Taxation on Foundations

Taxation on Foundations

Maltese Foundations are very attractive from a tax perspective. This is because the Malta Foundation is treated in the same manner as a company that is ordinarily resident and domiciled in Malta. For Income Tax purposes, foundations are treated in the same manner as a company ordinarily resident and domiciled in Malta. Administrators have the option to elect that the foundation be treated under same provisions applicable to trusts. Such an election is only possible where the income consists of dividends, interest, royalties, rents, capital gains and/or income from investments. CSB Group’s professionals assists clients with tax consultancy on Malta Foundations.

 Malta Tax Implications upon Creation of Foundation

No Malta tax implications when a foundation is established with an initial endowment of cash or when futher endowments of cash is made subsequent to the creation of foundation

  • Malta tax implications will arise upon an initial or subsequent endowment of property which constitutes chargeable property;
  • When foundations elect to be treated for Income Tax purposes as trusts, an endowment in favour of the foundation consisting of chargeable property (that is, immovable property, securities (excluding securities having a fixed rate of return), business goodwill, copyright, patents, trademarks, trade-names and the full or partial beneficial interest in a trust) would be taxable under the relevant Capital Gains provisions, insofar that these would constitute a deemed sale at fair market value;
  • Certain exemption or deferral of tax on endowments can arise through the application specific exemptions or relief provisions.

 Malta Tax Implications upon Income Derived by the Foundation

General rule: chargeable income/gains derived by foundation are taxable at the standard tax rate of 35%.

  • Distributable profits of the foundation must be allocated in the same manner applicable to companies. Access to the full imputation and Refundable Tax Credit system is available;
  • Participation exemption regime applicable to income or gains derived from qualifying Participating Holdings
  • When a foundation elects to be treated as a trust and one or more of the administrators of the foundation is a person resident in Malta, Malta tax would be payable on any income attributable to the foundation at the rate of 35%.
  • When a foundation that elected to be treated as a trust for Income Tax purposes, operates in an international context, specific exceptions to the general rule, applicable to trusts would similarly apply to such foundations. In these cases, the foundation would be treated as a transparent entity for Malta tax purposes and the income would be deemed to have been derived directly by the beneficiaries.

 Malta Tax Implications upon a Transfer of Assets by the Foundation in Favour of Third Parties.

If the asset being transferred is a chargeable asset for the purposes of tax on Capital Gains, such transfers shall be charged at standard tax rate of 35%, unless the asset consists of immovable property in which case a Property Transfer Tax of 8% of the market value would be applicable.

This applies even if it elects to be treated as a trust for tax purposes.

 Malta Tax Implications

The below are the tax implications upon a distribution of assets by the foundation in favour of the beneficiaries

  • When distribution constitutes profits allocated to foundation’s tax accounts — these distributions are treated as dividends distributed to shareholders of a company.  In this case the beneficiaries get access to the applicable tax refund;
  • when the property being distributed in favour of the beneficiaries is property is a chargeable asset for the purposes of tax on Capital Gains – distribution will be as a transfer of assets to in favour of third parties as aforesaid;
  • In the case of foundations being treated as trusts, capital gains from transfer of property of foundation on the distribution of such property are deemed to form part of the income attributable to the foundation, therefore taxed at the level of the foundation. Distributions by administrators in favour of a beneficiary are treated in the same manner as a transfer by the administrators of a foundation of property in favour of third parties.
  • Certain exemptions applicable to trusts in Malta, will be similarly applicable to foundations, when the administrators elect to treat the foundation as a trust for Income Tax purposes.

 Malta Tax Implications upon a Transfer of a Beneficial Interest in a Foundation

Transfers of beneficial interest in a foundation is deemed to be a transfer of a security for income tax purposes, unless the foundation is treated as a trust.

In case of a foundation opting to be treated as a trust, the assets of the foundation are classified as ‘taxable trust property’, and the transfer of the said taxable trust property directly by the beneficiary constitutes a chargeable event, Malta tax would be chargeable on gains derived pursuant to a transfer of a full or partial beneficial interest in a foundation and any alienation of any such full or partial interest as a result of a disclaimer of such interest or as a result of a person not remaining a beneficiary of a foundation. The gain is equivalent to the consideration paid and is chargeable at the rate of 35%.

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