One of the relatively recent introductions to Maltese law, are Maltese foundations. An effective asset protection tool, to be considered in parallel to trusts, Maltese foundations may also be used for the carrying out of cultural or philanthropic purposes. At the outset, therefore, there are two distinct branches of foundations:
- Private foundations – serving as a private asset protection tool and serving purely private benefits;
- Purpose foundations – pursuing cultural, sporting and philanthropic goals
Private foundations may be constituted by a public deed or by a will, published in front of a notary public.
The foundation bears many similarities with a trust, to the extent that it is possible for a trust to change, if the statutes so allow into a foundation and vice versa.
In lieu of the settlor found in a trust, the equivalent powers are held in a founder or founders. The administration of the foundation is entrusted to administrators (the equivalent term in a trust would be ‘the trustee’), all of this for the benefit of the beneficiaries. Like trusts, it is possible to have protectors, acting as vigilant watchdogs to the administration of the foundation, or potentially to have discretionary and veto powers. And similar to trusts, a foundation has a separate patrimony, allowing it to segregate the assets of the founder to the foundation, in such a manner, that the assets are divested from the founder and effectively become the property of the foundation. Furthermore, like trusts, the scope of a foundation is not to engage in active commercial trading. The main thrust for a foundation is that of holding assets, albeit it is perfectly possible for administrators of foundations, to manage the assets of the foundation and to undertake and implement all such measures as necessary for the increment and preservation of the assets held by the foundation (therefore commercial agreements entered by the foundation are ancillary to the holding nature thereof). Administrators may avail themselves of professional expertise, such as property realtors, advisors and professionals in administering the assets of the foundation.
The comparisons with trusts keep stacking up. Like a trust, a foundation has a limited time-span, capped up to a maximum of one hundred years, and like the trust, the deed must clearly establish the following criteria:
- Name of the foundation;
- Registered address in Malta ;
- Purpose and objects of the foundation;
- Minimum endowment of the foundation (the minimum is set at EUR 1,165 for a private foundation, albeit progressive increments by means of future endowments are also possible;
- The assets of the foundation;
- The composition of the board of administrators (and their methods of appointment);
- The legal representation;
- Duration of the foundation
Therefore, having assessed undertaken the aforesaid analysis, why would a person elect to choose a foundation in lieu of a trust? Which are the differences that would sway the persuasion of a prospective founder to elect a foundation, over and above a trust? There are a number of reasons:
- A foundation has an intrinsic official and public dimension. The fact that it is published in front of a notary and enrolled in the public registry given it an element of formality that some founders would prefer to trusts, which may not require any form of publishing at all, and remain de facto private instruments.
This is not to say that foundation do not score highly on confidentiality and protection of the identity of the beneficiary. Quite the contrary, it is possible, albeit the foundation deed is a public document, that the list of beneficiaries be not disclosed in the published foundation deed, which is filed in the public registry, but is subject to a separate instrument, which is not freely accessible. Such list would be governed by separate notarial deed, thereby protecting the identity of the beneficiaries.
- Wider scope and reach. Some jurisdictions may have restrictions regarding the use of trusts, or reservations regarding their uses in tax structures, which is not usually reserved to foundations. Foundations, are widely accepted institutions and have been used significantly as holding structures, as well as collective investment vehicles or in securitization transactions.
- The greatest difference however lies in their taxation. By way of default, foundations are, for purely tax reasons, deemed to be at a par with companies. Therefore, unless there is an election to change a foundation into a trust (which is possible), foundations have all the characteristics of a company, from a purely fiscal perspective as companies. For this reason, they can hold shares in other corporate structures, and are entitled to claim the same fiscal benefits that would otherwise be afforded to holding companies, such as access to the participating holding or participating exemption.
