Panama Private Interest Foundations: Structure and US tax classification

Overview

Panama Private Interest Foundations (PIFs) are hybrid entities – part trust, part corporation – created under Panama’s Private Foundation Law of 1995. They are often used as vehicles for cross-border investments, but their unique nature creates complex US tax and reporting considerations that require careful planning.

What are PIFs?

PIFs are legal entities without shareholders, structured around a founder, a foundation council (like a board of directors), an optional protector, and beneficiaries named in the charter. Registered in Panama’s Public Registry, PIFs can own assets, manage investments, and conduct business if profits support the foundation’s purpose. 

Under Panama’s territorial tax system, foreign-source income is exempt, making PIFs ideal for asset protection, estate planning, and confidentiality. Assets are separate from the founder’s estate and shielded from creditors, while beneficiary identities remain private.

US classification of PIFs

PIFs often hold US assets, including interests in entities generating passive or active income. For US tax purposes, their classification as a trust or corporation follows “substance over form” principles, based on all relevant facts. Key factors include the foundation’s purpose and governing documents, the nature of its activities, founder control, whether the founder is the sole beneficiary, and whether income is distributed to non-beneficiaries in a manner resembling shareholders.

If the US Internal Revenue Service (IRS) treats a foundation as a corporation, US tax and reporting obligations arise. For example, if US persons control the PIF, it may be classified as a controlled foreign corporation (CFC), triggering taxable income for US persons, including global intangible low-taxed income (GILTI) and Subpart F inclusions. If the PIF is treated as a corporation controlled by foreign persons, this may affect the taxation of income flows from the US, including a 30% withholding tax on dividends, interest, and royalties.

Alternatively, if the foundation is characterised as a trust for US tax purposes, it is generally treated as a non-grantor trust if the founder cannot revoke the foundation. If the foundation has US beneficiaries, US tax rules may recharacterise the foundation as a grantor trust for US tax purposes. If such grantor trust holds US-situs assets, those assets may be subject to US estate tax upon the death of the foreign grantor. 

Planning considerations

Given the risk that US tax characterisation of PIFs may differ from taxpayer expectations, proposed US investment structures utilising PIFs must be carefully analysed to determine the correct US tax treatment. Existing PIF structures with US investments should be reviewed from a US tax perspective to ensure there are no latent tax risks that could result in unpleasant surprises.

---

Fernando Lopez is an International Tax Services partner with Mowery & Schoenfeld, leading the service line. With a focus on helping his clients expand in the US and foreign markets, Fernando specialises in cross-border tax planning and structuring.