Malta Foundations

Foundations have been described as the civil law alternative to trusts. Maltese foundations are non-commercial incorporated entities which have the benefits of trusts with the added protection of having a separate legal personality. Foundations are not a new concept and apparently trace their origins to the legal traditions of ancient Rome or Greece. Foundations have existed in Maltese law for at least a hundred years but a recent amendment to the civil code and a published guidance statement in 2007 has clarified their usage in the modern financial services industry. Maltese foundations in their current form are a very new vehicle which is likely to take up an important place in compliant and intelligent international tax planning.

Scope of Operation
Maltese foundations 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. Maltese foundations are suitable for passive holding only and if trading is required then the appropriate vehicle is likely to be a private limited company owned by a foundation. For more information on private limited companies in Malta please see our main article.

Private and Purpose Foundations
Maltese foundations can be either private or purpose foundations. Purpose foundations are established for a purpose, without beneficiaries and are generally philanthropic in nature. They can become registered charities and may receive tax exempt status (explained below). Private foundations do not need to have any philanthropic element and are established for the benefit of a beneficiary or group of beneficiaries. Private foundations are likely to be of much greater interest since they offer many advantages including a number of tax benefits (explained below). This article is principally concerned with private foundations but where important distinctions exist they will be highlighted and it is worth noting the existence of purpose foundation for philanthropic or social purposes.

Taxation

Throughout this article unless stated otherwise it is to be assumed that the taxation rules relate to foundations which do not have Maltese beneficiaries. If any of the beneficiaries are Maltese resident or intend to become Maltese resident different rules apply though it may be possible to achieve the below preferential rates provided the Maltese resident beneficiaries are not Maltese nationals and that they hold their interest in the foundation through some foreign vehicle. In this case advice should be sought before proceeding.

Private Foundations
Private foundations can elect to be taxed either as company or as a trust. The differences are set out below.

Taxed as a Company (5% or 10%)
Maltese companies pay an effective rate of 5% tax (in the case of trading income) or 10% tax (in the case of passive income) which is achieved by the payment of 35% tax and the refund to the shareholders of either 6/7ths of tax paid (for trading income) or 5/7ths tax paid (for passive income). For more detail on the mechanism of corporate taxation please see our main article on Maltese companies. Private foundations are by default taxed in the same way with the foundation paying 35% tax and the tax refund being paid to the beneficiaries.

Taxed as a Trust (0%)
Trusts in Malta can elect to be taxed as a company or to be taxed on their beneficiaries and assuming that these beneficiaries are not Maltese resident then the income of the trust is outside the scope of Maltese income tax. Foundations can also make the same election and be taxed in accordance with the trusts rules which means that they are see-through for tax purposes and there is no tax leakage in Malta. In this case all gains made by the foundation are deemed to arise on the beneficiaries directly and this income will not be subject to tax in Malta. This is one of the very few ways to achieve an effective rate of 0% tax in europe. The declaration to be taxed as a trust is irrevocable and must be made in writing to local taxation authorities. In most cases this will not matter unless the foundation has or is likely to have beneficiaries who are Maltese residents or intend to become so in the future.

Purpose Foundations
Purpose foundations may be exempt from tax subject to approval by local taxation authorities since charitable activities are exempt from income tax. However if an exemption from tax cannot be secured on this basis then the foundation will be taxed at 35%.

Protected Cell Foundations
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. Please see below for more details on protected cell foundations.

Formation and Administration

Separate Legal Personality
Maltese foundations are incorporated entities and have a separate legal identity to that of their founder, beneficiaries, administrators, council and protectors. This means that they can own property in their own name, open bank accounts, sue and be sued and are not affected by the death or insolvency of any involved parties.

