The Panama private interest foundation is considered by many to be one of the best asset protection vehicles in the world. As such it is highly promoted as an effective alternative to an asset protection trust. In most circumstances those claims are true. But, Panama foundations have also been promoted as providing tax benefits for their users as well. This certainly may be true for non-US persons, but is highly doubtful for US taxpayers.
One of the ways in which these foundations are sold to Americans is to point out that US tax law makes no specific provision for such entities, and as such, they are outside the rules. Nothing could be further from the truth!
Under US entity classification laws every non-governmental legal entity in the world is classified for tax purposes as a trust, a corporation, a partnership, or a disregarded entity. The tax regulations go on to say that in the case of entities that do not easily admit of classification, they are to be classified according to the way in which they operate. The example given is that if an otherwise unclassified entity is primarily used as an asset holding vehicle it will be considered a trust; however, if such an entity is used to actively operate a business or make investments it will be considered a corporation.
Therefore, a Panama private interest foundation will be considered by US tax law as either a trust or a corporation depending upon how it is used!
It is important to note that the same tax treatment will apply to all civil law foundations including stichtings, stiftungs, and anstalts.
Every one of these vehicles can be used effectively in the situations for which they are best suited. However, too many people seem to almost fall in love with the idea of using one of these civil law foundations. Perhaps it is because they sound exotic. But in so doing, they may end up with a vehicle ill-suited for their needs, and perhaps even dangerous...
