A Foundation is a legal entity which may hold, protect and distribute assets or income in accordance with the wishes of the person who established it (the Founder). Wilfred Services Ltd. possesses an extensive network in Panama where these entities can be formed for clients at any time in an efficient manner.

Historical & Legal Context:

To begin with, it is necessary to look at the legal and historical framework in which Foundations exist. Foundations are brought into existence by law and the recognition as a legal entity by the State. Like corporations, they are dependent on the State’s recognition for their existence (unlike a natural person who is physically present). Many people characterise the Foundation as being a hybrid or crossbreed between a trust and a corporation. I believe this is an incorrect depiction of the Foundation, although for comparative purposes it has its benefits.

To truly understand a Foundation, I believe that it is useful to look at the historical context in which Foundations came into existence. The concept of Foundation arose during the Roman Empire, and were created to enable the wealthy (such as officers of the Roman Army going off to battle) to leave their assets in the hands of administrators for the benefit of their families (the beneficiaries).

When so created, the assets themselves, which made up the Foundation (which I shall refer to as the “endowment”) had a completely separate legal existence from the life of the Founder and the administrators. Since the endowment did not belong to the administrators, they had to administer and apply these assets in accordance with the instructions which were left to them by the Founder, for the assistance of the beneficiaries (usually the Founder’s wife and children). This Foundation does not “belong” to any person – it is an independent legal entity, which exists for the purpose of providing for the necessities of its beneficiaries, and is managed by the administrators.

Thus, Foundations come into existence in Roman law much in the same way that Trusts developed in Great Britain. When the Knights of the British Empire went off to the Holy Wars, they often left their estates in the hands of an esteemed friend, in “trust”, so that this person would administer their assets for the wellbeing of their family. This was done to ensure that the estate was not wasted by bad management or spent-thrift children. The assets which were in trust belonged neither to the beneficiaries, nor to the Trustee – but rather were held in the name of the trustee “on trust”.

Foundations may be created as Private Foundations or as Public Foundations. A Public Foundation may be created for a charitable purpose, and its endowment can only be used for the furtherance of that purpose. Foundations of this nature are common in the United States of America, as well as in Europe – wherein an endowment is established to ensure that a particular charitable cause is guaranteed financial support and proper management of the funds in question.

Private Foundations, whether these be for a family or for a group of people, took on a new form in 1926, when the Principality of Liechtenstein adopted the Law of Persons & Companies and specifically created the Family Foundation and the Mixed Foundation. The Foundation in Liechtenstein is referred to as a stiftung. Foundations have also been used in Switzerland, Austria and Luxembourg. In 1998 the Netherlands Antilles adopted amending legislation which allowed for the creation of private foundations.

In 1995, the Panamanian Legislature adopted Law No. 25, introducing the Private Interest Foundation as a legal entity. Panama designed the Foundation based on the other models, with intentions of creating a more modern, flexible and affordable estate planning vehicle. It is an excellent medium for preservation of assets, with sufficient flexibility to enable it to be used for family, religious, public or charitable purposes and to administer, invest or preserve assets for a prescribed class of beneficiaries.

Foundation Purposes:

Possible uses of a foundation are:

  1. Asset Protection – to protect assets against excessive taxation, creditor claims, political instability or forced heirship rules;
  2. Business – to manage profit sharing or pension plans for employees; to hold shares, participation or interests in public or private companies; to collect royalties;
  3. Charitable Purposes – to carry on scientific, philanthropic, religious, humanitarian or educational purposes, or to manage funds or assets for such purposes;
  4. Family – to protect closely held businesses, providing continuity into 2nd and 3rd generations by preventing property-splitting; to protect minors, disabled persons or those incapable of managing their own assets; to manage payment of income or distribution of assets to family members or to provide for their education, housing or maintenance;
  5. Investment – to invest in shares, bonds, mutual funds, bank deposits or other assets; to own real estate or other assets of considerable value – such as works of art.

A Foundation cannot be established for commercial or profit-making purposes. Where a business is to be undertaken, it is appropriate for the Foundation to own the shares of the company which runs the business. The Foundation should not own and run the business directly. A Foundation may, however, receive passive income – such as from rental properties or dividends.

Establishing a Foundation:

A Foundation is brought into existence by registering at the Public Registry the “Foundation Charter”. This is a document signed by the Founder (or his agent – such as a Nominee Founder), during the Founder’s lifetime. The Foundation Charter may have immediate effect (inter vivos) or may be an instrument which takes effect upon death (mortis causa). The Foundation Charter is taken to a Notary who prepares the Public Deed, which is then registered at the Public Registry. The date of registration is the date on which the Foundation comes into existence. A Foundation may be established in perpetuity, or may be established simply for a limited period of time (such as for a specific purpose or project).

