Foundation

Foundations

• Asset protection
• Segregated cells
• Consolidated asset management
• Inheritance planning
• Tax planning
• Professional and impartial intermediary

Although a Maltese Foundation cannot itself have a commercial purpose, unlike a company, it can, however, be the passive owner of a commercial business, commercial property or other commercial asset.

Foundations provide a useful device for individuals and organisations in various structures and transactions. Individuals may use foundations in various situations such as to plan their financial affairs and provide for future generations in an efficient and practical manner.

Malta 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.

Personal & Charitable Uses – Purpose Foundations

Foundations may be set up in Malta for the private benefit of one or more persons, or a defined class of persons in which the beneficiaries must be certain or for a particular purpose including a charitable purpose.

Once a foundation is established, a new legal person is created. Therefore, the foundation itself becomes the owner of the foundation property. Whilst the law on foundations is relatively new in Malta, foundations have been used in Malta for decades and we are at the forefront in this field with extensive experience.

With its own legal personality, distinct and separate from that of its founders, administrators and beneficiaries, foundations are defined as an organisation, constituted by one or more founders, where the assets are either:

• For the fulfilment of a specified purpose i.e. special purpose vehicles for commercial or securitisation transactions; or
• For the benefit of a named person or class of persons – private foundations

Foundations may be established by way of deed or by testamentary will. Purpose foundations can endure for an unlimited time, whilst private foundations are valid for a maximum of 100 years.

The minimum endowment of money or property to set up a private foundation must be at least €1,165, or €233 for social purpose or in respect of non-profit making purpose foundations.

Commercial Uses

Although a Maltese Foundation cannot itself have a commercial purpose, unlike a company, it can, however, be the passive owner of a commercial business, commercial property or other commercial asset. In an organisational context, foundations may be used in commercial transactions including as collective investment vehicles, as securitization vehicles or as shipping organisations.

As such, a Malta foundation can:

• Be endowed with commercial property or a shareholding in a profit making activity, or asset giving rise to income; or
• Subject to applicable regulation, be used as a collective investment vehicle, the passive holding of a common pool of assets, the management of which is delegated to a third party, including pension or employee benefit arrangements
• Be used as a vehicle for securitisation transactions.

Segregation of Cells

A foundation may also establish segregated cells within itself in order to achieve particular purposes with particular assets.

The law on foundations provides an innovative development in that it caters for the creation of segregated cells within a foundation.

Segregated cells allow assets and liabilities of an organisation to be hived off and insulated from other assets and liabilities of the same organisation – its assets and liabilities constitute a separate patrimony, distinct from all other assets and liabilities of the foundation or other cells.

However, segregated cells are not vested with legal personality and do not constitute distinct persons at law. Essentially this means that the assets of such cells are available for the fulfilment of any obligations undertaken by the foundation in relation to that cell, but not for any other liabilities entered into by the foundation itself, or in respect of other cells.

Conversion to a Trust

Another considerably advantageous characteristic of the law on foundations is that it provides for the conversion of a foundation into a trust and vice versa.

By allowing this conversion, the law grants the opportunity to individuals and organisations to benefit form the diverse characteristics of the both structures depending on the circumstances that may vary form time to time.

Comparison – Trusts and Foundations

Foundations – Taxation

The tax laws relating to the Malta taxation of foundation are set out in the Malta Income Tax Act and in the Foundations (Income Tax) Regulations.

A Malta foundation can be Malta taxed in one of two ways as chosen by the administrators of the Malta foundation:

Option 1 – 0% Taxed
The administrators of a foundation may also by notice in writing to the Commissioner irrevocably elect that a foundation be taxed under the provisions of the Income Tax Act applicable to trusts. If a Foundation elects to be taxed under the rules applicable to trusts, profits received by the Foundation would be charged to tax in the hands of the beneficiaries following distribution. If all beneficiaries are non-resident in Malta and all income derived by the Foundation is foreign-source, there would be no tax payable by the beneficiaries in Malta. Tax advice should be sought by beneficiaries in their jurisdiction of residence.

Option 2 – Taxed as a Company
As a company for income tax purposes in Malta unless the administrators opt to have the Foundation taxed under the rules applicable to trusts.

A Maltese Foundation is therefore subject to tax at 35% on its worldwide income however, upon receipt of a distribution of profits, the beneficiaries of the Foundation are generally entitled to a refund of 6/7ths of tax paid (for trading income) or 5/7ths tax paid (for passive income), thus reducing Malta tax liability to 5% or 10% respectively.

Thus, the foundation may benefit from the participation exemption provisions and/or foundation beneficiaries may be entitled to claim a refund of all or part of the tax paid at the level of the foundation. In the same manner, the foundation may also deduct for tax purposes any donations paid under the Donations (Sports & Culture) Rules (SL123.102).

Charitable Foundations – Taxation

Foundations which are enrolled in terms of the Voluntary Organisations Act or established for the achievement of a social purpose and with a non profit-making intention are subject to progressive rates of tax where the highest rate of tax is capped at 30% instead of 35%. The tax is calculated on the chargeable income of the foundation where no part of its profits constitutes distributable profits or are destined for the personal benefit of any member, administrator or owner of the property of the foundation.