Confidentiality
The Maltese legal system affords a far greater degree of privacy to foundations than it does to other structures such as companies. For example it is possible to maintain the confidentiality of the beneficiaries (for more information please see the below section on registration formalities). 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 the confidentiality of the beneficiaries. 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. Whilst the high degree of confidentiality is generally welcome it is to be noted that notwithstanding the above in order to operate effectively (for example to take receipt of many types of assets including shares or to open a bank account) this level of confidentiality may need to be lifted to some extent in order to disclose the identity of beneficiaries to banks and other institutions since Anti-Money Laundering (AML) and Know Your Client (KYC) rules require these institutions to identify the beneficiaries under a foundation. Purpose foundations, having no beneficiaries, are an exception to this rule.

Formation and Costs
Maltese foundations may be registered during life by registered public deed or on death by will. Foundations relevant to international clients will be made by deed and this article focusses on this route but it is to be noted that testimonial foundations also exist. Foundations are registered by the Registrar for Legal Persons which is an authority distinct from the Malta regulator for companies and trusts. The registration and operation of private foundations is regulated in Malta by its own class of licence which is an add-on licence to the trust licence. As will become apparent throughout this article the constituent documents of foundations need to be tailored to the needs of the client to a much greater extent than is the case with a company or even a trust. This fact means that foundations generally have a higher formation cost than other vehicles and this cost will vary depending on the complexity of the client’s requirements.

Endowment
This initial endowment must be at least 1,200 EUR (approximately, the exact amount is slightly less and is calculated based on the Maltese Lira). This endowment can be made either in cash (in which case a bank deposit slip is required as proof) or by the contribution of a non-cash asset (in which case a local auditors report is required). At this point fees are paid which are on a sliding scale depending on the size of the initial endowment. Since there is no prohibition on the making of subsequent endowments (though they must be reported) it is unclear in what circumstances it would be advantageous to start with larger endowment than 1,200 EUR.  Endowments are irrevocable.

Documents to be Presented Upon Registration
The main document submitted upon registration is the constituting deed (which is the equivalent to the Memorandum and Articles of Association of a company or the trust instrument of a trust). This deed governs the way the foundation can operate and the roles of the various involved parties (for more details please see the below section on administration).

Timescale for Registration
Maltese foundations are a new vehicle and they are not administered by the same regulator as companies and trusts. Given the relatively much smaller size, reduced opening hours and lower level of international exposure of the registrar Maltese foundations currently take much longer to form than companies. Whilst a company can be usually be formed in the same day the capital and diligence are received a foundation will take considerably longer and clients should expect to wait not less than two weeks and not more than two months.

Protected Cell Foundations
An innovation of Maltese foundations is that they can be formed with segregated cells, similar to a protected cell company but unlike protected cell companies their usage is not restricted (except insofar as all foundations are restricted to non-commercial purposes). A protected cell foundation is registered with a number of different cells which are segregated from each other for all purposes including their objective, their beneficiaries (or purposes), their taxation and choice of tax regime and the ownership of their assets in the case of the foundation being sued.

Deed
The deed is a public document and must contain: 1) the name of foundation (which must end in the word ‘foundation’); 2) the foundation’s address in Malta; 3) the purpose or objects of the foundations; 4) evidence of payment of initial endowment (explained above); 5) details of the administrators or if none have yet been appointed then the particulars of how they will be appointed; 6) details of the legal representation if different (for an explanation of legal representation in Malta please see our article on Maltese private limited companies); 7) the term for which the foundation is established (which failing any provision to the contrary will be one hundred years in the case of most foundations); 8) if administrators are non-Maltese then the details of the local representative; and, 9) in the case of private foundations only the licence of the person forming the foundation. Note that the beneficiaries of a private foundation do no need to be included in the public deed but if they are not then the deed must include a statement to say that it is constituted for the benefit of named beneficiaries and these beneficiaries must be set out in a separate (non-public document) signed by the founder and given to the administrators. This is a provision designed to afford greater confidentiality. Please see above for more details on the confidentiality measures Maltese law affords to foundations.

