Panamanian Corporations, Private Foundations and Trusts

Transcription

1 Panamanian Corporations, Private Foundations and Trusts By: David M. Mizrachi, B.A., J.D. 1 I. Introduction The Republic of Panama has developed several laws and regulations governing the creation and functioning of entities with separate legal personality from their owners. These include partnerships, corporations, limited companies, private interest foundations, cooperatives, trusts and others. The most common form of legal entity used to conduct business and hold assets under Panamanian law is the corporation, which dates back to The trust was statutorily introduced in 1984, and the private interest foundation was created in 1995, primarily as asset holding entities. We shall briefly review these three forms of legal entities. A. Panamanian Corporations Corporations are literally called Sociedades Anónimas, which loosely translates as Anonymous Partnerships. In practice, however they are not really anonymous and are somewhat similar in nature to the American concept of a corporation as in, for example, Delaware corporations. Panamanian corporations are primarily governed by Law N 32 (1927) and the Commercial Code of Panama. Although their legal origin dates back nearly eight decades, some of its more cumbersome requirements were modernized through the 1997 Amendments to the Commercial Code. Therefore, they remain a very common and reliable alternative to conducting business and holding assets separate from the private individual or family structure. i. Formation Requirements Under Article 1 of Law N 32 (1927), a corporation may be formed by two or more adults regardless of their nationality, known in that law as the subscribers. These subscribers must sign the articles of incorporation, which shall include the following: 1. The names and domiciles of the subscribers (similar to promoters), who may or may not be the actual owners or beneficiaries; 2. The name of the corporation which may not be identical or similar to that of another existing corporation, and shall include a designation in any language stating the corporate status (for example the words Corporation, Incorporated ; or the abbreviations Inc., Corp., and, most commonly, S.A. ). This provision is subject to very lax enforcement, many times sufficing that a word be added for registration to be allowed, in spite of the similarities in name with another 1 ( 2006, Mizrachi, Davarro & Urriola) DISCLAIMER: This document is not meant to be relied upon in place of seeking independent legal advice. It is only an informal survey of certain laws, which may contain inaccuracies. The Author and his firm disclaim any responsibility for its accuracy, fairness, reliability, or contents. No representation is made as to the legal and/or tax consequences of any of the concepts herein described. The reader is specifically warned not to rely on its contents and to seek professional advice from a licensed attorney in Panama. The hiring of an attorney is an important decision which should not be based on advertising and/or publications alone. Should you be interested in learning more regarding the Author s qualifications, you will be provided with additional information free of charge upon request.

2 existing corporation; 3. The corporation s purpose, which may be specific or general, but limited to lawful activities only; 4. The authorized capital and number of shares of the corporation, which shall be stated in any legal currency, but most commonly Panamanian Balboas or United States Dollars; 5. The different kinds of shares (if applicable), and their preferences, rights and privileges; 6. The number of shares that each of the subscribers agrees to take, although in many instances the subscribers waive that right without actually taking any shares; 7. The corporation s domicile, which may be located anywhere in the world, and the name and the domicile of its resident agent, who must be a lawyer or law firm in Panama; 8. The duration or term of the corporation, most of which are for an indefinite term; 9. The number of directors, with their names and addresses, which should be at least three (3), and may composed of at least as many individuals or entities, regardless of their nationality; 10. Any other lawful provision agreed to by the subscribers. The articles of incorporation must be transcribed into a public instrument and signed by a Notary in Panama, followed by its registration at the Public Registry, which would then assign a microfiche number to each corporation. These are only the general rules. Certain domestic business activities such as banking, insurance reinsurance, securities, protection services and gaming have additional incorporation requirements and may need governmental approval prior to their incorporation. Public corporations also have additional reporting requirements. Other activities such as retailing may not be undertaken by corporations which are owned or controlled by foreigners. Domestic real estate ownership through a Panamanian corporation has only a few restrictions which must be consulted prior to incorporation. Foreign owned Panamanian corporations may thus hold private property in Panama. Initial incorporation is usually quick, taking approximately four (4) business days when the subscribers are nominees located in Panama, and the basic form of articles of incorporation is adopted. Changes to the basic form of articles may involve some additional work and costs, and may take longer to register. The articles must be written in Spanish although they may include a translation. ii. Share Capital and Shareholders The number of shareholders in a corporation depends upon the number of shares allowed in the articles of incorporation. Shares may be issued nominally or to the bearer and may carry par value or have no par value. There may also be more than one type of share, for example, preferred or ordinary shares and voting or non voting shares. Depending upon the type of activity involved, the shareholders may be Panamanians and/or foreigners, as well as individuals and/or entities. Unless otherwise stated in the Articles of Incorporation or Bylaws, the board of directors is in charge of issuing shares and determining their preferences, method of payment and all other aspects inherent to such. Generally, bearer shares must be fully paid prior to their issuance and the holder of bearer shares may request their re-issue as nominal shares. The holding of bearer shares is becoming less and less practical due to banking and know your customer regulations. Even when accepted, many contracting parties in Panama and abroad are now requiring their holders or beneficiaries be clearly disclosed prior to 2006 Mizrachi, Davarro & Urriola Page 2

