolled into one. But in order to understand the idea and benefits of the foundation structure, you first need to be clear on the difference between a common law trust and a corporation.

It is important to note the difference between English speaking countries that use Common law (like the USA, UK, Canada, Australia etc) and many non-English speaking countries that use Civil Law or Napoleonic Code (for example France, Spain, Germany… and Panama).

Most businesspeople and investors understand the idea behind a corporation. Corporations are more commonly referred to as ‘Companies’ in British English, but it’s the same thing. Corporations are used everywhere in the world and operate along broadly similar lines. They are designed for doing business (not so much for holding assets, though they can also be structured for that purpose.)

The principal idea behind a corporation is that it is a separate legal entity, different from its owners or managers. It is what can be termed a juridical or legal person. Although of course it is not a human being, it has all of the rights and responsibilities of a human being under the law. It can, for example, sue or be sued in its own name. It can also sign contracts or take on debts in its own name, without creating a liability for its owners. The liability of the owners is limited to what they have agreed to put up as share capital.

That is the key point that we are interested in here: the assets and liabilities of the corporation are separate and distinct from those of the shareholders. Basically no court in the world can argue with that.

The trust, however, is a different kind of vehicle. Trusts are not designed to engage in business activities. They are designed for holding assets in safe keeping for a designated person or group of persons. The trust does not have a separate legal personality – instead the assets are registered in the name of the trustee. Common law recognizes, however, that the trustee is holding those assets for someone else. For example, if the trustee goes bankrupt, the assets he holds as trustee will not be involved in the bankruptcy proceedings. They will be kept separate.

There are two major problems with trusts:

• Problem number one is that as the Trust is a Common Law concept that does not exist in Civil Law, there can be conflicts of legal systems. If a country where assets are located interprets trust law differently from the country of residence of the person who created the trust, for example, you don’t need a wild imagination to see that the results could be catastrophic. With more and more people choosing to live, invest, retire and do business in more than one country, this problem is becoming more prevalent.

• The second problem is that trusts have also been attacked from all sides in recent years, even in Common Law countries. You may have heard about this in the news. Recent court cases in the USA, for example, have proven in my opinion that US judges either do not understand the essence of what a trust is meant to be or – more likely – have simply chosen to disregard the centuries-old trust law altogether in favor of public policy decisions like supporting the government, IRS, or greedy ex-spouses.

For this latter reason (in my humble opinion), any trust structure that is a domiciled in the US and some other common law countries is really not worth the paper it is written on. This is not to say that the laws in these countries are poor regarding these structures. The laws are good. The problem is one of interpretation and of courts not respecting the law. When your opponents don’t play by the rules, serious preparations are required. All in all, trusts are not the great asset protection vehicle they once were.

That is not to say there is anything inherently wrong with offshore trusts. On the contrary, they are an ideal vehicle for tax and inheritance planning in some circumstances. But with the number of jurisdictions in the world offering trusts, and all having tailored their laws and jurisprudence in slightly different manners, I will not enter into a comparison of good and bad types of trust here. Suffice to repeat that the main difference between trusts and corporations is that trusts are designed for holding and preserving assets, while corporations are designed for doing business.

Where, then, does the Panama Private Interest Foundation fit into this picture?

The Panamanian foundation offers the best features of a trust and the best features of an offshore corporation. Since there are no shares in a Panamanian foundation, it has no owners. The founder does not own the foundation and as such gains important tax reporting and asset protection benefits.

While the foundation cannot technically engage in business activities, it can own the shares of a company engaged in business activities. It is also permissible for the foundation to engage in any activity designed to increase the value of assets. This means that a foundation can be the owner of bank accounts, securities brokerage accounts and real estate holdings, for example.

Because many judges have taken the route of “re-interpreting” the law in such a way that Trusts are not as secure as they once were, the Panamanian Private Interest Foundation is worthy of consideration as an alternative. Foundations have some attributes that make them superior to trusts.

Clients who ask me in individual consultations about Panamanian foundations have many questions… but I have found that the most frequently asked question is: What’s the difference between a trust and a Panamanian foundation?

A Panama Foundation acts like a trust but operates like a company. It is, in essence, a company with beneficiaries instead of shareholders. Rather than trustees, the foundation is managed by a council which acts more like a board of directors.

Another way of describing it would be “an incorporated company without participating shareholders but still having limited liability.” The foundation is the owner of its own assets and functions in a codified legal system, which is less open to interpretation than common law (in other words, you know in advance the deal you are getting!)

Like a Panama company, the Panamanian foundation must have a local Registered Agent (lawyer or law firm) in order to establish its legal domicile in Panama. It also has the flexibility to move in and out of Panama in a similar way to companies that are able to change domiciles.

A Foundation is created by a charter, which is registered with the Public Registry in Panama, in the same way as a company. The terms of the foundation charter can be made as loose or as rigid as the client desires. The charter is typically written in such a way that its provisions can be easily altered to meet contingencies by means of ‘regulations.’

The charter is the only public document, and will typically include the names of nominees who serve as the Foundation Council. The typical (and most private) structure then appoints one or more ‘Protectors’ who might be the client or a trusted friend or professional etc. Typically, the Protector is responsible for the day-to-day operations, and operates through a Power of Attorney. The Protector is therefore the ‘main man’ who has sole signatory power over the bank and brokerage accounts.