Role of the Founder
The founder of a Maltese foundation has a similar role to the settlor of a trust; they contribute the endowment property or cash which forms the foundation. Whilst the settlor of a trust cannot have any involvement in the operation of a discretionary trust the founder of a foundation may retain as much control as they wish and can do so either directly or in the role of administrator, member of the supervisory council and/or beneficiary. The only prohibition on the role of founder is that they if they are also the sole beneficiary then cannot be the sole administrator. For more details on this point please see below in our section on comparison of foundations with trusts. The founder can be any natural or legal person or a trust. Since the foundation deed is signed by the founder it may be desirable to establish a Special Purpose Vehicle (SPV) to make the endowment or to use a service provider since this will afford a greater level of confidentiality. Founders generally have the right to see the accounts of the foundation but this is specified in the foundation deed.

Role of Administrators
Administrators are similar to the directors of a company and deal with the management of the foundation for the benefit of the beneficiaries (or purpose) in accordance with the terms of the foundation deed. They are appointed either in the deed directly or the method of their appointment may be set out. Their replacement, right to remuneration, powers, level of disclosure obligations, dismissal and obligations to consult with the protector are set out in the foundation deed. The administrators can be either in Malta or outside but if they are all outside then a local Maltese representative must be appointed who must hold a foundation licence. In most cases this person or entity will be provided by a service provider. Administrators can be any natural or legal person. The only restriction applies in the case of purpose foundation where the administrator, if a company, must have at least three directors who are natural persons. Administrators have the rights to see the accounts. They can also delegate their authority to a supervisory council (see below for information on the supervisory council) and subject to the rules of the foundation deed may need to consult with the a protector (see below for details on the role of protector). The most important role of the administrators is to decide who to benefit under the foundation and to what extent. This decision may be tightly controlled or may afford a very great discretion including the power to appoint and remove beneficiaries.

Role of the Protector
Protectors can be any natural or legal person and may be the same person or entity as the founder and may be a beneficiary. The protector has (subject to the terms of the foundation deed) a right to be consulted before certain actions are taken and may have a veto right. The law allows for a wide discretion generally on all roles in a foundation and particularly the role of protector. Protectors are a trust law concept introduced recently to add a degree of comfort to clients uncomfortable with the complete discretion and total transfer of ownership which occurs in the establishment of trusts (for more information on trusts generally and on the role of protectors please see our main article on trusts in the products section). Whilst we do not recommend the use of protectors under discretionary trusts (since they are likely to interfere with the discretion of the trusts risking the trusts being found to be a sham) this is not as important a consideration for foundations.

Role of Beneficiaries
The beneficiaries of a Maltese foundation are similar to the beneficiaries under a trust in that they have the right to benefit from the foundation subject to the terms of the foundation deed. Purpose foundations do not need to have beneficiaries but private foundations must have at least one which may be a natural or legal person, a trust or another foundation. In Malta beneficiaries have a right to information including accounts (unless this is specifically excluded) and can have any other rights as set out in the foundation deed. Both rights provided by law and those set out in the foundation deed are legally enforceable in Malta. An interest in the foundation is a personal right and therefore should not be enforceable by creditors including heirs against the foundation itself however this is an area of law with conflicts with general provisions of Maltese inheritance law. The position for foundations has not been tested but in similar circumstances Maltese courts have held that inheritance rules override trust rules on segregation of  assets under trust from the settlor’s estate (and it is for this reason amongst others that we do not recommend the use of the Maltese trust. For more information on this please see our main article on trusts in Malta.). In any case it is possible to appoint beneficiaries whose right to benefit is contingent on some circumstance. If attacks by creditors of the founder or the beneficiaries on the foundation is a concern (including tax authorities and heirs) it may be prudent to make the entitlement to any benefit conditional on not being under attack from creditors or extinguish it on bankruptcy.