3 doing any business with a corporation. Unless otherwise stated in the Articles of Incorporation or the Bylaws, the Shareholder Assembly is the ultimate controlling body within a corporation. Generally, all shareholders have the right to be summoned to an Assembly and may vote either directly or by proxy. Many corporations simply serve as holding companies and do not undertake any regulated business activities. Such corporations are generally not required to file a notice of annual meeting at the Public Registry. The most common corporate activities registered at the Public Registry are changes in the board of directors, capital structure, powers of attorney, officers and shareholder authorizations to transfer or dispose of corporate assets. iii. Corporate Liability and Insolvency Matters A corporation is a legal entity separate and distinct from its shareholders. As such, it carries liability for its own acts or omissions. It is also capable of holding its own assets and may be decreed in bankruptcy as provided by the bankruptcy laws of the places where it does business. iv. Management and Representation of the Corporation Management of corporate affairs is generally vested upon its board of directors and officers, and representation vested upon the president of the corporation or another person so designated by the articles of incorporation, a shareholders resolution or by the board of directors. A corporation may issue general or special powers of attorney in fact, which may or may not be registered, vesting upon another individual or entity the power to bind the corporation, either discretionally or not, depending upon the document which grants such power of attorney in fact. Corporate assets may generally be transferred, disposed of and/or encumbered by the board of directors or any duly appointed person, but only following a shareholders meeting called for that purpose, or with the express written consent of a majority of the shareholders, in the absence of such a meeting. iv. Treatment of Profits and Losses As a business entity, a corporation may earn profits or incur losses. The profits may be kept by the corporation or paid out as dividends, depending on the board of directors or the shareholders, as may be the case. A corporation may also sit idle and not have any income producing activities, as is the case with a real estate holding corporation. v. Liability of Officers and Directors Directors may be held jointly and severally liable to a corporation s creditors if declaring dividends or payments which would render the company insolvent; if their actions reduce the company s capital; or, when making a false declaration of a material nature regarding the corporation. Although not a common occurrence, with the advent of good corporate governance norms, this may become an issue. Directors and officers may also be found liable for breaching their duties under the Securities Laws of Panama in case of public corporations. vi. Liability of Shareholders Article 39 of Law N 32 (1927) states: Shareholders are only liable with respect to a company s creditors up to the amount owed on account of their shares; but no action may be filed against any shareholder for the debt of the company until a judgment has been 2006 Mizrachi, Davarro & Urriola Page 3

4 rendered against it, which total import has not been collected following execution against the corporate assets. Similarly, Article 251 of the Commercial Code states that: A commercial entity created under the provisions of this Code shall have a legal personality of its own different from that of its members for all of its actions and contracts Panamanian laws provide for protection of the corporate veil in most circumstances. This means that a shareholder is generally not personally liable for the acts or omissions of the corporation and vice versa, a corporation is generally not liable for the acts or omissions of its shareholders when acting in their individual capacity. Thus, generally the assets of a corporation cannot be sought to satisfy the individual obligations of its shareholders. Under normal circumstances, shareholder liability would be limited to the amount owed on its shares, if any, and only if the corporation cannot pay its debts. However, these general rules also carry some exceptions, the most salient of which are when criminal activity, domestic tax fraud, government funds, highly regulated industries or some pressing family or labor law issue are involved. In such limited circumstances, the corporate veil may be pierced, and the liability may be transferred from the corporation to the individual shareholder, beneficiary or controlling party and vice versa. B. Private Interest Foundations Since 1995, Panamanian law provides for the creation of private interest foundations, which are different from non-profit foundations and public interest foundations. Private interest foundations facilitate lifetime planning, management and disposition of assets. They are characterized by their efficiency, simplicity and discretion. They generally follow the model of the Liechtenstein Family Foundations. The benefits from a private interest foundation are primarily, as stated in its name: for private use. Private interest foundations are frequently used to plan the use of the founder s assets or of part of such, and to distribute the benefit of the foundation between or among several beneficiaries, including the founder itself, as well as institutions not related to the founder or the beneficiaries. Private interest foundations may give the founder s assets protections similar to those of a trust, but without many of the formalities inherent to such. They are also a vehicle to grant legacies with more discretion than an open will. Finally, they offer almost all the advantages of a corporation, and particularly their flexibility, simplicity and effectiveness. i. Formation Requirements Under Law N 25 (1995), as regulated by Executive Decree N 417 (1995), a foundation may be formed through a public instrument by a founder who may be a natural person or a legal entity. The founder may be acting on its own behalf, or on behalf of a third party. The basic requirements for registration are: 1. The foundation s name in any language using the latin alphabet which cannot be identical or similar to that of an existing foundation and must include the word Foundation ; 2. The initial capital which may not be less than B/.10, (the equivalent of US$10,000.00); 3. The designation of the foundation council, which may include the founder and which may be composed of three individuals or at least one entity. The foundation council may have all the rights provided for by the founder, the foundation charter or the bylaws, and may also have no rights while the founder is alive or in existence, according to each case. Generally speaking, the foundation council has functions which are analogous to those of a board of directors of a corporation; 2006 Mizrachi, Davarro & Urriola Page 4