The Foundation Charter usually contains the following details:

  1. The name of the Foundation (may be in any language which uses the Latin alphabet, but must include the word “foundation”);
  2. The name of the Founder (or his Nominee);
  3. The initial endowment (which must be at least US$10,000 – but may be stated in any currency);
  4. The name(s) of the member(s) of the Foundation Council;
    • If a Corporate Entity – the Foundation Council may be composed of a single member;
    • If natural persons – it is necessary to have at least 3 members.
  5. The purpose(s) for which the Foundation is established – these may be drawn up as broadly as the Founder wishes;
  6. The responsibilities of the Foundation Council, and their powers (some powers may be reserved to the Founder or to the Protector);
  7. Whether or not the Foundation will have a Protector or other Supervisory Bodies (such as Auditors, etc.);
  8. The powers and responsibilities of the Protector (if any); and
  9. Other standard clauses – such as the name and address of the Registered Agent, whether the Foundation is irrevocable, the address of the Foundation, arbitration clauses, change of jurisdiction (re-domiciliation), and meetings.

The Foundation Charter is usually prepared in both English & Spanish for all clients.

Bylaws or Regulations:

A second document which should be mentioned with respect to establishing a Foundation is the Bylaws or Regulations. While the Foundation Charter contains the basic information regarding the Foundation, the Bylaws generally contain the details regarding the administration of the Foundation. The Bylaws do not need to be registered or filed for public scrutiny, and therefore in the Bylaws more confidential matters can be detailed. Matters which may be covered by the Bylaws include:

  1. The assets which are being transferred to the Foundation;
  2. How the assets are to be managed;
  3. Whether donations to the Foundation are revocable;
  4. The identity of the Protector (if any) if this is not established in the Foundation Charter;
  5. The identity of the beneficiary(s) of the Foundation and what rights they have;
  6. When and how endowments are to be vested in the Beneficiary(s);
  7. Matters relating to accountability of the Foundation – whether they must present reports, who the reports must be presented to, with what frequency;
  8. The causes for removal of the Foundation Council;
  9. Procedures for meetings and adopting resolutions; appointment of officers; appointment of committees;
  10. Records which must be kept – if any;
  11. Procedures for dispute resolution; and
  12. Indemnification of the Foundation Council for everything done in Good Faith

It is also possible that rather than identifying the beneficiaries in the Bylaws that these be identified through a Private Document. Depending on the terms of the Foundation Charter, the beneficiaries may be appointed by the Founder, the Foundation Council or the Protector.


Once the Foundation has been established, the minimum endowment at least should be deposited in the Foundation’s account. However, it should be noted that it is not necessary that the endowment be made in cash – it is also possible to transfer to the Foundation present or future assets, including real estate, monetary instruments, securities or chattels of any nature. Also, the endowment of the Foundation may be increased by persons other than the initial Founder.

The Founder:

The role of the Founder should be established in the Foundation Charter – it is possible for the Founder to reserve certain powers (such as power of appointment of beneficiaries or power of removal of the Foundation Council). However, it is also common for the Founder to simply have the role of preparation of the Foundation Charter, and leave to the Foundation Council or the Protector these other powers. As the law is curiously silent regarding the transferability of the Founder’s rights and obligations (but specifically provides that Foundations may be established through third parties), it is understood that a nominee founder may transfer all rights and obligations to the real founder by private document (and thus not appear in the Public Registry as the Founder). This is particularly important, as the document should be executed in Panama (in order to avoid difficulties of authentication of the document), and so it is much simpler for our office to provide a nominee founder who is easily accessible.

The Foundation Council:

The Foundation Council is responsible for the administration of the Foundation, and is accountable to the Founder and to such Supervisory Bodies as may be provided for in the Foundation Charter. The Council’s responsibilities would usually include the investment or management of assets of the Foundation’s endowment, the distribution of funds to beneficiaries of the Foundation, and ensuring that the purposes for which the Foundation was established are fulfilled.

The Foundation Council members do not have to be Panamanians – and it may be composed of natural or legal persons. It is not necessary to hold annual meetings, nor it is necessary for meetings to be held in Panama.

The Foundation Charter may establish causes for which it is possible to remove members of the Foundation Council. It may also establish who may remove the Foundation Council or who may petition a court for the removal of the Foundation Council. If nothing is specified in the Charter, then it is understood that the Founder or the Beneficiaries may petition a court in Panama for the removal of the Foundation Council, in the event of conflict of interest, lack of diligence or prudent in the administration of the Foundation endowment, incapacity, or the commencement of insolvency or bankruptcy proceedings. It is common for the removal of the Foundation Council to be in the hands of the Protector of the Foundation.

The Protector & Other Supervisory Bodies:

The Foundation Charter may provide for certain persons to have a supervisory role in the Foundation. The principal “watchdog” is usually the Foundation’s Protector. The Protector does not actively manage the Foundation, but may be given responsibilities such as: appointment and removal of beneficiaries or the Foundation Council; approval of transactions over a certain limit (say $50,000.00); annual review of the accounts of the Foundation and the performance of the Foundation Council.

The role of the Supervisory Bodies is to ensure that the Foundation Council complies with the laws and with the purposes of the Foundation. If the purposes of the Foundation become impossible (because of a change in circumstances) or too onerous, the Supervisory Bodies may have the power to amend the Foundation Charter to change the objectives for which the Foundation was established.