The rules of participating holding and participating exemption are important, as they unlock the potential for a 100% tax refund. A Maltese foundation that derived profits from equity held in corporate structures, or upon capital gains arising from a disposal of such equity, would be able to reduce its tax bill, by obtaining a full tax refund. The rules for the participating holding and participating exemption are identical, and albeit there are six (6) grounds, the foundation would only need to meet one criterion. The full list of conditions are set forth below:
- To hold at least ten percent (10%) shares in a subsidiary or any entity whose capital is divided into shares, provided that that equity are entitled to any of the following rights (i) right to vote; (ii) participating rights (to dividend income); and (iii) receive assets upon an eventual winding up of the subsidiary; or
- The monetary value of the equity is of EUR 1,164,000 (or equivalent in any currency) , and that holding is held for an uninterrupted period of at least 183 days; or
- It is entitled to call for and acquire the entire balance of the shares not held by itself to the extent permitted by the law of the country in which the equity shares are held; or
- It has the right of first refusal in the event of a proposed disposal, redemption or cancellation of all the equity shares of that company not held by that equity shareholder company; or
- It is entitled to either sit on the board of directors or appoint a person to sit on the board of directors of that company as a director; or
- It is the equity shareholder in a company and the holding of such shares is for the furtherance of its own business and the holding is not held as trading stock for the purpose of a trade.
Although, any one of the aforesaid six ground shall suffice, it would be advisable to rely on recitals (a) and (b) set forth above – these being of an objective nature and easily ascertainable by means of Memorandum & Articles of association, register of member, share certificates etc; The other grounds (c) to (f) may naturally still be availed of, if grounds (a) or (b) are not ascertainable. However, being of a subjective nature, they are subject to more interpretation than the aforesaid two grounds.
In any case, if any of the aforesaid grounds are satisfied, this shall entitle a tax exemption on:
- Dividend income;
- Capital gains arising upon a disposal of the participating holding.
Whilst the blanket exemption afforded to capital gains is absolute, for dividend income, there are additional conditions which need to be met, to meet this tax exemption. These conditions, set forth below, may be summarized as follows:
The holding must be held in an entity which:
- Is resident or incorporated in the EU; or
- It is subject to a foreign tax of 15% or more; or
- It does not derive more than fifty percent (50%) of its come from passive interest or royalties.
Once again only one condition must be met. In the off chance where these conditions may not be met, there are yet another fall back positions which would allow the foundation to meet the participating holding or exemption criteria when it comes to dividend income. The additional conditions are the following:
- The shares in the non-resident company must not be held as a portfolio investment and the body of persons does not derive more than 50% of its income form portfolio investment (this being defined as securities held as an investment and with no intention of influencing the management of the underlying company; and
- The non-resident company or its passive interest of royalties have been subject to a tax at rate which is not less than 5%
Provided that the foundation can meet the aforesaid criteria, it would be eligible for the participating holding regime, whereby it would pay 35% but the beneficiaries would be entitled to a tax refund of 100% of the aforesaid tax paid. Alternatively, it is possible to have a participating exemption, whereby in lieu of this 100% tax refund, the foundation would simply elect not to pay any taxation at all.
Therefore, foundations may be used as tax efficient vehicles, not merely for the segregation of assets, but also as effective tax planning tools.
It is highly probable, that confidentiality ranks high in the priorities of the founder when considering setting up a foundation. In this regard, the Maltese foundation scores highly, based on the following considerations:
- The deed of foundation may indicate the name of the beneficiaries in a separate written instrument, separate from the foundation deed itself. The foundation deed is a public document, filed in the notarial deeds and the public registry. However, the list of beneficiaries, if included in a separate instrument, is a confidential instrument, that is signed by the founder and addressed to the administrators. When the founder elects to undertake this route, it is merely necessary that a note of reference is made in the foundation deed, stating that the list of beneficiaries has been communicated to the administrators.
- Where any court proceedings concerning a private foundation are instituted, these are only to be held in chambers and attended to only the parties to the proceedings, the administrators and the beneficiaries (only insofar that they have an interest in the proceedings).
Right to trade?