5 4. The foundation s domicile which may or may not be located in Panama; 5. The resident agent, who must be a Panamanian lawyer or law firm located in Panama and must countersign the foundational charter; 6. The foundation s purposes, which must be lawful, and may not include the conduct of habitual or regular business activities; 7. The manner to name the beneficiaries, which may include the founder; 8. The right to modify the foundational charter by the founder if considered convenient; 9. The destination given to the foundation s assets and the form of liquidation in case of dissolution; 10. Any other lawful purpose at the founder s discretion. The foundational charter must be included in a public deed and signed by a Notary, followed by its registration in the Public Registry, which would then assign a microfiche number to each foundation. Initial creation is also fast, taking about four (4) business days when the founder is a nominee located in Panama, and the basic form of foundational charter is adopted. Changes in the basic charter may involve some additional work and costs and may take longer to register. The charter must be written in Spanish although it may include a translation. ii. Bylaws The foundation s most important document is its bylaws. The law allows for the bylaws to be included in a private document, and thus its contents may be strictly confidential. Such confidentiality is relative. Banks and other service providers generally require the disclosure of the foundation s beneficiaries, real founder, their nationality and the source of the foundation s assets. Typical bylaws include the names of the beneficiaries; the foundation s assets; their use, distribution or maintenance; the manner in which the foundation will be managed and may also contain any other lawful disposition under Panamanian law. For example, the bylaws may direct that the foundation council not become effective until the death of the founder. They may also provide that the foundation be audited by a specific person or that protectors be designated to manage the foundation. Bylaws must be carefully and professionally drafted in order to avoid problems with their interpretation. The bylaws may also provide that all disputes to be submitted to arbitration or other forms of alternative dispute resolution. iii. Estate Planning Uses under Panamanian Law Subject to the laws applicable to the individual founder and/or beneficiaries and/or their assets, under Panamanian Law, a foundation s bylaws may serve as a post mortem, disability or old age based asset disposition method, without the need for the interested party to draft a public testamentary will. Under Panamanian law, while a public will s content is available to everyone, the bylaws of a foundation generally are only available to interested parties. Foreign founders and/or beneficiaries (heirs) will still be responsible to comply with the laws of their respective countries of origin and or domicile. iv. Inter Vivos (Living) Gift Uses under Panamanian Law Subject to the laws applicable to the individual founder and/or beneficiaries and/or their assets, under Panamanian Law, a foundation s bylaws may serve as a way to provide for the needs of the founder and 2006 Mizrachi, Davarro & Urriola Page 5

6 or beneficiaries through lifetime grants or gifts. Accordingly, the founder may designate its heirs as beneficiaries of such and may also transfer the benefit of the foundation to them upon the occurrence of one or several conditions, even though the founder has not died. For example, the bylaws of a foundation may require that each of the founder s grandchildren be granted a fixed amount of money upon becoming adults or upon marriage or graduation from college. They may also provide for the foundation to pay for the education and medical expenses of the children of the beneficiaries or the founder up until their reaching adulthood. Foreign founders and/or beneficiaries (heirs) will still be responsible to comply with the laws of their respective countries of origin and or domicile. v. Holding and Transferring of Assets A foundation may acquire and manage its own assets and those of third parties, including real property, depending on the case. It is recommendable that specific donation or sales contracts or other written proof be drafted for each of the assets to be transferred to the foundation. Foundations may not engage in habitual businesses. Nevertheless, a foundation may be used as a holding of shares of corporations or other entities which in turn are actively involved in other businesses. vi. Liability of Stakeholders Absent fraud (including fraudulent conveyance) or other criminal activity, a foundation s assets may not be judicially attached or retained for liabilities which are not inherent to the foundation. This means, that the foundation s assets normally do not answer for the individual liabilities of the founder, the beneficiaries, the foundation council, or of third parties which may have contributed assets, as long as those liabilities are unrelated to the foundation s own activities. Under limited circumstances, which are similar to those in the case of a corporation, the foundation s veil may be pierced. C. Trusts In 1984, Panamanian laws enacted the legal concept of a trust. Although a statutory creation in a civil law jurisdiction, Panamanian trusts are generally similar to common law trusts. The law describes the trust as a legal action whereby a grantor transfers assets to a trustee for the benefit of a beneficiary rather than a free standing entity. Nevertheless, they are granted separate personality and thus are treated as legal entities. i. Formation Requirements Under Law N 1 (1984), a trust is formed in writing by a grantor who conveys assets to a trustee in order for the latter to manage or dispose of such assets for the benefit of a beneficiary who may be the grantor. It may be created through an authentic private document or a public deed. The trust instrument must contain: 1. The designations of the grantor, trustee (fiduciary) and beneficiary; 2. The designation of the substitute trustee and beneficiaries, if any; 3. The description of the assets or part thereof over which the trust is made; 4. The express statement of intent to form a trust; 5. The rights and obligations of the trustee; 2006 Mizrachi, Davarro & Urriola Page 6

