Panamanian Trusts

The Republic of Panama, located in Central America between the countries of Colombia and Costa Rica, has been considered to be one of the oldest and safest tax havens in the world. Following its independence from Colombia in 1903, Panama has had convenient and attractive legislation for offshore operations, based exclusively on the territorial principle of not taxing foreign source income.

Because of its structure, geographical position, political stability and characteristics of its economy, Panama is one of the most important tax havens of the Western Hemisphere. Panama has excellent international transportation and communication systems; the U.S. Dollar as legal tender; no exchange controls nor government regulations and a complete freedom in the movement of funds. Most important, confidentiality and banking secrecy are recognized by law.

Panama’s success as a tax haven is based primarily on its tax structure. According to article 694 of the Fiscal Code, income earned by any person, either an individual or a corporation, from sources located outside of Panama, is exempt from taxes. Panama’s legislation expressly provides that the following transactions are not subject to income tax in Panama:

Invoicing a company overseas, from an office located 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.

Directing or managing, from an office headquartered in Panama, any operations and transactions that are executed, completed or take effect abroad.

Distribution of dividends from any income earned by a company when that income is produced or earned abroad.

Along with this, the Fiscal Code exempts from income tax:

Interest paid by banks located in Panama to their customers for savings accounts and time deposits kept in Panama and

Any salary or fees earned by Directors, Officers and Executives of Panamanian corporations located abroad.

These benefits have made Panama the tax haven that it is today.


The first trust law in Panama was adopted in the 1940’s and it was based on common law trust. However, in 1984, new provisions on trusts were enacted by Law No. 1 of January 5th to complement other legal instruments and benefits provided by Panama as a tax haven to the international financial community.

This legislation introduced new and modern concepts to update the former trust laws in order to make them more flexible and convenient to foreigners searching for a place to execute a trust overseas.

The important features of the Panamanian trust are:

LIBERTY OF BARGAINING: The trust can contain any lawful clause as the needs of the settlor may require. According to articles 5 and 9 of Law No. 1, the trust may be created for any purpose provided it is not contrary to the law or public policy.

SIMPLICITY IN ITS EXECUTION: The trust shall be created in a private document and the only formality is that the signature of settlor and trustee must be authenticated by a Panamanian Notary, so confidentiality is guaranteed. It is not necessary for the trust to be executed in a public deed or registered public ally unless real property located in Panama is given in trust.

DURATION: The trust is not perpetual unless it is so stated by the settlor in the trust. The trust should have its duration expressly stated, and it may be revocable or terminated before it expires if so provided by the settlor in the trust agreement.

CONFIDENTIALITY: Article 37 of Law No.1 guarantees the confidentiality for the execution of the trust. It provides that the trustee and his representative or employees or any other person involved in the execution of the trust must uphold the secrecy of the operation.

CORPORATIONS MAY BE USED: Both the settlor and the trustee and/or beneficiary may be a corporation and not individuals.

SPECIAL TAX BENEFITS: Consistent with the tax principles already mentioned, Law No.1 states the acts of executing, modifying and terminating a trust as well as transferring, conveying or encumbering trust funds and the income or interest produced by the assets and properties given in trust are exempt from all taxes, contributions, assessments or encumbrances, provided the trust involves the following assets:

1. Properties or assets that are located abroad;

2. Funds not from Panamanian sources or subject to taxes in Panama;

3. Shares of stocks or securities of any kind, issued by corporations whose income is not produced in Panama, even though those shares or securities may be deposited in Panama;

4. Time deposits or savings accounts set aside in Panamanian banks The previous tax limitation will not be applicable when trust funds are invested in housing projects or the development of industrial parks in Panama, in which case the income earned in those commercial operations will be tax free.

SEPARATE ESTATE: Trust assets shall constitute an estate separate from the assets of the trustee. Therefore, they can not be attached, seized or subjected to any lien as a result of obligations of the trustee. The assets of the trust only answer for liabilities of the trust itself.

ASSETS SUBJECT TO TRUST: The trust fund may consist of properties or assets of any kind, present or future. The settlor may increase or add other assets to the trust fund after the execution of the trust.

APPLICABILITY OF FOREIGN LAW AND JURISDICTION: Although the trust is regulated by Panamanian law, the settlor and the trustee may agree that foreign law will be applicable. The trust and the trust fund may be transferred to another jurisdiction or country as well.

TRUST OF OTHER JURISDICTIONS: Trusts created pursuant to foreign law may be governed by Panamanian law provided the trusts are subject to the formalities of the law on trusts.

TRUSTEE: The trustee can be any person, either an individual or a corporation duly authorized by law. Also, the settlor may replace the trustee if so provided in the trust agreement.

These are the most relevant features that have made the Panamanian trust one of the most secured and useful trusts of any tax haven in the Western Hemisphere.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.

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