The main rationale of a foundation shall always be that of holding assets and preserving wealth and therefore, it cannot be engaged in carrying out active trading or commercial activities. A few exceptions to the following rule are however permissible:
- A foundation may be endowed with commercial property or shareholding in an existing business, or for that matter any income generating business. Holdings or management of these assets, geared with the intention of maximizing returns, would not be deemed to fall foul of the non-trading rules;
- Foundations, may, following the advent of investment services, be used as collective investment vehicles. When used in this function, the foundation is allowed to issue units to investors in the collective investment vehicle, for the passive holding of a common pool of assets, albeit the actual management of the assets held in unison would be delegated to a third party – typically an investment manager;
- Of recent introduction, is the possibility of using foundations for securitisation transactions, whereby foundations may borrow monies against the issue of bonds.
Endowments and Future Increment of Assets
A foundation may only be set up insofar that the founder bestows upon the foundation a minimum endowment (in cash or in kind) which has a value of EUR 1,165 or equivalent in any other currency. The effect of the endowment is very similar to the share capital in a company, with the underlying rationale, that the foundation, must be bestowed with assets of a monetary value in order to achieve its first and primary purpose of holding assets. However, contrary to the share capital in a company which may, provided certain statutory safeguards are retained at all times, be returned to the shareholders (by way of reduction of share capital), the underlying principal is that endowments made to the foundation, are irrevocable of their very nature, and may never be returned to the founder, but are there for the enjoyment of the beneficiaries.
When a foundation is formed, the founder must therefore devolve assets to the foundation. The foundation deed must in fact, acknowledged that the foundation has been endowed by at least the minimum monetary amount. Further endowments, shall be evidenced onto the foundation deed, by subsequent changes to the deed.
Foundations may retain and operate bank accounts. The operations of the bank account would be entrusted to the administrators. It is possible for the protectors to have co-signing powers on the foundation deed.
Who can be an Administrator?
Whilst purpose foundations, allow greater leeway in who can exercise the function of administrators, there are rigid rules when it comes to the carrying out of this role, when it comes to private foundations. Administrators , similarly to trustees in a trust, are subject to maximum probity and scrutiny, in the carrying out of their statutory functions. Therefore, the role of administrators may only be undertaken by individuals who are approved by the Maltese regulator, the Malta Financial Services Authority (“the MFSA”), and who have the knowledge, expertise and competence to undertake such a role.
In this regard, our licensed trust and fiduciary company is licensed by the MFSA and approved by the MFSA to act in such a capacity.
Who can be the Beneficiary in a Foundation?
Private foundations are established for the benefit of one or more persons or for a class of persons. This enjoyment is a purely personal nature, and therefore, creditors, spouses, heirs or legatees of the beneficiaries may only exercise their rights of redress to the extent of the beneficiaries’ entitlement. They are precluded from exercising any rights against the assets of the foundation.
It is the founder who enjoys discretion regarding the appointment of the beneficiaries in the foundation deed, and may add or remove beneficiaries at will. Such amendment however cannot have retrospective effect, or effect the validity of any act undertaken by the administrators, prior to such change.
A beneficiary may be appointed subject to a condition, or for a specified time, or up to a specified value of benefit, that the founder may deem fit (capping). It is also possible to bestow the decision to add or remove the beneficiary at the discretion of the administrators.
Beneficiaries, may also consist of body corporates, like companies, partnerships etc; provided they are clearly identifiable. Other foundations, may also be beneficiaries in foundations.
Termination of a Foundation
A foundation has a finite life, the duration of which may be resolved by the founder himself, at the establishment of the foundation. In any case, the duration of the foundation, may not be in excess of one hundred (100) years for the establishment thereof.
However, there are also other ways in which a private foundation may be terminated. Unless the founder, has expressly excluded such right, the foundation may be terminated at the demand of all the beneficiaries of the foundation, provided that no one of them is an interdicted person or a minor.
Another possible reason for the termination of the foundation, may be caused by the death of the founder. The court may dissolve and wind up any private foundation upon a request put forward by all the beneficiaries of the foundation, where however, the Court is satisfied that the continuation of foundation is no longer necessary to achieve the intentions of the founder.
