Panama Charitable Foundation Formation

A Panama Charitable Foundation provides international opportunities for wealthy individuals to establish a charitable structure to further their philanthropic goals - while still maintaining a degree of control over how the charity operates and parcels out its funds.

Of course the same would apply if such a charitable foundation were to be set up in the U.S. or U.K. for instance, but there is much red tape, and the fact that everything has to be disclosed to the revenue agencies and to always have them looking over your shoulder can get somewhat tiresome.

What if you could do the same thing offshore, where you would have no reporting requirements in your home country, but you can control how and where the funds are spent? Remember even for U.S. foundations the IRS allows up to 90% of the Foundation’s income to be spent on administrative expenses such as salaries and office expenses.

Panama Charitable Foundation Overview

A Panama charitable foundation is a legal entity established under Panamanian law designed to hold and protect assets while furthering philanthropic objectives. Unlike corporations, foundations don't have shareholders but instead operate with founders, beneficiaries, and often a foundation council that manages its affairs.

The primary purpose of these foundations is twofold: to protect assets from potential creditors and to facilitate charitable giving according to the founder's wishes. The structure allows wealthy individuals to establish a legacy of giving while maintaining significant control over how funds are utilized.

Panama foundations can hold various types of assets including real estate, intellectual property, investment portfolios, and business interests. They function somewhat similarly to trusts in common law jurisdictions but offer enhanced privacy and protection features unique to Panama's legal system.

For years the wealthy in the U.S. have established 'foundations'

For example:

• The founder of Duty Fee Shops, Charles Feeney, sold his company for US$ 3.5 billion, and paid not one penny in U.S. tax! Yet he still has control over all of the funds - and directs how his foundation's monies are expended.

• The Kennedy family has a foundation that exploits opportunities in energy. Some of the proceeds are used to provide low or now cost heating fuels to people in the Northeast. A great deal of money is made through for-profit joint ventures and corporations the charity invests in. This has created opportunities for the management of the foundation - some of whom have become extremely wealthy.

• Within the past few years The Fidelity Fund has established a charitable mutual fund that the investor can 'direct' all of the expenditures! The Fund is a qualified charity, and the investor 'controls' the disposition of the funds. In less than a few years Fidelity has attracted over a billion dollars to this fund.

A wealthy individual with cash, marketable securities, liquid assets, or other assets can irrevocably transfer the assets to a foreign 'charity'. A Panama Charitable Foundation is the perfect vehicle for setting up such a charity offshore.

If no deduction or reporting is acceptable, and virtually no governmental oversight is a desired element of the structure, then the assets would be contributed directly to a foreign charity. Once the assets reach the foreign charity, there will be virtually no onshore connection or oversight with regard to the assets.

The country in which the charity is formed ensures fulfillment of the foundation's charitable mission. There is virtually no oversight by the Panamanian authorities so long as all contributions are derived from outside of Panama. If a charitable deduction for tax purposes for contributors is required in one’s home country, then the assets must be first paid to a domestic charity, one that is classified as a 'public charity' (which in the U.S. for example, goes by the IRS designator of a '501(c) 3').

The public charity can then 'feed' the assets to the foreign charity. The IRS for instance has even provided specific rules and guidelines on how to funnel contributions to a foreign charity through a local charity! Each foundation is custom tailored for our clients. The foundation can be managed by a 'perpetuating board'.

That is a group of individuals who will serve as the directors and, who will have the right to re-appoint themselves or their heirs. Hence, control of the foundation can be maintained for generations. The foreign charity can pay the directors to attend board meetings, and provide him/her with transportation to all board meetings. There is no reason why some directors cannot be paid more than other directors.

Any stipends paid to the client as a board member (or for other services provided to the charity) are includable in his/her income. Further, the client can provide services to or on behalf of the foreign charity and be compensated for such services. 

Benefits of Panama

Since a charity is separate from its founders, it offers a unique degree of isolation from creditors and former spouses.

A foreign charitable foundation is an excellent vehicle to fulfill your dreams of doing good for society and mankind, immortalizing you goals - and at the same time generate international opportunities. Also the foundation can be set up as a quasi-religious organization, that is even able to use the word 'church' in its name.

The easiest way we accomplish this is to adapt a regular private interest family foundation and customize the foundation charter to include its principal religious, spiritual and/or humanitarian goals.  Then a detailed set of by-laws are designed to detail the operations of the foundation, how and when its assets should be distributed and to which organizations or projects as well as succession details for its on-going perpetuity.

Such Panama based charitable foundations cost considerably more then a Private Interest Foundation to set up, partly because five Panamanian 'subscribers' have to be located, willing to put their names to the bye-laws of the Foundation indicating their assent and agreement with the goals and purposes of the Foundation.

Such subscribers are not necessarily hard to find if at least some of the funds will go to some local needy projects (and there are always plenty of them), but it takes a little more time and work for us to line up the subscribers.

However, a less expensive option is, as mentioned in the previous paragraph above, is to adapt a regular private interest foundation and create a private interest charitable or church foundation out of it, which will achieve many of the goals of a public charity with far less hassle and expense. That is the unique flexibility of the Panama Foundation that cannot be duplicated so easily with a trust.

Why Panama?

Panama's territorial tax system represents one of the most significant advantages for charitable foundations. Under this system, foundations only pay taxes on income generated within Panama, allowing assets held internationally to remain tax-exempt.

