Malta Trusts

Published 10 May 2017

Malta makes an attractive location for the establishment of trusts, thanks to its cutting-edge domestic trust law, high professional standards and authorisation.

It is also one of the few countries to successfully incorporate the Anglo-Saxon trust concept with its Roman law-based legal system.

Maltese legislation provides for a wide variety of trusts that may be used for different purposes.

 

DEFINITION AND PRINCIPLES

In terms of Malta law, a trust exists where a person or persons (referred to as a trustee) holds, as owner, or has vested in them property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose or for both such benefit and purpose aforesaid[1]. Any type of property may be settled on trust, such as shares in companies, bonds, cash, copyright, patents and trademarks.

The trust therefore separates the legal title, or ownership, of property from the right to benefit from that property.

Furthermore, Malta law fully recognises foreign trusts and provides the possibility for trusts established in Malta to be governed by a foreign law. Malta law also precludes the applicability of Maltese mandatory rules relating to succession, inheritance or forced heirship in cases where, upon settlement, the settlor is not domiciled in Malta.

In addition to providing investors with a flexible environment, Malta law regulates the institute of trusteeship as well as laying out the fiduciary obligations that define the legal relations in the trust context.

This provides investors with the assurance of a highly regulated environment that remains faithful to the original concept of trusts by enabling domestic courts to recognise and uphold trust principles.

[1] Article 3 of the Trust and Trustees Act, Chapter 331 of the laws of Malta

 

THE LEGAL EFFECTS OF A TRUST

The holding of property by the trustee under trust has the following legal effects:

  • Personal creditors of the trustee have no recourse against the trust property;
  • The trust property does not form part of the trustee’s personal estate upon his insolvency or bankruptcy (unless the trustee himself has a claim against the trust); and
  • The trust property does not form part of the matrimonial property of the trustee or his spouse nor part of the trustee’s estate upon his death

 

BENEFITS

  • Flexibility in the drafting of the trust deed
  • Possibility of imposing certain conditions on the distribution of assets following the demise of the settlor
  • Efficient distribution of assets
  • Protection of assets from claims and creditor
  • Tax planning opportunities
  • Settlors may establish trusts governed by Malta or foreign law
  • Malta trust can be converted into a foundation with continuity of existence
  • EU and Eurozone location
  • High professional standards
  • Malta offers lower set-up and administrative costs
  • Malta has over 60 double taxation treaties

 

USES

Many trust arrangements are broadly similar although each is tailored to the individual requirements of the settlor and beneficiaries. There are various types of trusts, the choice of which will depend upon the circumstances of the settlor and the manner in which it is intended to provide for the beneficiaries.

Malta caters for all the main types of trusts such as:

  • Discretionary trusts
  • Accumulation and maintenance trusts
  • Fixed interest trusts
  • Spendthrift trusts
  • Charitable trusts
  • Unit trusts

As such, Maltese trusts are used for a wide range of reasons, including confidentiality, succession planning, avoiding probate, asset consolidation, management and asset protection, tax planning and protecting minors. Malta law also permits the setting up of a Collective Investment Scheme and pensions schemes via trust.

 

CREATION OF A TRUST

Malta offers various flexibilities in the formation of a trust. With the exception of unit trusts, which must be created by a written instrument, a trust can be created in any way, whether this is done unilaterally, by an oral declaration, by an instrument in writing, by a testament/will, by operation of law or by a decision of the Court.

 

DURATION OF A TRUST

Except for unit trusts, trusts set-up for a charitable purpose or trusts set-up as retirement funds in terms of the Special Funds (Regulation) Act, Cap 450, trusts come to an end upon the expiration of 100 years from their creation, unless they have been terminated or revoked before such date.

 

THE OFFICE OF THE “PROTECTOR”

For peace of mind that the trust is being managed by the trustee as according to the trust deed and/or letter of wishes, the trust may also provide for the office of a protector, the role of whom is to act as a supervisor over the trustee in order to ensure that the trustee manages the trust property in accordance to the settlor’s wishes and in a proper manner. The office of a protector is more common in the case of trusts where the settlor and the trustee reside in different jurisdictions.

