Private interest foundation

Offshore consultant

private interest foundation

an interesting alternative to the trust

The Private Interest Foundation is a legal entity that is born from the donation of the assets of a person or company for specific purposes, which are set out in its founding charter. It is a legal concept similar to the Trust, but while the former is essentially a contract governed by Law, the Private Interest Foundation is an entity with its own legal status, the same as a corporation.

Foundations can therefore own property, exercise any right, open bank accounts and have their own debts and obligations. The Private Interest Foundation is different from other foundations in that its purpose is not of public interest, but that is created for purposes of private interest, which is permitted only in a few countries having specific legislation in this regard. Furthermore, compared with a commercial company, the Private Interest Foundation has no partners or shareholders and cannot engage in business or profit activities, unless these are unusual and serve their general purposes.

For example, the sale of real property held by the Foundation would be allowed, but it could not engage in the business of buying and selling property. It could not engage in trade, but could hold shares in commercial companies. Also exempt from this rule is the so-called passive income, i.e. interest, income from shares, bills or bonds, provided its dividends are used to fund its objectives outlined in the foundation charter.

figures and documents of a private interest foundation

The founder.This is the person or entity (it can be a company) who donates the assets or rights.

The assets. Also called the "corpus" or "body". They can be of any nature whatsoever, including property, cash, securities, etc... Most usually the Foundation is established with an initial cash contribution which may coincide with the minimum capital required for establishing it and other property or assets are gradually transferred afterwards.

The beneficiaries. These are the people for whose benefit the Private Interest Foundation is created. The founder himself has also the option to establish himself as a beneficiary. For example, he can be set up as the recipient of the benefits until his death, and afterwards they will pass on to other beneficiaries.

The Foundation Council. This is the body responsible for administering and carrying out the purposes of the Foundation. Normally it is made up by several persons appointed by the founder. They can be both individuals and legal entities. The founder himself, if he so desires, may be part of the council.

The Foundation charter. This is equivalent to the statutes or “articles of association" of corporations and therefore the most important document. It is usually required to be recorded in a public register and contains all relevant data on the Foundation. It describes its purpose, identifies the council members and establishes how beneficiaries are designated. These, however, do not need to be identified in the charter itself, but can be established by a supplementary private document, which has different names according to the specific jurisdiction. It can be called “bylaws”, regulations (reglamento) or supplementary statutes. As in the case of Trusts, the founder can usually include a clause for review or revocation.

The bylaws. This document is very similar to the "Letter of Wishes" used in Trusts. As explained earlier, it identifies the beneficiaries and establishes the conditions under which they will receive the benefits or profits of the Private Interest Foundation.

Foundations also offer many options for privacy protection. The founder may remain anonymous by using a nominee founder or professional council members. These nominees, if so desired, may issue a general power of attorney which empowers the real founder to manage the day to day matters of the institution, allowing him to maintain control over the assets, bank accounts and the investments of the Foundation. The legal consequences of such powers should however be always analyzed carefully, because holding control might have adverse tax consequences under applicable Law.

Another possibility is to introduce the figure of a protector, “curator” or a supervisory committee to monitor the actions of the council, with sufficient powers to replace its members, should it be necessary. This avoids the direct involvement of the founder, but guarantees a control mechanism to prevent abuse. As can be seen, there are many different alternatives.

Main Purposes

Basically, a Foundation can serve the same purpose as a Trust or a fiduciary relationship. The most usual purposes are the following:

Alternative to a will. It offers greater flexibility and avoids mandatory heirs, i.e. laws that oblige to surrender a specific percentage of the inheritance to the first-degree relatives.

Family purposes. To ensure pensions, annuities, for the education of children, support of minors or persons declared legally incapable, to serve as beneficiary and channel of an insurance policy, etc.

Asset protection. The assets of a Privat Interest Foundation are not subject to attachment and seizure, except in the case of debts incurred by the Foundation itself.

Alternative to a holding company. It can own shares and bonds of other entities or corporations. It can also manage stock investments, mutual funds, etc., all with a great level of privacy.

Tax Purposes. Tax benefits can be obtained by constituting an estate separate from the owner’s.

Guarantees. Similar to an “escrow agreement”. The asset that serves as collateral can be transferred to the Foundation which will deliver it to the creditor or the debtor depending on whether the debt has been paid off or not.

Most Popular Types of Private Interest Foundations

It is possible to establish a this kind of entity in many countries. They exist, for example, in Switzerland, Austria, The Netherlands, Sweden and even in the United States. But only very few places have developed specific legislation that provides all the legal guarantees to allow it to be used effectively by foreign citizens. The following are the most popular

  • The Liechtenstein Foundation (Stiftung). Traditionally the most popular and accepted. It exists since 1926.
  • The Liechtenstein Establishment (Anstalt). A variant consisting of a hybrid entity between a Foundation and a corporation. Very similar to the Stiftung, but also allows trading activities to some extent.
  • The Panamanian "Fundación de Interés Privado". Inspired by Liechtenstein’s Stiftung, it incorporates some innovations. Its lower cost and capital requirements have made it grow in popularity.
  • The Belizean Private Interest Foundation. A more recent and often unknown alternative, very similar to the one of Panama, but established with original paperwork in english.

On the other hand, other tax havens have also begun to pass legislation in this regard. Variants on Foundations are already to be found in the islands of St. Kitts and Nevis, the Bahamas, the Netherlands Antilles and more recently, the Seychelles. However, so far none of them has reached the popularity of the aforementioned.

The Private Interest Foundation is a very attractive alternative to the Trust, particularly for people residing Continental Law (Civil Law) jurisdictions where the latter is not recognized. The creation of a legal entity separate from the donour, and the difficulty of establishing the identity of the founder, turns the Foundation into an important tool for privacy and asset protection.