Foundations are therefore tax efficient and effective asset management tools which are to be seriously considered by the founders, for wealth preservation and tax minimization. Their uses in corporate structures cannot be discounted, and the possibility of availing oneself of effective monitoring and supervisory tools such as protectors, render the foundation a distinct and effective vehicle.
Purpose foundations are of relatively recent introduction. Governed, by a different set of rules, other than its private foundation counterpart, it can only be incorporated for the promotion of any social, cultural and philanthropic purpose. These can range from the promotion and development of any sporting event, religious creed, literature, artistic and cultural scope.
Founders of a purpose foundations must submit their application to the Maltese Commissioner of Voluntary Organizations, who must be convinced that the foundation is truly a purpose one, and not serving any private purpose. An application, together with a copy of the foundation deed must be submitted to the evaluation of the Commissioner of Voluntary Organization. If the foundation is approved, it shall be enrolled inside a specific register of approved voluntary organizations.
The establishment of a purpose foundation must be undertaken by means of a public deed, enrolled in the records of the notary public and the public registry.
This approval is a substantial and important milestone since, the enrollment into the aforesaid registry, shall give the purpose foundation, tax exempt status. The rationale is that purpose foundations have a social dimension, rather than an economic goal, and for this reason, they are eligible to this favourable tax regime, albeit they are still obliged to prepare accounts and subject the same to an audit on an annual basis.
Similarly to private foundations, purpose foundations have a general restriction towards trading and commercial activities. However, commercial activities which are ancillary to the promotion of the scope for which the purpose foundation is set up is permissible, insofar that the proceeds go towards the promotion of such objective. In other words, a purpose foundation promoting literature, is permitted to sell literary works, insofar that the proceeds of such sale, are re-directed towards the promotion of the literary works (promotion through self-sustaining measures).
It is possible for the foundation to amend or add to the purpose of the foundation by means of an amendment to the public deed, however, where such change is occasioned, the prior consent and approval of the Commissioner of Voluntary Organization should be sought, in order not to prejudice the favourable tax treatment of the foundation.
Roles within a Purpose Foundation
Some general differences exist between those of a private and a purpose foundation. At the outset, albeit founders are necessary in both types of foundations, there is a different degree of formalities when it comes to the appointment of administrators.
Whilst in the case of private foundations, the role of administrators is only permissible to duly licensed and authorized administrators, in the case of private foundations, any person can act as a foundation, without the need to be licensed or approved by the Maltese regulator, the Malta Financial Services Authority. The rationale behind this, is that purpose foundations, are pursuing a social purpose, rather than a private interest, and therefore there should be a lesser degree of probity and obstacles to establishment.
Nevertheless, the foundation must have a minimum of three (3) administrators. When all the administrators in a purpose foundation are resident outside Malta, there must be a local representative to act as point of liaison between the foundation and the Maltese authorities (such as Commissioner of Voluntary Organization and Commissioner of Inland Revenue).
Furthermore, whilst in the case of a private foundation, beneficiaries must be identified (albeit with the possibility of allowing discretion to be exercised by the administrators, or subject to a condition), in the case of purpose foundation, there is no real identifiable beneficiary. The beneficiary is deemed to be society at large, as the purpose foundation would be undertaking its scope to the general benefit of the general public, and one or two identified individuals.
The flexibility afforded to purpose foundations also extends to the endowment levels. Whilst private foundations, require a minimum endowment of EUR 1,165 (or equivalent in any other currency) or the equivalent value in kind, the minimum endowment for private foundations is set at just one/fifth of the aforesaid value – approximately EUR 233.
The general rules applicable to foundations shall apply – thereby meaning that foundations have a finite duration. However, as there are no identifiable beneficiaries, there is no possibility for a request of termination to be brought by the beneficiaries themselves (as in the case of private foundations). Rather, founders, who believe that the foundation can no longer achieve its purpose, may request its termination.
Purpose foundations are versatile and highly attractive vehicles. They allow a degree of flexibility to the administrators, and ease of establishment. This combined with their tax exempt purposes, make them a genuine contender for all organization, clubs and association wishing to find a flexible and tax-efficient structure to promote their cultural, sporting and religious activities.