Foundation

Benefits and advantages to register your foundation in Malta

Malta Foundation

All the benefits and advantages to register your foundation in Europe.

Form a Foundation in Malta

Maltese Foundations are regulated by the Second Schedule of the Civil Code (Chapter 16 of the Laws of Malta), which was introduced by Act XIII of 2007 to complement the detailed regulatory framework for trustee and fiduciary activities, and voluntary organisations.

Legal nature of foundations in Malta

In terms of the said Second Schedule, foundations are defined as constituting an organisation consisting of a universality of things constituted by one or more founders whereby assets are destined either:

for the fulfilment of a specified purpose – such foundations being referred to as ‘purpose foundations’; or
for the benefit of a named person or class of persons – such foundations being referred to as ‘private foundations’.

Foundations may be constituted by virtue of a public deed or by a will. The deed of foundation is required to contain certain mandatory details including the foundation’s name, its registered address, a description of the constitutive assets with which it is formed (a minimum amount or value of €1,165 applies but is lowered to €233 if the foundation is established exclusively for a social purpose or as a non-profit making foundation) and its purposes and/or objects.

Registration of a foundation under Maltese law

Registration of a foundation under Maltese law serves to vest the foundation with legal personality distinct and separate from that of its founders, administrators and beneficiaries (where applicable). By virtue of its separate legal personality, a foundation is capable of holding assets for its own benefit and of incurring obligations for which it is liable with all its assets, present and future. A foundation is not, however, liable for the obligations of any other person except to the extent that it expressly agrees to be so liable.

Administration of a Malta-registered foundation

The administrator of a Malta-registered foundation is primarily responsible for keeping accurate records of all the foundation’s assets and liabilities and income and expenditure, maintaining possession and control of the foundation’s property, safeguarding such property and ensuring compliance with the foundation statute and any applicable laws. In particular, the administrators must ensure that the foundation’s assets and liabilities are kept distinct from that of its founder, administrators or any beneficiaries.

Tax on Maltese foundations

Maltese foundations are very attractive from a tax perspective. The Malta Foundation can elect to be treated in the same manner as a company that is ordinarily resident and domiciled in Malta. This results in the chargeable income accruing to and/or gains realised by a foundation to be subject to tax in Malta on a worldwide basis at the flat rate of 35%.

However, upon a distribution of qualifying foreign or local source income by the foundation in favour of its beneficiaries, the said beneficiaries would generally be entitled to a refund of 6/7ths of the Malta tax suffered by the foundation on the qualifying income out of which a distribution was effected (thus reducing the combined overall effective Malta tax rate to 5%).

Alternatively, the administrators of a foundation may irrevocably elect to have the foundation taxed in Malta under the rules applicable to trusts. To the extent that none of the beneficiaries of the foundation are persons resident in Malta and that any assets acquired and held by the foundation shall be located outside Malta, all income and/or gains derived by the foundation would, for Malta tax purposes, be deemed to have been derived directly by the said beneficiaries (such that the foundation would be totally transparent for Malta tax purposes). In turn, such non-resident beneficiaries would not be chargeable to tax in Malta on non-Malta source income and/or gains deemed to have been derived directly by them as aforesaid.

Use for tax advantage

Income/Receipt of capital gains

Income tax, corporate tax and capital gains tax can in most cases be avoided or at least deferred indefinitely with the proper structuring of a Maltese foundation.

Inheritance Planning

Foundations are also used to avoid inheritance tax and death duties by transferring assets away from the founder prior to death.

Controlled Foreign Corporation (CFC) rules

Most countries attempt to some degree to tax and regulate foreign entities which they feel are being used to avoid tax due to them or which they feel falls within their remit due to being operated within their borders. The principle basis for these rules is, in the case of foundations, the location of the administrators; specifically where the administrators spend the majority of their time.

Therefore, a foundation administered in Malta may also be taxable elsewhere if the administrators spend most of their time there in a foreign country. Where foundations are taxable in more than one country there may be dual taxation arrangements in place however if one of the countries is a high tax area this is likely to defeat the tax planning reasons for which the foundation was established. Various methods have been used to attempt to avoid this situation with different degrees of success.

