Overview of Malta Foundations

Published 10 Mar 2016

The institute of foundations is not new to Malta, having been recognised for many years, even as early as Roman times. Prior to the Second Schedule to the Civil Code, foundations lacked a clearly defined legal framework within which to function, and it was with the inception of the Second Schedule that foundations were legislatively defined.

The term ‘foundation’ includes all organisations, institutes or similarly titled patrimonies which are set up through a bequest, endowment or appropriation of assets, but do not include trusts. In terms of Maltese law, two main types of foundations may be set up, that is:

 

PURPOSE FOUNDATIONS

Purpose foundations have no ascertained beneficiaries but are set up exclusively for:

  • A non-profit making organisation;
  • Any charitable, philanthropic or other social purpose;
  • Any other lawful purpose.

Due to its separate legal personality the foundation’s patrimony is owned by the foundation itself and administered by designated persons, known as ‘administrators’ for the fulfilment of the purpose for which the foundation was established.

 

Private Foundations

Private foundations are set up for the benefit of a named person or class of persons called beneficiaries. As with purpose foundations, the foundation’s patrimony is owned by the foundation itself, and is administered by the administrators for the benefit of the same beneficiaries.

Private foundations do not need to have any philanthropic element, and may undertake any lawful activity which is not commercial in nature. They may however, be endowed with commercial property such as vessels, shares, intellectual property and real estate if they take no active role in their operation.

 

Main features of a maltese foundation

Under Maltese law, a foundation is endowed with separate legal personality. Nevertheless, registration of the foundation with the Registrar for Legal Persons within the Public Registry in Malta is a mandatory requirement for the foundation to be granted separate legal personality. Even though, upon registration, the administration of the foundation is then entrusted to the administrators, the same assets are not owned by its administrators, nor the founder or beneficiaries, but are owned by the foundation itself.

In accordance with Maltese law, it is possible for a founder to maintain a certain degree of control over the foundation as compared with the concerns that this would typically raise within a trust context. It is also interesting to point out that the founder of a foundation may also be a beneficiary, as long as he is not the sole administrator.

Foundations act through their board of administrators, who, as fiduciaries are bound to carry out their duties with utmost good faith and must act honestly in all cases. In addition, there are other anti-abuse and regulatory statutory safeguards which exist in Malta.

As with several other jurisdictions, the administrators of foundations may also be legal entities, provided that, as per Maltese law, such entities have at least three directors. A recent development is that administrators of private foundations require the authorization of the Malta Financial Services Authority to act as such.

The creation of a foundation under Maltese law requires a minimum amount as an initial endowment, in the form of money or property of at least €1164.69. It is noteworthy that the law creates an exception in the case of a foundation established exclusively for a social purpose or as non-profit making, in which instance the endowment must be at least €232.94. Furthermore, a Maltese foundation may only be constituted by virtue of a public deed inter vivos or a will.

Under Maltese law, the statute of a private foundation may state that it is revocable, as long as acts which have been lawfully carried out are not invalidated or interrupted whilst still in progress. In addition, a private foundation may be terminated upon request of all the beneficiaries of the foundation. Nevertheless, if the founder is still alive, his consent is required. On the other hand, a purpose foundation may only be set up in an irrevocable manner and may not be subsequently revoked.

 

segregation of cells

Maltese law also allows the setting up of segregated cells within a foundation so that particular purposes can be achieved with particular assets. The ensuing result is that:

  • The assets as well as the liabilities of the cell shall form a distinct patrimony from all other assets and liabilities of the organization, including other cells which may be established.
  • The assets of the cell shall be available for the realisation of any obligations pertaining to that cell (but not with respect to any obligations contracted by the organisation for itself or in respect of other cells).
  • The assets of an organisation shall not be available for the realisation of the obligations undertaken in relation to that cell.
  • No individual can attempt to use any assets attributable to any cell to satisfy a liability which is not attributable to that cell.

 

can Foundations be converted into other organisations?

A unique aspect of Maltese law is that it allows for the possibility of converting a foundation into another type of organization, including a trust. Therefore, one can appreciate the great amount of flexibility in structuring one’s affairs and adapting to changing circumstances. It is also possible to amalgamate two or more organisations and to divide an organisation into two or more organisations.