The Protector is then responsible for appointing the Beneficiaries, in a private document. You might or might not choose to tell the beneficiaries directly. With suitably drafted statutes, the Protector is free to change the Beneficiaries – and pretty much anything else for that matter – at any time and without informing anybody. This in itself offers much greater flexibility than a typical trust.

All in all, therefore, it could be said that the Panama Private Interest Foundation offers better privacy, security and asset protection than a trust or fiduciary arrangement.

Largest Canadian Labour Union calls Barbados “Tax Haven” a “problem”

An article at the Toronto Sun news agency says that a Canadian House of Commons committee recently began probing offshore accounts and tax evasion. Some Canadians are concerned that Canada’s government is “missing out on billions in potential revenue” because of low tax countries. The article names Barbados, Bahamas and the Cayman Islands.

“I was really struck to the extent to which this trend seems to be increasing when we were assured it was less of a problem… This money is not going into investing in real activities and in growing the (Canadian) economy.”

…Toby Sanger, Canadian Union of Public Employees CUPE senior economist. CUPE has almost 600,000 members and is Canada’s largest workers’ union.

This is serious business for Barbados because our national economy and well being are highly dependent upon that offshore investment from Canada. Not only that, our tourism industry is also closely linked with the offshore banking and investment sector. Many Canadians and other tourists who head for Barbados in the winter are coming for their “annual shareholders meeting” that just happens to be scheduled every year in the middle of the coldest winter months.

And don’t kid yourself that it’s about all offshore jurisdictions: Barbados is a big big player in Canadians’ offshore tax strategies. I once heard it said that Barbados is the #1 Caribbean country for Canadian offshore banking and companies. I don’t know if that is still true, but Barbados is big enough that we are squarely in the sights of those who want to curtail the ability of Canadians to pay lower tax rates.

All Hands on Deck!

The Toronto Sun article seems to be a balanced piece that gives both sides of the Canadian debate. There is a side that says offshore banking and corporate centres like Barbados actually benefit the Canadian economy by allowing Canadian companies to be competitive in the world markets.

The danger for Barbados is that in bad times governments can get focused only upon revenues and lose sight of the big picture.

As we’ve seen occasionally in Barbados, governments can raise taxes too much and ‘kill the goose’. Some Canadians want their government to restrict access to offshore banking centres like Barbados, and don’t realize this would harm Canadian industry in the long run.

Let’s hope that our government acts decisively and swiftly to convince the Canadian Government, tax authorities and Canadians in general that both countries greatly benefit from our long standing relationship and the agreements that allow both Canada and Barbados to prosper in the world economy. We are both lesser without each other.

Further Reading

Please read the article at the Toronto Sun, but we’ll reprint it here because sometimes articles go missing in cyberspace and then we have nothing to support our fair commentary.

Rising investment sparks offshore tax debate

Rising investment sparks offshore tax debate

Offshore financial centres continue to attract billions of dollars of Canadian cash despite the fact that overall investment overseas has been declining, creating debate as to whether Canada is losing out on revenue.

According to Statistics Canada, direct investment abroad dropped for a second year in 2010, falling by $4.5 billion to $616.7 billion, pulled down in part by a strong loonie.

However, investment in low-tax countries such as the Bahamas, Barbados and the Cayman Islands all continued to rise. So did the amount invested offshore by Canada’s banks and financial institutions, which accounted for half of all investment abroad last year.

Canadian investment through offshore financial centres totals about $100 billion, or 20% of the total. However, the money rarely stays in the tax havens and is usually passed onto to operations elsewhere around the globe.

The company is then able to pay tax on these operations at low to zero rates — 2.5% in Barbados, for example — and repatriate the remainder to Canada.

Some say that means the government here is missing out on billions in potential revenue.

“I was really struck to the extent to which this trend seems to be increasing when we were assured it was less of a problem,” said Toby Sanger, senior economist at the CUPE union. “This money is not going into investing in real activities and in growing the (Canadian) economy.”

It’s a hotly contested debate and one that was aired in a House of Commons committee probing tax evasion and offshore accounts as recently as March.

On the other side of the debate are those who say that offshore financial centres are an essential tool to help Canadian companies compete in global markets.

Walid Hejazi, a professor at the University of Toronto’s Rotman School of Management who spoke at the committee hearing, warned against confusing tax evasion by using offshore accounts with tax minimization.

“When they are using them for tax minimization, it’s completely legal,” Hejazi said. “There is far more tax evasion within Canada than there is outside.”

He estimated the amount saved in taxes through offshore centres is about $4 billion a year. That’s way less than the $50 billion or so that is thought to be lost through evasion and under reported taxes at home.

While it’s complex to estimate the exact size of the underground economy in Canada, most studies, including one by right-wing think-tank The Fraser Institute, calculate that it’s probably about 15% of gross domestic product.

Hejazi said without the centres, Canadian companies would not be able to compete on a global stage.

“Every country in the OECD allows companies to use these centres,” he said. “If it were so bad, why would they allow it?”

He argues that the competitive edge helps generate greater profits for the companies, which end up boosting revenues in Canada indirectly, through taxes of dividends paid to shareholders, for example.