- what it is and how it works

A Foundation is an artificial "legal paper person". It is set up so it can act in commercial life, much like a person. It can own things, both tangible and abstract, it can buy and sell things, it can borrow and lend money, and it can enter into legally binding agreements. But it cannot run a business.... It can own a business, though!

The Foundation is established with a purpose. The purpose generally is to manage its assets to the benefit of a person, an organization, or an idea or a concept. Almost anything is possible!

What makes the Foundation interesting in our context is the fact that it can be established with the purpose of benefiting whomever you choose! This even ioincludes yourself and your family. But it can also be a charity, or a defined scientific purpose. You can, in fact, compare the Beneficiaries of a Foundation to the Shareholders of a Corporation, but with the important difference that Shareholders have a vote and, in reality, control the Corporation, whereas the Beneficiaries of the Foundation have no say in regards to the management of the Foundation. So, in a way, the Foundation is a nanny or "pseudo-parent" for the Beneficiaries.

You might want to view a graphical presentation of a Foundation while you read this.

The link opens a separate window with a drawing in pdf format, so it takes a few seconds to download. You might want to print it out for reference - you do this by using the print icon of the Adobe program (closest to the drawing itself) - not your browser's print icon (on the outer frame of the window).

If you don't have an Acrobat Reader yet, you can download one for free (opens in a new browser window).

Thinking now of your Foundation as the "nanny" for your "pets", you can imagine that the Foundation itself has a parent, who is the person or business who faciliate the establishment of the Foundation. In principle, this could be yourself, but it is highly advisable, for the protection of your privacy, that you abstain from that honor and let someone else do that....

The Foundation needs someone to runs its day-to-day affairs, and that, of course, has be live people. In Panama, the law requires three persons, or one person and a corporation. This is the Council - which is completely parallel to The Board of Directors for a Corporation. The Council members are responsible for the Foundations' compliance with law, so the members of Council are on public record with the government.

But the Council members do not really decide what the Foundation does and doesn't do, other than dealing with the legal compliance issues. They elect, by secret vote, a Protector. And they submit to the Protector their letters of resignation, undated!.

The power of this is very remarkable. And it is the very key to the way the Foundation functions in privacy. In Panama, Council members who do not respect the privacy of the Protector will be fined jail terms of a minimum of 3 years. But they also want to make sure that they are not doing anything with the Foundation that could put them into trouble. Because they do not know if the Protector fired them as of yesterday, they will hence not take any action on behalf of the Foundation other than what the Protector has requested! Only by having their instructions from the Protector can they protect themselves against being sued for taking action, for which they had no authority!

This also means that Council, if knowing that the Protector is acting under pressure, can choose to ignore the orders. This could for instance happen if the Protector is acting under pressure from somebody else who wants him/her to pay for something he/she or the Beneficiaries of the Foundation don't benefit from paying for. This obviously goes for the situation of a foreign government trying to find out what assets your Foundation owns. It also goes for the case of your losing a legal dispute in court and being ordered by the court to pay certain fees or penalties you cannot afford or don't want to pay. If you are the Protector of a Foundation, such liabilities are not passed on to the Foundation.

The set-up

When you get a Foundation set up, you want to make sure that Council will elect you as its Protector. This is normally always "part of the deal". You can, however, also use a nominee Protector, from whom you get a letter of resignation, undated, just as for the Council members. This way, you are formally totally out of the legal picture - but you will still be the one who controls the Foundation.

The Foundation must have a purpose, but that purpose can be changed any time by the Protector asking Council to do so. The purpose is not on public record. The most common way is to name some Beneficiaries, in order of preference. This selection of Beneficiaries is a private matter that remains with Council and does not go on public record. Beneficiaries can be almost anything, including organizations, persons, and general causes such a political or charitable agenda.

In some countries (including the USA, the UK, Canada, and Australia), there is some liability connected with your assuming the role of Beneficiary or Settlor (= "Grantor" in the USA) of a Foundation. Although this is not yet formally instigated for Foundations, it certainly is for Trusts, and it is foolish to not expect something similar coming soon for Foundations - it is just a matter of time. In almost all western countries, you are supposed to report to your government on your tax return whether you have any affiliation with a foreign Trust or not. For your own future protection and to avoid later hassle, you should choose "not". This is possible by having someone else establish the Foundation in your place as Settlor and have a nominee Protector appointed. Although you are protected by Panama's privacy laws as Beneficiary, you might opt for adding a nominee Beneficiary, which you deal with the same way as the Council members.

Yes, it gets a little complicated - but if you compare this to the complications associated with dealing with your own government's tax agency, you will most likely find it much easier to aviod all reporting liabilities for the Foundation...

Using the Foundation

You can send money to the Foundation. Council will make a bank account for it, or as many bank accounts you want, and you can - through a "Letter of Wish" - have the Council invest the Foundation's money on your behalf, "playing the market", as you want.

By law, you cannot involve the Foundation in any day-to-day business operations. At least not directly. For that, the Foundation needs an IBC to conduct the business through.

The money you receive for work well done as a consultant or a subcontractor, or as part of any business deal that does not involve employment, can easily be directed to the Foundation. You can make it part of the deal that any payments and fees to you must be endorsed not to yourself, but to the Foundation. This way, you do not pay income tax on the money you make, because, legally, you don't make any! The Foundation does! (Be aware, though, that, in many countries, this will call on serious suspicion from your government's side, and you might be faced with a tax demand on the money you earned, whether or not you got paid yourself! In the USA, this is definietly the case - but there are other and smarter ways of avoiding these problems.)

You can also have the Foundation pay money for you. You can buy almost anything with the Foundation's money - provided the funds are there and the purchase does not conflict with the purpose of the Foundation! It takes only a simple expression of your wish to Council to facilitate this.

One warning: if you let the Foundation pay money to yourself, it will have consequences for your personal income tax, unless you set it up so it clearly and legally is a loan.

A Foundation does have some similarities with a Trust. It is, in many ways the CIVIC LAW's counterpart to the COMMON LAW's Trust. The bad news is that Offshore Trusts have been so heavily abused by Americans in particular that most modern governments see "red flags" whenever you mention the word "Trust" or "offshore".

Now, by having all your assets transfered to a Foundation and having all your professional income sent to your Foundation, you would think that you could not pay any taxes, right?

Wrong! In the USA for sure, you will be charged taxes on those gifts, and you will be held liable for paying taxes on all income the Foundation makes!

So, why the hassle of doing this Foundation business?

Here is the clue:
Foundations are not subject to income taxation,
they are not even obliged to submit a tax return
- and it further provides complete privacy
for the Protector and the Beneficiaries....

Now, we are getting close to the really exciting stuff:

Why Panama?