For U.S. persons involved in cross-border estate planning, Panama Private Interest Foundations (PIFs) offer a powerful combination of asset protection, confidentiality, and flexibility. These hybrid entities — part trust, part corporation for Panamanian — allow founders to structure wealth transfers and hold assets abroad, but their unique nature creates complex U.S. tax and reporting considerations that demand careful planning.
What are PIFs?
PIFs are legal entities created under Panama’s Private Foundation Law of 1995. They operate with independent legal personalities and have no shareholders. They consist of a founder, a foundation council acting similar to a board of directors, an optional protector, and beneficiaries who receive benefits by charter.
Registered in Panama’s Public Registry, PIFs can hold assets, manage investments, and engage in commercial activities if profits serve the foundation’s purposes. Panama’s territorial tax system exempts foreign-source income, making PIFs attractive for asset protection, estate planning, and confidentiality.
PIF assets are legally separate from the founder’s estate, shielding them from creditors, and beneficiaries are not publicly disclosed. PIFs cannot distribute profits for private gain beyond their stated purposes, but are flexible vehicles, capable of holding shares, real estate, intellectual property, and functioning as holding entities.
U.S. classification of PIFs
It is common for PIFs to hold U.S. assets, including legal entities that generate passive and/or business income. Under those circumstances, U.S. tax characterization of PIFs as either trusts or corporations is based on “substance over form” principles, taking into account all relevant facts and circumstances. Factors influencing IRS determination include the foundation’s governing documentation and purpose, the nature of investment or business activities, the degree of founder control, whether the founder is sole beneficiary, whether some income is distributed to non-beneficiaries who are akin to business associates or shareholders.
U.S. treatment of a foundation as a corporation triggers U.S. tax and reporting obligations. If U.S. persons are deemed to control the FIP, it may be treated as a controlled foreign corporation with associated taxable income for U.S. persons, including GILTI and Subpart F inclusions. Where the FIP is treated as a corporation controlled by foreign persons, this may affect the taxation of income flows from the U.S., including 30% withholding tax on dividends, interest and royalties.
Alternatively, where the facts and circumstances are such that the foundation is characterized as a trust for U.S. tax purposes, it is generally treated as a non-grantor trust where the founder cannot revoke the foundation and take back its assets. However, where there are U.S. beneficiaries, U.S. tax rules under Section 672(f) may effectively convert the foundation to a grantor trust for U.S. tax purposes.
The U.S. tax consequences of having grantor trust treatment when the taxpayer was expecting non-grantor trust treatment may may result in unpleasant surprises. For example, if such grantor trust holds U.S.-situs assets (e.g., U.S. real estate, U.S. stocks), those assets may be subject to U.S. estate tax upon the death of the foreign grantor.
Given the risk that U.S. tax characterization of PIFs may be different than what taxpayers expect, proposed U.S. investment structures utilizing PIFs must be carefully analyzed to determine the U.S. tax characterization and treatment. Similarly, existing PIF structures with U.S. investments should be reviewed from a U.S. tax perspective to ensure there are no latent tax risks that will result in highly unpleasant surprises.