The Minister of Finance, the Economy and Investment recently enacted L.N.312 of 2010 – The Foundations (Income Tax) Regulations, 2010 (FITR) which regulate the taxation of foundations.
The FITR prescribe that for the purposes of the income tax acts, a foundation shall be treated in the same manner as a company that is ordinarily resident and domiciled in Malta. Therefore the rules applicable to the taxation of income of companies are applicable to foundations. Foundations pay tax at the rate of 35%, like companies. Distributable profits of foundations are allocated in the same manner applicable to companies. The profits allocated to beneficiaries of the foundation are treated as dividends distributed to the shareholders of a company.
Foundations are eligible to the flat-rate foreign tax credit and the participation exemption in the same manner as companies. Furthermore, distributions by foundations trigger the refundable tax credit system.
Foundations may be established with segregated cells. Each cell of the foundation is to be considered as a separate foundation. A beneficiary of a foundation may, transfer or otherwise deal with his interest in a foundation in any manner. Given that foundations are treated like companies, the transfer of the beneficial interest by the beneficiaries of the foundation is deemed to be a transfer of a security for the purposes of the income tax acts and consequently attracts tax on capital gains.
Article 32A of the Second Schedule of the Civil Code prescribes that foundations may not be established to trade or to carry out commercial activities, irrespective of the fact that any proceeds thereof would be used for social purposes. However:
A foundation may be endowed with commercial property or a shareholding in a profit making enterprise, a franchise, a trade mark or other asset which gives rise to income, as well as a ship as long as the organisation is only the passive owner of such assets;
A foundation may be used as a collective investment vehicle, and issue units to investors therein, for the passive holding of a common pool of assets, the management of which is delegated to a third party, including a pension or employee benefit arrangements; and
A foundation may be used as a vehicle for the purpose of a securitisation transaction, borrow monies against the issue of bonds and do all relative and ancillary acts.
Generally, foundations may not be established for a period exceeding 100 years; however, purpose foundations, foundations used as a collective investment vehicle and foundations used in a securitisation transaction may be established for an indefinite term.
The administrators of a foundation may be juridical persons provided that they have at least three directors.
Ernst & Young
Tel: +356 2347 1440
Website: www.ey.com