The method of simply holding meetings in the country of registration is, for example, likely to be ineffective in almost all cases. The method of appointing local administrators may, if operated properly, be effective in avoiding CFC rules based on management alone. More sophisticated anti-avoidance rules may seek to attack a foreign entity on the basis of a lack of substance or that it is wholly or mainly artificial and therefore should be ignored for tax purposes.

More sophisticated systems may also base taxation of companies not simply on their management but also on their ownership and voting rights on the basis that the shareholders having the right to appoint and remove the board of directors are effectively in control of the company. Since foundations do not have owners, they may be extremely effective in avoiding anti-avoidance rules of this nature provided they are properly administered.

Non-tax related uses

The following is a list of some of the uses of foundations which are not tax related, or at least not primarily motivated by tax advantage.

Confidentiality

As outlined above Maltese foundations provide extremely high levels of confidentiality (the highest levels possible in the EU) and could also include the possibility of a structure with no beneficial owners, in the case of purpose foundations.

Securitisation vehicles

Maltese law envisages the use of foundations in place of a trust as a suitable vehicle for the securitisation of debts and the issue of bonds against those debts.

Collective investments scheme

Maltese law also envisages the use of foundations as a suitable vehicle for collective investment schemes. For more information about this area please see our main article on the fund industry in Malta.

Asset protection

Foundations may also be used for asset protection. A client who is about to start a career with a high risk of litigation and who for some reason cannot take advantage of a limited liability vehicle may wish to move assets away to protect them in case they are sued in the future. The asset protection function of foundations may also be effective against creditors, spouses and tax authorities provided that any such obligations to pay arise after the foundation was set up: a foundation cannot be used to avoid a legitimate debt.

Succession planning

Foundations can be used to avoid the separation of family estates and prevent disputes between heirs. In more general terms a foundation can be used in the same way as a will to ensure, for example, that a spouse has the use of the family home after the death of the settlor or to make provision for partners, lovers etc. and may even be constituted by a Maltese will. It may also be possible to achieve a greater degree of specificity about the division of the settlor’s estate on death than may be permissible without a foundation such as the treatment of reckless heirs, the care of beneficiaries with special needs and provision for partners or lovers not recognised by law etc. (these points are explored more below). The use of a foundation may therefore afford a greater degree of privacy and flexibility than may be possible with a will alone.

Spendthrift beneficiaries

Foundations can be created to prevent reckless heirs from squandering family wealth on the death of their parents by limiting their interest to income or to capital (at least until they reach a certain age). Foundations can be drafted such that a beneficiary is alienated from interest if they are declared bankrupt in order to protect the foundation from attack from creditors of the beneficiary.

Care for persons with special needs and minors

Foundations can be used to make provision for beneficiaries who will be unable to care for themselves on the death of the founder and in situations where it may be appropriate that one heir should benefit more from the death of the founder since they require a greater amount of care with its associated costs.

Partners/Lifestyle planning

Partners who are not married, gay or whose familial arrangements are not straight-forward may find that some countries’ legal systems do not provide adequate solutions on their death or separation. In such cases a specifically drafted foundation can be used to ensure that partners and/or children are treated as the founder intends.

Charitable/Philanthropic uses

Foundations are a popular choice for charitable purposes. Unlike trusts (which in Malta as in most countries are not permitted to operate for a purpose but rather must have beneficiaries) foundations give a much greater degree of flexibility since they are enforceable without beneficiaries which makes them suitable for many situations where a trust would not be effective such as the advancement of an area of special interest or the establishment of a disaster relief fund.

Perpetuity/Winding up

Foundations in Malta can be formed for a maximum of one hundred years except in the cases of foundations operating as collective investments scheme or securitisation vehicles. Foundations may make specific provision for their winding up in their foundation deed and in any case can be wound up by application to court made by all persons entitled to benefit under the foundation (assuming they are all adults).

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