7 6. The limitations set upon the trustee; 7. The rules for acceptance, distribution or disposal of assets, revenues and products from the trust; 8. Place and date when the trust is formed; 9. Designation of a Panamanian lawyer or law firm as the trust s registered agent; 10. The trust s domicile within the Republic of Panama; 11. An express statement of intent to form the trust under the laws of Panama. Any other lawful provision may be inserted into the document. Creating a trust depends upon the complexity of the grantor s intent, the assets to be transferred and other factors specifically inherent to each trust. Professional advice should be sought prior to creating a trust. ii. Purpose Panamanian trusts may serve any legitimate purpose as long as it is in accordance with the laws, morals and public policy. The most common purposes are estate planning, lifetime gift distribution, investment management, asset backed business guarantees and asset protection. Trusts are also routinely used to finance, securitize and develop capital intensive projects and real estate deals. Trusts involving real estate located within the Republic of Panama must be formed through a public instrument, and will only affect third parties from the date in which it is registered at the Public Registry. All other trusts shall affect third parties upon authentication of the signatures of the grantor and the trustee or their attorneys in fact by a Panamanian notary public. Companies regularly providing trust management services to third parties must hold a trust license issued according to Panamanian law and must be subject to permanent government supervision. Many local banks have trust departments which manage trusts established on behalf of its customers and invest trust assets. iii. Estate Planning Uses under Panamanian Law Trusts which shall take effect following the grantor s death must take the form of a will (generally a public document), except when the trustee is a licensed trust company, in which case a private document should suffice. iv. Inter Vivos (Living) Gift Uses under Panamanian Law Inter Vivos trusts, whose effects take place during the grantor s lifetime, do not have to be included in a public document as long as the signatures of the grantor and the trustee have been authenticated by a notary. v. Holding and Transferring of Assets The trustee shall manage the trust s assets (or even those of third parties if acceptable to the trustee), including real property. It is recommendable that specific donation or sales contracts or other written proof be drafted for each of the assets to be transferred to the trust. Subject to any restrictions found in the trust instrument the trustee shall have all rights inherent to 2006 Mizrachi, Davarro & Urriola Page 7

8 property ownership upon the trust s assets. The trustee must act with the standard of care expected from a good parent and shall always remain liable for gross misconduct and intentional damages. The law generally provides for tax exemptions for activities involving trust assets located outside Panama and income derived from foreign sources. vi. Trust Liability Absent fraud (including fraudulent conveyance) or other criminal activity, assets in a trust may not be judicially attached or retained for liabilities of the grantor or the beneficiaries. In that sense, article 15 of Law N 1 (1984) states: The trust s assets shall be separate property from the trustee s assets for all legal purposes and may not be attached or subject to judicial embargo, except for obligations incurred or damages caused due to the trust s actions or by third parties when the assets have been transferred or kept through fraud and to the detriment of their rights. Thus, under limited circumstances the trust s veil may be pierced. II. Conclusion This brief summary is meant as an introduction to the concepts of a corporation, private interest foundation and trust under the laws of Panama. These are commonplace alternatives to individual ownership of property and conduct of business which may be subject to other regulations. Panama has developed law and jurisprudence which further explain the use and governance of Panamanian corporations and private interest foundations. In the case of foreign nationals, it is incumbent upon each interested person to inquire as to the compatibility, taxes and legal consequences of doing business, holding and disposing of assets using a Panamanian corporation, private interest foundation and/or trust. Mizrachi, Davarro & Urriola Abogados - Attorneys at Law P.O. Box WTC Calle 58 y Avenida Samuel Lewis Torre ADR, Oficina 6-C Panama, Republic of Panama Tel. (507) Fax (507) Cellular (507) mizrach_mdu@cwpanama.net 2006 Mizrachi, Davarro & Urriola Page 8