A trust is a specific contract on the basis of which the trust settlors transfer a part of their private or company assets (possibly all their assets) to a third person referred to as trustee. The trustee may be a person appointed by the settlor or a professional licensed trustee holding a license for the carrying on of these activities (usually a bank or a special company holding a license for trust administration).
The assets transferred to a trust are handled on the basis of the Last Will or Letter of Wishes in such a manner which corresponds to the wished of the settlor. The settlor can also appoint a Protector, who can supervise over the activities of the trustee, whether the trustee acts in the best will and according to instructions or wishes of the settlor and persons who should have benefits from the trust (beneficiaries). A protector can be any person, such as a family friend, lawyer or any person who has the confidence of the trustee.
According to article 694 of the Fiscal Code, the income earned by any person, either an individual or corporation, from sources outside Panama, is exempt from taxes. Legislation expressly provides that the following transactions are not subject to income tax in Panama:
- Invoicing to a company abroad (from an office in Panama), the sale of goods for an amount greater than that at which said goods were invoiced to the office located in Panama, provided those goods are handled exclusively abroad.
- Dividends from income earned by a company when produced or earned abroad.
- Directing or managing (from an office in Panama) operations and transactions that are executed, completed or take effect abroad
The advantages of trusts result especially from the fact that settlors transfer a part of their personal or company assets (or all these assets) to a third person (trustee) and thus they avoid any execution, forfeiture, confiscation or nationalisation of the assets of the settlor by heirs at law (spouse, children, relatives) or creditors (banks, financial institutions, state, creditors, etc.), because the ownership of the assets owned in this manner will be separated from the original owner by way of transfer to a third person, in this case to a trust. Features of the Panamanian trust are:
- Trust is created in a private document, with the only formality that signature of settlor and trustee must be authenticated by a Panamanian Notary, guaranteeing its confidentiality. It is not necessary that the trust be executed in a public deed or be registered in any public register unless real property located in Panama is given in trust.
- Article 37 of Law No.1 expressly guarantees confidentiality for its execution. It provides that trustee, representatives, employees or any other person involved in its execution must uphold the secrecy of the operation. Violation of this provision is penalized with imprisonment of up to six (6) months and a fine of up to US$50,000.
- Trust is not perpetual unless so stated by settlor. Trust should have its duration expressly stated. It may also be revocable or terminated before its expiration if it is so provided by the settlor in the trust agreement.
- Trust can contain any lawful clause as settlor may need. According to articles 5 and 9 of Law No. 1, trust may be created for any purpose not contrary to the law or public policy.
- Both settlor and trustee and/or beneficiary may be a corporation. They do not need to be individuals.
- Tax principles: The Law expressly states that the acts of executing, modifying and terminating a trust as well as the transfer, conveyance or encumbrance of trust funds and the income or interest produced by assets and properties given in trust are exempt from all taxes, contributions, assessments or encumbrances, provided trust involves the following assets:
- Interest paid by banks located in Panama to their customers for savings accounts and time deposits kept in Panama;
- Salary/fees earned by Directors, Officers and Executives of Panamanian corporations located abroad.
These benefits have made of Panama the tax haven that it is today and the reason why others from the region have tried to imitate us
As it has already been stated, Licensed Trust Companies are entities which hold a license in the jurisdiction in question, that enables them to administer and establish trusts for their international clients, possibly for fiduciary services as well.
A number of leading bank companies establish trust companies in classical offshore centres as well as out of those centres, in order to be able to provide their clients with complete services from a number of classical bank services to trust and often fully specific and individual services connected with a confidential administration of onshore and offshore assets (such as share subscribers, nominee directors and shareholders, fiduciaries, etc.