The Beneficiaries:

The beneficiaries are those people (or that group of people) who are meant to benefit from the Foundation. They can be likened to the beneficiaries of a Trust – they are not owners of the property or assets, they generally have little or no say in the matters of the Foundation – but all actions taken by the Foundation Council are for their benefit. The beneficiaries generally have no claim against the assets of the Foundation, unless they have already been vested with their endowment.

It is possible to specify in the Foundation Charter that beneficiaries have no rights against the Foundation assets and that the Foundation Endowment cannot be attached for any debts or claims against a beneficiary. It is also common to specify in the Foundation Charter that beneficiaries may not transfer their rights as beneficiaries, or that any such transfer will result immediately in their removal as a beneficiary of the Foundation. The purpose of such clauses is to ensure that creditors of a beneficiary (such as a spend-thrift child), or an ex-spouse, cannot attach future benefits of the Foundation.

Separation of Assets:

Once the endowment is made (assets are donated) to the Foundation, these assets no longer belong to the Founder, but rather solely to the Foundation. These assets are a separate and independent estate from the Founder’s personal assets. As a result, the endowment cannot be attached, seized or be subject to any lawsuit or legal actions as a result of obligations or liabilities of the Founder or the Beneficiaries.

Fraudulent Transfer of Assets:

Having stated that the endowment cannot be subject to any lawsuit as a result of obligations or liabilities of the Founder, it is necessary to highlight the exception to this rule. The creditors of the Founder have the right to object or to contest the transfer of assets to the Foundation if the transfer represents a fraud against their credits. However, 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. Therefore, in the case where assets are transferred legally, prior to any legal action against the Founder, it is not possible to later make any claims against the Foundation’s endowment.

Taxable Consequences:

Under Panamanian law, the transfer, assignment or donation of any assets to the Foundation is not subject to any taxes. However, consideration should be given to the impact of tax laws of other countries – such as the Founder’s country of residence or the jurisdiction in which the assets to be transferred to the Foundation are held. Many jurisdictions have rules regarding estate or gift taxes which may be payable upon making a gift to the Foundation. These rules will have an impact upon the Founder, and should be taken into consideration with the advise of competent counsel of the jurisdiction in question.

For example, in the United States of America a person may, during his or her lifetime, make gifts of up to $600,000 without paying estate/gift tax on these. However, should they make a transfer of $2-million to a Foundation, then only the first $600,000 would be exempt from the gift tax and it would be necessary to pay taxes to the US government on the remaining amount transferred.

A possible second taxable consequence exists with respect to distributions from the Foundation. When the Foundation makes a distribution to a beneficiary, this may be considered “income” by the beneficiary’s country of residence. Therefore, the beneficiary would need to report this gift as income received, and pay the appropriate taxes thereon. Care should be taken to ensure that these consequences have been clearly explored beforehand.

The income produce by the assets of a Foundation will not be subject to taxes in Panama. Further, the Founder would no longer be responsible for the payment of such taxes. Where the Foundation is receiving income from another country (i.e. not Panama) and there are withholding requirements, the Foundation will need to comply with such requirements. Nevertheless, there are many international investments which result in tax-exempt income (for example – investments in the US stock market, where capital gains on stock trading is exempt from taxes where the investor is not a US citizen).

Estate Planning Consequences:

As the assets transferred to the Foundation are considered to be separate from the Founder’s assets, this means that the Founder’s heirs have no right to object to the distribution which is to be given to the endowment. They may well have such a right under the laws of the country of residence of the Founder, but Law No. 25 of 1995 establishes that the Founder’s heirs do not have a right to revoke the creation of the Foundation nor the right to object to the transfer of properties to the Foundation. The laws of the Founder’s country regarding intestacy have no bearing on the validity of the Foundation – ensuring that the objects for which the Foundation was established will be honoured even in the event of the Founder’s death.

Nonetheless, attention must be given to the situs of the assets which are owned by the Foundation. To the extent that the assets of the Foundation are in Panama (or are liquid assets), it would be difficult for a family member to assert a claim against the assets. But where the assets are in the Founder’s or their successor’s jurisdiction, courts in that jurisdiction may disregard the Panamanian law. It would be inaccurate to believe that matters relating to the Foundation and the distribution of the Foundation’s assets is an entirely Panamanian matter to be decided in Panama under Law 25 by Panamanian courts. If the Founder transfers his home to the Foundation, and then upon death the spouse is left homeless, a court may disregard the transfer of the house to the Foundation if this is contrary to their local heirship laws.


As will hopefully be apparent from this outline of Foundations, they are flexible entities which can be utilised for the preservation and administration of assets. Nevertheless, it is necessary to establish the Foundation with full fore-thought and planning, in order to optimise the benefits which a Foundation may offer. The Foundation Charter may limit or prohibit property splitting, property transfers, mortgages or using the endowment to secure loans or other forms of financing, as well as regulate the general administration of the assets or business transferred to the Foundation. The Foundation Council should preserve, administer and invest the assets consigned to it and undertake all commercial and legal transactions necessary to the realisation of the purposes which the Founder established for it.