The current legislative system of Maltese trusts and trustees is relatively new and is the result of an extensive overhaul of the trust legal system which started back in 2000 as part of Malta’s efforts to provide a specific regulatory framework for trusts and trustees while meeting its international commitments to the OECD and FATF and moving towards an onshore (rather than offshore) financial centre. Maltese trust law is largely based on the trust law of Jersey, although there are several differences between the two systems. The main piece of legislation regulating trusts and trustees is the Trusts and Trustees Act (the “Act”), but various provisions regulating trusts may be found in other pieces of Maltese legislation such as the Civil Code and the Income Tax Act (the “ITA”).
What is a Trust ?
A trust is a fiduciary obligation created by the settlor, binding a person or persons, known as the trustee, to deal with the property or assets settled on trust (the trust property) for the benefit of the beneficiaries or for a charitable purpose in accordance with the terms of the trust. Any type of property may be settled on trust, such as shares in companies, bonds, cash, copyright, patents and trademarks.
Creation 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 of course,they have been terminated or revoked before such date
The Office of the “Protector”
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.
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 hisspouse nor part of the trustee’s estate upon his death
Types of Trust
Maltese trusts can take the form of:
- Discretionary trusts;
- Fixed interest trusts;
- Accumulation and maintenance trusts;
- Spendthrift trusts;
- Charitable trusts; or
- Implied, constructive or resulting trusts
Who may act as a trustee?
The person appointed to act as trustee under the trust can be either (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 MFSA.
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
A. 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 Unlicensed Individual Trustee / Private Trustee
The unlicensed 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 Act requires the observance of certain formalities and the involvement and oversight of a Notary Public.
B. 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 incorporatedin a jurisdiction which is or has been approved by the MFSA
Trustee Authorization Fees
The current fees payable to the MFSA for the issue of a trustee license are as follows:
Application Fee : EUR 250
One-time approval Fee : EUR100
Annual authorisation Fee (payable upon authorization and upon each anniversary thereafter) : EUR 2,500
Tax planning opportunities for non-residents
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” in terms of the ITA 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 if the gain arises outside Malta. In addition, no tax is chargeable upon the settlement of property on trust, when the settlor is also the sole beneficiary of the trust property that has been donated directly by the settlor to beneficiaries who are closely related to the settlor or to philanthropic institutions; or where no loss or gain has arisen and the trust beneficiaries are close relatives of the settlor. 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.
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.
- 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, the ITA allows the trustee to opt to have the trust treated as a company for tax purposes 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 no, or 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 liability depends on whether the activity of the trustee can be considered as an “economic activity” in terms of the VAT Act. 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.
Also read: Ship registration in Malta
And: The Malta retirement programme
lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Mr. Dominique Lecocq on email@example.com for any questions.
- A Guide to Trusts and to the Authorization and Regulation of Trustees, MFSA
- Duty on Documents and Transfers Act, Cap 364
- Guidelines Regarding Trusts – Malta VAT Department, 2005
- Income Tax Act, Cap 123
- Trusts and Trustees Act, Cap 331
- Trusts (Income Tax) Regulations, L.N. 2 of 2006
- Trusts Law and Management, Foundation Course Notes, Institute of Financial Services Practitioners Malta, February 2008
- Trusts and Trustees Act (Fees) Regulations, L.N. 356 of 2008
- Value Added Tax Act, Cap 406