 

WHO MAY ACT AS A TRUSTEE?

The person appointed to act as trustee under the trust can be either be (i) a natural person, (an “individual trustee”); or (ii) a corporate entity (a “corporate trustee”). Furthermore, no person may be appointed as a trustee if such person is interdicted or incapacitated or is an undischarged bankrupt, has been convicted of any of the crimes affecting public trust or of theft or of fraud or of knowingly receiving property obtained by theft or fraud; is a minor; or is subject to a Trustee Disqualification Order issued by the Malta Financial Services Authority (the “MFSA”).

MFSA Authorization

Acting as a trustee may necessitate the application for MFSA approval when either the individual trustee or corporate trustee:

  • receives or is entitled to remuneration for acting as a trustee; or
  • acts as a trustee on a regular and habitual basis; or
  • holds himself or itself out to be a trustee.

An exemption applies to certain persons such as banks licensed in Malta or in an approved jurisdiction, investment services license holders (either in Malta or in an approved jurisdiction); as well as in certain cases, such as trusts created for the purpose of holding security in relation to a financial transaction. The conditions for authorization vary depending upon whether the trustee is a natural person or a corporate entity. Furthermore, if the individual trustee qualifies as a “private trustee” no MFSA authorization is required, as briefly explained below:

Individual Trustees

The Licensed Individual Trustee

In order for a person to obtain authorization to act as an individual trustee, the following conditions must be satisfied:

  • The individual trustee must be a resident or otherwise operating in Malta;
  • The individual trustee must be an approved person, meaning a person of good reputation possessing experience and qualifications in financial, fiduciary, accounting or legal services and approved by the MFSA as being fit and proper to carry out the duties of a trustee; and
  • The individual trustee must have established adequate systems for maintaining proper records as to the identity and residence of all beneficiaries, and of the dealings and the assets of the trusts and compliance with applicable laws and regulations.

The Non-licensed Individual Trustee / Private Trustee

The non-licensed individual trustee (the “private trustee”) is a person who agrees to act as a trustee because he is related to the settlor or he has known the settlor for at least ten years, and, in both cases, such trustee:

  • is not remunerated;
  • does not hold himself out as a trustee to the public, and
  • does not act habitually as a trustee, in any case in relation to more than five settlors at any time.

A private trustee is not required to apply for authorization from the MFSA. However, in order to provide some form of protection to the beneficiaries under the trust, the Trust and Trustees Act requires the observance of certain formalities and the involvement and oversight of a Notary Public.

Trustee Companies

A trustee company or corporate trustee must satisfy the following conditions in order to obtain a trustee license:

  • Its objects (as stated in its memorandum of association) must include acting as trustee and carrying on activities ancillary or incidental thereto, and cannot include objects which are not compatible with the services of a trustee;
  • Its actual activities must be compatible and connected with the services of a trustee;
  • It must have a minimum of three directors who, together with every person who has a direct or indirect interest in the corporate trustee, must all be approved persons;
  • It must have established adequate systems for maintaining proper records as to the identity and residence of all beneficiaries, the dealings and the assets in connection with the trusts and compliance with applicable laws and regulations;
  • Its name must be consistent with its trustee activity; and
  • If the corporate trustee is not registered in Malta, it must be constituted or incorporated in a jurisdiction which is or has been approved by the MFSA.

 

TAX PLANNING

From an international perspective, Maltese trusts may provide certain tax planning opportunities whilst offering due protection, security and estate planning benefits that come with the creation of trusts.

The tax treatment of a Maltese trust depends on several factors, such as the residence of the trustee, settlor and beneficiaries, the nature of the trust property, the source of the income attributable to the trust as well as whether the income is distributed or not.