The country's strong privacy laws provide another compelling benefit. Foundation details, including information about founders and beneficiaries, remain confidential and are not part of public records.

Establishing a foundation in Panama costs approximately 2,500 euros, covering incorporation articles and administrative expenses. This relatively modest investment provides access to Panama's sophisticated legal framework.

Panama foundations offer flexibility in governance structure. Founders can designate themselves as protectors, maintaining oversight while appointing professional managers to handle day-to-day operations.

Asset protection is particularly robust in Panama. Once assets are transferred to the foundation, they're legally separated from the founder's personal estate, providing protection from potential future claims.

Governing Laws and Regulations

Panama's Law No. 25 of 1995 serves as the primary legislation governing private foundations, including those with charitable purposes. This law established the framework for creating private patrimony foundations and defines their operational parameters.

The Panamanian foundation structure was inspired by the Liechtenstein model but adapted to fit Panama's civil law system. These foundations operate under the supervision of the Public Registry of Panama.

Charitable foundations in Panama benefit from the territorial tax system, meaning they are not taxed on foreign-sourced income. This creates an advantageous environment for international philanthropy.

The regulatory framework ensures privacy while requiring compliance with anti-money laundering regulations. Foundations must adhere to Law 23 of 2015, which established measures against money laundering.

Foundation Charter and Bylaws Requirements

The Foundation Charter (Acta Fundacional) must include several mandatory elements:

• Foundation name (must include "Foundation" or "FP")
• Initial patrimony (minimum $10,000 USD)
• Complete designation of the Foundation Council members
• Foundation domicile in Panama
• Foundation purposes and objectives
• Procedure for amendment of the charter

Bylaws must outline the governance structure and decision-making processes. They should detail the roles of foundation protectors, if any, and specify the rights and responsibilities of beneficiaries.

The charter must establish clear procedures for the administration of assets and distribution of benefits. It should also address the foundation's duration and dissolution procedures.

All documents must be executed before a Panamanian notary and registered with the Public Registry to gain legal personhood. Registration provides the foundation with independent legal status separate from its founders.

The Formation Process

Establishing a Panama Charitable Foundation involves several critical steps that must be followed in accordance with Panamanian law. The process requires careful attention to legal requirements while ensuring the foundation's structure aligns with its philanthropic objectives.

Choosing a Foundation Name

The first step in forming a Panama Charitable Foundation is selecting an appropriate name. The name must be unique and not already registered in Panama's Public Registry. It should include the word "Foundation" to clearly identify its legal structure.

Names can be reserved for a short period while completing other formation steps. This prevents others from registering the same name during your formation process.

It's advisable to conduct a thorough name search before submission to avoid rejection and delays. Many founders choose names that reflect their charitable mission or family legacy.

The name can be in any language, though Spanish or English are recommended for administrative convenience.

Appointing a Foundation Council

The Foundation Council serves as the governing body responsible for managing the foundation's affairs. According to Panamanian law, the council must consist of at least three members who need not be Panamanian citizens.

Council members should be selected based on their expertise, trustworthiness, and alignment with the foundation's mission. The founder may serve as a council member if desired.

Each council member's responsibilities should be clearly defined in the foundation documents. The council typically includes positions such as president, secretary, and treasurer.

A professional advisor with experience in Panamanian foundations can help identify qualified candidates if the founder does not have suitable connections. Council members' personal information must be provided during registration.

Drafting and Registering the Foundation Charter

The Foundation Charter is the primary governing document that outlines the foundation's purpose, structure, and operations. This document must include:

• The foundation's name and stated charitable purpose
• Initial assets and contributions
• Rules for administration and governance
• Procedures for appointing beneficiaries
• Provisions for dissolution

The charter must be notarized by a Panamanian notary public before registration. Translation into Spanish may be required if originally drafted in another language.

Registration occurs at Panama's Public Registry. This process typically takes 1-2 weeks, though expedited services are available for additional fees.

Once registered, the foundation receives legal personality separate from its founder and council members.

Tax Exemptions for Charitable Foundations

Panama Private Interest Foundations (PPIFs) enjoy significant tax benefits that make them attractive vehicles for charitable activities. Assets and income derived from foreign sources are exempt from local taxation in Panama. This means that donations, investments, and other financial resources originating outside Panama are not subject to Panamanian income tax.

PPIFs are not permitted to engage in ongoing commercial activities, which reinforces their tax-exempt status. This restriction helps maintain the charitable nature of the foundation.

The foundation structure also provides protection from inheritance and estate taxes. This benefit allows for seamless wealth transfer across generations while supporting charitable causes.

Compliance with Tax Regulations

While Panama offers favorable tax treatment, contributors must consider tax implications in their home countries. If donors seek charitable deductions in their domestic tax jurisdictions, assets typically must first be paid to a recognized domestic charity before transferring to the Panama foundation.

For U.S. persons establishing a PPIF, careful planning is essential. The foundation may be used to protect assets or shield business interests, but improper structuring could trigger adverse tax consequences under U.S. regulations.

Proper documentation and transparent operations are critical for maintaining tax-compliant status. Regular reporting and adherence to both Panamanian and home country regulations will help avoid unwanted scrutiny.

Professional tax advice from experts familiar with international foundation structures is strongly recommended before establishing a Panama Charitable Foundation.

For more Panamanian Offshore Structures

• Panama Offshore Company
• Panama Foundation & Offshore Company Combo