FOUNDATIONS IN MALTA
A foundation, in some cases, may be used as an alternative to trusts and can achieve the same objectives as trusts. In its simple terms, a foundation is an organization having a separate legal personality and has the same benefits of a Company but also carries the same benefits of a trust in the sense that it can provide confidentiality, asset protection, consolidated asset management, provision for beneficiaries, inheritance in planning, tax planning or achieve philanthropic purposes. The Foundation Administrators are vested with fiduciary obligations towards the beneficiaries and therefore are requested to be licensed entities in terms of the Trusts and Trustees Act.
Foundations are typically utilized by high-net worth individuals who require to structure and plan their finances, both present and future. They are ideal vehicles for estate planning when the founder wishes to ensure sufficient and specific provision for his descendants. From an investment perspective, foundations may also be used to ensure the maintenance and separate personality of the property in question.
Foundations in Malta
Foundations have long been found in Malta, however they have only recently become regulated by codified legislation, introduced on the 1st of April 2008. Maltese Foundations are regulated by the Second Schedule of the Civil Maltese Code which dedicates an entire sub-title to foundations.
A foundation can only be constituted in writing, either by a public deed or by a will. The foundation deed must be registered with the Office of the Registrar of Legal Persons to enable the foundation to become the owner of the foundation property.
The Maltese legal system offers a greater degree of privacy to foundations than it does to other structures such as companies. In addition the legal system has undertaken not to violate the confidentiality of the beneficiaries of a foundation even in the case of legal proceeding and accordingly all such procedures are held in closed court and conducted in a manner which preserves confidentiality of the beneficiaries. Further on, the identity of the founder may be concealed by registering a Special Purpose Vehicle (SPV) for this purpose or using a service provider to act as founder. Having said this, in order for the foundation to operate effectively, the agent would still need to disclose the identity of the founders, beneficiaries and protector (if applicable) to the banks and any other institutions (only if requested) and this to comply with the Anti-Money Laundering and Know Your Client rules. In view of this, full due diligence will still be requested for our files.
Types of Foundations
Maltese legislation allows for the set-up of two types of foundations, having particular uses and benefits to accommodate the clients' needs.
Purpose Foundations - are established exclusively for a charitable, philanthropic or any other special purpose, as a non-profit organization or for any other lawful purpose. Purpose foundations are requested to make an endowment of money or property to amount to at least EUR 233.
Private Foundations - as the name implies, private foundations are established for a private benefit and therefore for a named person or class of persons called beneficiaries. Unless evident from the statute, a foundation is always considered to be a private foundation. The founders also need to make an endowment of money or property worth at least EUR 1,165.
Rights of the Founder/s
The individual or individuals are the people who establish the foundation and may:
Exercise supervision over the administration;
Intervene in the manner of appointment of administrators;
Intervene in the disposal of assets;
May also be an administrator;
May be a beneficiary during his lifetime, but cannot act as a sole administrator of the foundation
Agent as Administrator of the Foundation
The agents duties as administrators of the foundation include the following:
They are responsible for maintaining possession and control of the property of the foundation, safeguarding such property and ensuring compliance with the statute of the foundation and the law;
They are bound by fiduciary obligations stipulated in our Civil Code.
Foundations in Practice
Foundations may be used for any of the following purposes:
As an estate planning vehicle;
As an asset protection vehicle;
As a vehicle through which one can care for persons with special needs;
To manage payments of money or distribution of assets to family and provide for education, housing maintenance or profit sharing in the family;
To hold shares in companies;
As a vehicle for the collection of royalties;
As a vehicle to invest in shares or bonds;
As a vehicle to own real estate or other assets of considerable value;
To manage pension plans for employees
Having said this, foundations may not be established to trade but may own commercial property or a shareholding in a profit making company.
All documentation of private foundations, except for those which are registered, cannot be made available to third parties without obtaining prior written consent of the administrators, the supervisory council, if any, or the Court and only when it is satisfied that such third parties have a legitimate interest in the information.
Tax Treatment of Foundations
For tax purposes, foundations are akin to limited liability companies resident and domiciled in Malta. Private foundations do not enjoy exemptions and are taxed at the rate of 35% on their worldwide profits in the same manner as a company's taxable profits.
Where however a foundation is either enrolled in terms of the Voluntary Organisations Act, or, where not so enrolled, is established for the achievement of a social purpose and is non-profit making, it would only be taxed in the same manner as a company where it informs the Commissioner of Inland Revenue in writing that it opts irrevocably to be treated in this manner. Where such option is exercised, any rules pertaining to the taxation of income applicable to companies as provided for under the laws of Malta shall equally apply to the foundation. 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.
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. As a general rule where at least one of the trustees is a person resident in Malta, tax is be payable in Malta on any income attributable to the trust. There are however certain situations where income is not deemed to be attributable to the trust, such as for example where all the income of the trust consists of income arising outside Malta and all the beneficiaries are persons who are either not ordinarily resident in Malta or not domiciled in Malta. In such a case it is deemed that such income is derived directly by the beneficiaries of the foundation. Consequently, a Maltese foundation is beneficial and particularly advantageous in cases where the foundation involves non-resident founders, beneficiaries and assets.
Moreover, 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.
The administrators need to keep records of all assets and liabilities, as well as the income and expenditure of the foundation for annual financial periods. Accordingly, the procedures shall follow the general accounting procedures as stipulated by the Companies Act and IFRSs. As for documentation, this will entirely depend on the activity and/or assets held in foundation, examples may include the following; bank statements, loan agreements (if applicable), portfolio valuations/reports/statements (if applicable), valuation reports in the case of immovable property (if applicable), and financial statements of the investment if shares in the investment are held for value appreciation (not for trading).