Foundation under Maltese Legislation

Foundations under Maltese law may be either a private (the “Private Foundation”) or a purpose foundation (the “Purpose Foundation”). A Private Foundation is established for the benefit of beneficiaries, whereas a Purpose Foundation relates to foundations established exclusively for a charitable, philanthropic or other social purpose or as a non-profit organization. A foundation may be constituted by virtue of a public deed inter vivos or by a will. A public deed is required to be published by a Public Notary and registered in the Public Registry. The Maltese courts have provided broad jurisprudence on the formalities required for the setting up and administration of Maltese foundations.

Definition of Foundation

Article 26 of Chapter 16 of the Laws of Malta (the “Civil Code”) stipulates that a foundation is an organisation consisting of a universality of things constituted in writing, including by means of a will, by a founder or founders (the “Founder(s)”) whereby assets are destined either:

– for the fulfillment of a specified purpose; or
– for the benefit of a named person or class of persons, and are entrusted to the administration of a designated person or persons.

The patrimony, namely assets and liabilities, of the foundation is kept distinct from that of its Founder, administrator(s) (the “Administrator(s)”) or any beneficiaries.

The term “foundation” includes all organisations, institutes or similarly titled patrimonies which are set up through the bequest, endowment or appropriation of assets, by public deed or otherwise and howsoever named, for a stated purpose or for the benefit of a named person or class of persons, to be achieved through a designated Administrator or Administrators, but shall not include trusts as defined in Chapter 331 of the Laws of Malta (the “Trusts and Trustees Act.”)

The assets of a foundation may originate from any lawful business or activity and may consist of present or future assets of any nature.

Purposes of a Malta Foundation

A Purpose Foundation is a foundation which is established exclusively for a charitable, philanthropic or other social purpose or as a non-profit organisation or for any other lawful purpose.

The purpose of a foundation may be amended or added by means of an additional public deed if the Founder so wishes, or if permitted by the statute, another body or person. The Court may authorize such amendment or addition to the purpose on the application of the Administrator, after the death of the Founder. The Statute of the foundation can indicate the manner in which the monies or property of the foundation may be utilized for the attainment of the purpose for which the foundation is established. However, when there is no such indication the Administrators may exercise their discretion. In the Statute establishing a foundation, an indication may be done on how the assets of the foundation are to be applied if its purpose is achieved, exhausted or becomes impossible. When no such indication is made, the Administrators or the supervisory council may make specific proposals to the Court for authorization to use or dispose of the assets, unless the Founder amends the purpose of the foundation.

Any disposal of assets shall be made only to another purpose foundation with similar purposes.

When the dominant purpose of a foundation is to support a class of persons which constitute a sector within the community as a whole, because of a particular social, physical or other need they may have or disability they may suffer from, the indication of such a class of persons or one or more members of such a class shall not render it a Private Foundation but it shall be treated as a Purpose Foundation in terms of law.

Malta Foundation main Characteristics

A foundation may be established for the private benefit of one or more persons or of a class of persons and such beneficiaries shall enjoy such benefits, and shall have legally enforceable rights against the foundation, as may be stated in the terms of the foundation and the provisions of the Second Schedule of the Civil Code.

The interest of the beneficiary (the “Beneficiary”) under a foundation shall be deemed to be movable property even if it includes immovable property.

It is pertinent to note that the benefit under a foundation is personal to the Beneficiary. However this benefit is subject to any applicable laws and only as stated in the terms of the foundation. The creditors, spouses, heirs or legatees of the Beneficiary may have rights only to the extent of the Beneficiary’s entitlements under the foundation and have no other rights in relation to the assets of the foundation.

Of utmost importance is the fact that unless expressly provided for in the Statute, upon the death of the Beneficiary the Beneficiary’s entitlement under a foundation shall not be transferred to his heirs but shall terminate.

A Private Foundation may be terminated prior to the term for which it is established if all beneficiaries demand this. However, if the Founder is still alive his consent is also required. The Founder may in the Statute exclude such a right of the beneficiaries. Moreover, the Statute may determine how the assets remaining in the foundation are to be distributed on termination.

When a foundation terminates for any other reason at law, the assets of the foundation shall, subject to the terms of the foundation, devolve on the Founder or his / her heirs at law.

Malta Foundation main Purposes

Foundations may be used for several purposes amongst which are:

– as an asset protection vehicle;
– as a vehicle to take care for persons with special needs;
– to manage payments of money/distribution of assets to family and provide for education;
– housing maintenance or profit sharing in the family;
– to hold shares in companies both local and foreign;
– as a vehicle for the collection of royalties;
– as a vehicle to invest in shares/bonds;
– as a vehicle to own real estate or other assets of considerable value;
– to manage pension plans for employees.

Taxation of Maltese Foundations

Taxation of Maltese Foundations, distribution and reversion of property endowed to a foundation is regulated by Legal Notice 312 of 2010 entitled Foundations (Income Tax) Regulations, 2010 (the “Regulation”).

The Regulation establishes that for tax purposes, foundations are akin to limited liability companies resident and domiciled in Malta. Private foundations do not enjoy exemptions and are taxed at the rate of thirty five (35%) percent. The beneficiaries of the foundation, upon receipt of a distribution of profit from the foundation would then be eligible to claim the refunds of tax envisaged under the Income Tax Management Act as if they were shareholders of a limited liability company. The shareholders become entitled to claim refunds of 6/7ths if profit is derived from an entity resident in Malta or 5/7ths, if the profit is derived out of a non-resident entity, of the tax paid.

Where however a foundation is either enrolled in terms of the Voluntary Organisations Act or, where not so enrolled, is established for the achievement of a social purpose and is non-profit making, it would only be taxed in the same manner as a company where it informs the Commissioner of Inland Revenue in writing that it opts irrevocably to be treated in this manner. Where such option is exercised, any rules pertaining to the taxation of income applicable to companies as provided for under the laws of Malta shall equally apply to the foundation.
The Administrators of a foundation may also, by notice in writing to the Commissioner, irrevocably elect that a foundation be taxed under the provisions of the Income Tax Act applicable to trusts.

Foundations which are enrolled in terms of the Voluntary Organisations Act or established for the achievement of a social purpose and with a non-profit-making intention are subject to progressive rates of tax where the highest rate of tax is capped at thirty (30%) percent instead of thirty-five (35%) percent. The tax is calculated on the chargeable income of the foundation where no part of its profits constitutes distributable profits or is destined for the personal benefit of any member, Administrator or owner of the property of the foundation.

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