 

foundations as compared with trusts

In Malta, foundations complement the law of trusts quite well, and in fact share a number of similarities.

Similarities

  • Possibility of appointing a protector to supervise the acts of the administrators or trustees.
  • Both private foundations and trusts are created for the benefit of beneficiaries who are identifiable or ascertainable.

Differences

  • The duration for foundations is limited to a maximum period of 100 years whilst the duration for trusts is limited to a maximum period of 125 years.
  • The extent to which the settlor and founder may be involved in the trust, distinguishes these two institutes in a significant manner. The amount of control given to the founder exceeds that given to the settlor. This is due to the fact that whilst the trustee must at all times act in accordance with the terms of the trust, the founder is able to exercise supervision over the administration of a foundation.
  • Whilst a settlor may only amend the trust instrument if the terms of the trust provide as such, with private foundations, founders can amend the foundation deed and add or remove beneficiaries (always subject to the terms of the deed of foundation).
  • In the case of a trust, the beneficiaries may require the trustee to terminate the trust and distribute the trust property, and this notwithstanding the terms of the trust. On the other hand, with a private foundation, the beneficiaries can only make such a request if the founder has not expressly excluded the right to revoke the foundation. In addition, if the founder has not done so and is still alive, this right is subject to the founder’s consent. This clearly provides added protection for the founder and ensures that the beneficiaries benefit out of the foundation in accordance with the wishes of the foundation.
  • A further area where the control highlighted by the founder is manifested pertains to the addition of property to the original trust or foundation. Whilst in the case trusts, a trustee may accept additional property only subject to the same terms of the trust, the founder may add to the assets of the foundation by additional endowments at any time.
  • The most significant difference between a trust and a foundation arises from the fact that unlike a trust, a foundation is a juridical person enjoying separate legal personality. Therefore, whilst the trustee holds the trust property in his own name or under his control, an administrator has control over the foundation property but would not hold the same in his own name.

 

advantages of foundations over trusts

  • Maltese foundations are able to offer much more in terms of scope, and, in fact, more purposes may be considered and attained when using a foundation as compared to a trust.
  • It is significant to note that with respect to the duty of information owed by both the administrator of a foundation and the trustee, the founder is placed in a more advantageous position as this duty is always present. However, the settlor only enjoys this right subject to the terms of the trust.
  • The foundation enjoys all the advantages that arise from it being a juridical person, distinct from its founders, administrators and beneficiaries, and effectively binds no one but itself.

 

Fiscal treatment

In terms of Maltese fiscal laws, a foundation can be treated as a company which is resident and domiciled in Malta, and can therefore benefit from Malta’s imputation tax system and, accordingly, tax suffered and paid in Malta by the foundation is directly attributed to the beneficiaries. Alternatively, the administrator, by notice in writing to the Commissioner for Voluntary Organizations, can irrevocably elect that the foundation should be treated as a trust for tax purposes (thus wholly transparent for Malta tax purposes).

The election to be treated as a trust generates a number of private asset planning opportunities, particularly where the Founder and beneficiaries are not resident and domiciled in Malta. In this situation, no tax or duty is payable in Malta on settlement or on income attributable to the foundation. 

Where a Maltese foundation has protected cells, each cell must determine which is its most appropriate taxation route. Maltese income tax authorities treat separate cells as different entities and each cell will file its own return and be assessed individually.

 

practical uses / benefits

  • Succession planning
  • Asset protection
  • Securitization vehicles
  • Hold shares in local/foreign companies
  • Collective investment schemes
  • Collection of royalties
  • Invest in shares/bonds
  • Own real estate
  • Manage pension plans for employees
  • Spendthrift beneficiaries
  • Care for persons with special needs
  • Care for minors
  • Partners / lifestyle planning
  • Charitable / Philanthropic uses
  • Perpetuity / Winding up
  • Conversion between foundations and trusts

 

This publication is intended to provide an overview of the subject matter (errors and omissions excepted) and is not comprehensive in nature or to be construed as legal, tax or investment advice. We recommend that clients seek professional advice on any particular matter. 

 

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