Background

In 2007, Malta enacted specific legislation regarding
foundations. Subsequent legislation was introduced, regulating the taxation of foundations,
and this further enhances Malta as a jurisdiction for international private
asset planning.

Foundations have been described as the civil
law alternative to trusts.

There are three types of foundations in Malta:

• • Private
    foundations are established
    for the benefit of a beneficiary or group of beneficiaries.

• • Charitable
    foundations are public benefit
    foundations exclusively promoting a social or public purpose on a non-profit
    making basis.

• • Purpose
    foundations are established
    for a purpose, without beneficiaries and generally have a philanthropic objective,
    although they can be established with a
    private purpose.

Why Establish a Foundation?

There are numerous reasons why a foundation
may be of benefit, which apply to a private foundation established in
Malta:

• • Confidentiality: the foundation deed states the foundation’s name, its registered address, a description of the initial
    endowment with which it was formed, and its purposes and objects.

• • Asset protection: if a home country is not politically or
    economically stable, a foundation can be established overseas and assets
    transferred into it (professional advice should always be taken in the home
    country, prior to any transfer taking place).

• • Securitisation vehicle: Maltese law allows for the use of a foundation
    in place of a trust, as an appropriate vehicle for the securitisation of debt.

• • Succession
    planning: a foundation can
    generate a greater degree of privacy and flexibility than may be possible with
    a will alone. Foundations can be used to avoid the separation of family estates
    and to prevent disputes between heirs.

• • Spendthrift beneficiaries: foundations can be created to prevent
    reckless heirs from spending 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, or until they fulfil certain requirements). Foundations can be
    drafted in such a way that a beneficiary is ‘excluded’, if they are, for
    example, declared bankrupt.

• • A solution for
    the care of individuals with special needs and minors: a foundation can
    be used to make special provisions 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 on the death of the founder, as
    they require a greater amount of care, with its associated costs.

• • Lifestyle planning: partners who are
    not married, or whose family 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 children of such partners, are treated as the
    founder intends.

Characteristics
of Maltese Foundations

• • Maltese private
    foundations are regulated by the ‘Second Schedule to the Civil Code of the Laws
    of Malta’. New legislation introduced a registration procedure, which has been
    designed in a way to safeguard the privacy of Maltese private foundations.

• • A foundation can
    only be constituted by virtue of a public deed ‘inter vivos,’
    drawn up by a notary public or by means of a will. Once the foundation is
    constituted, it is registered with the Malta Registrar of Legal Persons.

• • A private
    foundation is limited to a maximum period of 100 years.

• • An interesting
    feature of a Maltese foundation is that segregated cells can be established within
    a foundation to achieve particular purposes with particular assets. The
    segregated cell does not have separate legal personality; however the assets
    and liabilities of the cell are ring-fenced from other assets and liabilities
    of the foundation and/or other cells.

• • In terms of
    Maltese legislation, it is possible to re-domicile a foundation into and out of
    Malta.

• • A foundation may
    be terminated at any time if all of the beneficiaries agree, provided they are
    all alive, none have been convicted of a crime or are minors. If the founder is
    still alive his consent would also be required. Termination obligations must be
    included in the deed.

Maltese Foundations: A Choice to be Taxed In
One of Two Ways

• • A foundation can
    either be treated as a company, which is both resident and domiciled in Malta,
    OR as a trust.

Taxation as a Trust

A Maltese foundation can irrevocably elect
that the foundation be treated as a trust, for tax purposes.

An election to be treated as a trust gives
rise to beneficial private asset planning opportunities, particularly where the
founder and beneficiaries are not resident and/or domiciled in Malta. In such a
situation no tax and/or duty will be payable in Malta. This applies on settlement
and in relation to the income, attributable to the foundation.

Taxation as a Company

If a Maltese foundation decides to be taxed as a company,
as with other companies in Malta, the income and/or gains realised are subject
to tax in Malta on a worldwide basis at the flat rate of 35%.

However, on the distribution of qualifying foreign or
local source income, by the foundation in favour of its beneficiaries, the
beneficiaries will generally be entitled to a refund of 6/7ths of the Malta tax
paid by the foundation, giving an effective tax rate of 5%. This assumes that
the beneficiaries are not resident and/or domiciled in Malta.

A number of reliefs are also available to foundations, as
well as to companies – amongst these are; the full imputation system,
participation exemption, and access to appropriate unilateral agreements, Malta
also has wide network of Double Tax Treaties.

How Can Dixcart Assist?

The Dixcart office in Malta can
assist in the establishment and management of a foundation in an efficient
manner and to meet the agreed objects of the foundation.

Additional Information

For further information about Maltese foundations and the benefits that they offer, please speak to Jonathan Vassallo: advice.malta@dixcart.com at the Dixcart office in Malta. Alternatively, please speak to your usual Dixcart contact.