At the Settlement

The settlement of property on trust falls within the definition of a “taxable transfer” whereby the settlor is deemed to have realized a taxable gain on the difference in the market value of the property at the time of the settlement on trust and the cost of acquisition (taxable gain upon settlement = market value of property upon settlement – cost of acquisition).

Such a gain shall not, however, be taxable in Malta if the settlor is not resident or domiciled in Malta, and the assets of the trust are located or registered outside Malta and therefore the gain arises outside Malta. In addition, no tax is chargeable upon the settlement of property on trust, when:

  • the settlor is the sole beneficiary; or
  • the beneficiaries of the trust are close relatives or approved philanthropic institutions; or
  • the trustee holds such property for designated commercial transactions such as the custody of investment instruments, or for approved commercial transactions such as the securitisation of assets, collective investment schemes, employee benefit or retirement schemes, timeshare and multi-property structures.

The transfer may also be exempt from taxation by reason of the nature of the property settled on trust. For instance, the settlement of certain property on trust, such as coins, art, or antique furniture is not subject to tax on settlement. Furthermore, the settlement of property on trust fall outside the scope of the charge to duty on documents and transfers[1] where the assets are located outside Malta.

[1] In terms of the Duty on Documents and Transfers Act, Chapter 364 of the laws of Malta

 

During the lifetime of the Trust

The Maltese trust is not regarded as a tax efficient vehicle for Maltese resident beneficiaries as the income distributed is taxed in the hands of the resident beneficiaries at the normal rates of taxation. However, the Maltese trust offers non-resident beneficiaries a highly attractive tax efficient vehicle.

 

Distribution of income

Trusts are generally considered to be transparent for tax purposes, meaning that income attributable to a trust is not charged to tax in the hands of the trustee if such income is distributed to the beneficiaries. When all the beneficiaries of a trust are non-Maltese residents and when all the income attributable to a trust does not arise in Malta (i.e. interest, royalties or profits on a disposal of shares in a company where the assets do not mainly consist of immovable property in Malta), there will be no tax impact under Maltese tax law.

Transfer of a beneficial interest

No Malta tax would be chargeable when transferring a beneficial interest in a trust which does not include Chargeable Property or by a beneficiary who is not ordinarily resident and domiciled in Malta if the trust in question does not include Chargeable Property[1] situated in Malta.

Capitalisation of income

If, on the other hand, the trust income is not distributed to the beneficiaries, such income is charged tax in the hands of the trustee at the rate of 35%.

Under certain conditions, it may be advantageous for the trust income to be taxed in Malta. In this regard, it is allowed that the trustee opts to have the trust treated as a company for tax purposes[2] resulting in the distributions of the profits to the beneficiaries being treated as if they were dividends distributed to shareholders of a company. This automatically results in the trust being subject to the full imputation tax system applicable to Malta companies, whereby the trust income will be subject to tax at the corporate rate of taxation of 35% and upon the distribution of dividends, the beneficiaries shall be entitled to a refund in part or in full of the Malta tax paid, resulting in very little tax leakage in Malta. Furthermore, once the trustee opts to have the trust treated as a company for tax purposes, the trust may also under certain conditions be able to benefit from the double taxation treaties to which Malta is a party.

Finally, in the case of mixed income, that is, income partly arising in Malta and income partly arising abroad, only income arising in Malta will be taxed.

 

VAT

VAT liability depends on whether the activity of the trustee can be considered as an “economic activity”. Generally, if the trustee receives a remuneration under the terms of the deed, this does not qualify as an economic activity and, accordingly, no VAT would be payable. However, if the trustee commercially exploits the trust property in return for a consideration (e.g. the leasing of trust property in return for a rent) such activity would constitute an economic activity and would be subject to VAT.

[1] Chargeable Property comprises solely of: immovable property, securities, business, goodwill, business permits, copyright, trademarks and any other intellectual property.

[2] Article 27D(1)(a) of the Income Tax Act, Chapter 123 of the laws of Malta.

 

Download as PDF