Role of the Supervisory Council
The supervisory council is not essential and is more applicable to purpose or charitable foundations than to private foundations where there will be a greater amount of administrative work. The Supervisory council, if appointed, may comprise the founder, the protectors, any of the beneficiaries, and other legal or natural person in any mixture. It receives authority from the administrators to assist in their functions, to advise them or to hold them accountable. The role of the council, its members, their powers and the scope of their operation is specific to the terms of each foundation (or foundation cell in the case of protected cell foundations) but the law allows a great deal of flexibility in this regard.

Accounts
Maltese foundations must prepare audited accounts but the associated cost is one of the lowest in Europe. For more information on the preparation of accounts please see our main article on accountancy in Malta.

Lack of Legal Certainty
Maltese foundations (in their current incarnation at least) are a new vehicle and the law surrounding them is relatively sparse and untested. Malta has a poor record for the implementation of trust law and clients may feel the time is not right for the use of a foundation whether because of uncertainty about how Malta will interpret foundation law and how Maltese foundations will be treated elsewhere. The concern regarding Malta’s treatment of foundations can realistically be dismissed since the poor implementation of trusts resulted from a conflict between civil law and common law systems whereas foundations are clearly common law and sit very easily within the Maltese legal framework. The foreign treatment of Maltese foundations is uncertain but parallels can be drawn with other foundations such as Panama, Luxembourg and Switzerland where this is not usually problematic. One argument for the use of Maltese foundations may be that in their relatively new state their lack of a requirement for philanthropic purposes (in the case of private foundations) may not be known making the Maltese foundation an alternative to private trust without any of the associated stigma (for information about the connection between trusts and tax planning please see our article on trusts in the products sections). In any case Maltese foundations more than make up for their lacklustre trust framework.

Regarding Continuity
Foundations, unlike companies, cannot continue indefinitely and are usually limited to a perpetuity period (explained below). This raises concerns about what happens after this period has elapsed. In many cases this will not be an important consideration (such as where provision is made to terminate the foundation on the death of the founder) however if it is a concern it can be quite easily addressed by making the founder or one of the beneficiaries a limited company (which does have an indefinite continuity) and arranging matters in the foundation deed such that this benefit before the perpetuity period elapses.

Rogue Administrators
A frequently raised concern is that rogue administrators may abscond with foundation property or at least may become unanswerable to the beneficiaries. This is more of a concern for trustees than foundation administrators since the obligations of the administrator (including the obligation to provide information) is (by contrast with a trust) both available in a public document legally enforceable as of right (there is no question of establishing sufficient standing to take action as in trust law). Finally comfort may be taken by the fact that holders of foundation licences in Malta must first have obtained a trust licence which is a very high level of authorisation and includes, amongst other things, a requirement for insurance sufficient to address this sort of losses. This area can also be controlled to some extent by limiting the discretion of the administrators for example stopping short of the right to remove beneficiaries or curtailing this right by recourse to a supervisory council or protector or both. These controls can be included in the foundation deed as can provisions requiring the administrators to act honestly and fairly and/or the creating of a right of recourse by removed beneficiaries either to the supervisory council or by application to court.

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). This provision is essentially the same as the rule in trusts that the beneficiaries may collectively set the trust aside (sometimes called the Saunders Vautier rule).

Conversion Between Trusts and Foundations
Under Maltese law trusts may be converted into foundations and vice versa. This provision demonstrates the close association in the mind of the legislature of these two quite different concepts and is an illustration of the problems incurred when trying to implement trusts into an alien and fundamentally incompatible legal system. Whilst it is unlikely that there would be any need to change a foundation into a trust the reverse may be desirable in some limited cases and the option may perhaps provide some degree of future flexibility. For more information on Maltese trusts please see our main article on Trusts in Malta.

Comparison of Foundations with Companies and Trusts

The following table illustrates the main differences between foundation, trusts and companies. For more detail on trusts please see our main articles on trusts in the product section, companies in the product section, Maltese Trusts or Maltese Private Companies.

Maltese Alternatives