The Maltese tax system offers attractive tax features for trusts. Malta, a whitelisted jurisdiction by the OECD with a growing reputation as a trust domicile, proves to be highly beneficial for trusts resulting either incomplete neutrality or a low effective rate of tax.
In addition, although a Civil law jurisdiction, Malta has successfully transposed the trust legislation into its system, regulating trusts clearly and enabling domestic courts to recognise and uphold trust principles.
Settlement in Trust
The settlement of assets in trust, which assets are not located or registered in Malta should not be subject to tax in Malta, provided that the settlor is not resident in Malta or not domiciled in Malta. Settlement falls outside the scope of the charge to duty where the assets are located outside Malta.
No tax equally applies where a non-Maltese resident settlor settles shares where the company which would have issued such shares would have assets that exclude immovable property situated in Malta.
Taxation of Trust Income
The taxation of trusts in Malta is governed by the Income Tax Act Cap. 123, the Income Tax Management Act, Cap. 372 and the Duty on Documents and Transfers Act, Cap. 364.
In terms of the Maltese tax law, where at least one of the trustees of a trust is a person resident in Malta, the tax shall be payable in Malta on any income attributable to a trust. Income attributable to a trust includes the aggregate of any relevant income accruing or derived by the trustee from a property which has been settled in the trust, and from a property which was acquired in the course of administration of such trust.
By the establishment of residence in Malta of one of the trustees, the following options apply:
Where all the below conditions are satisfied, chargeable income or gains characterised as constituting income attributable to a trust would be deemed to have been derived directly by the beneficiaries and would not, therefore, be chargeable to tax in Malta in the hands of the trustee.
The conditions to be satisfied are the following:
All the income attributable to the trust consists of:
Dividends distributed by one or more companies registered in Malta; and/or
Income arising outside Malta; and/or
Income consisting of Interest / Royalties / Gains or profits on disposal of shares or securities in a company which is not a company owning immovable property situated in Malta.
All the beneficiaries of the trust are persons who are either not ordinarily resident or not domiciled in Malta.
Should all the above conditions be satisfied, the Malta Commissioner of Inland Revenue would effectively look through the trust for income tax purposes and deem all chargeable income and gains accruing thereto or realised thereby to have been derived directly by the beneficiaries of the said trust.
This option may be an effective tool for efficient tax planning, also pursuant to the various double tax treaties currently in force in Malta.
2. Election for Trust to be treated as a Malta Company
Alternatively, a trustee of a trust who is a person resident in Malta and who is authorised to act as such in terms of the Laws of Malta may make an irrevocable election to compute the chargeable income in relation to the income attributable to the said trust as if such income was derived by a company ordinarily resident and domiciled in Malta. Such election, which shall be irrevocable, is to be effected from the date of the establishment of such trust or the appointment of a resident trustee whichever is the later.
The resident trustee would, however, only be entitled to make such an irrevocable election should the trust in question has been established by a written instrument which, in turn, specifically restricts the income attributable to the trust to income in the form of royalties, dividends, capital gains, interest, rents or any other income from the investment.
In such a case, the tax shall be charged at the rate of 35%. It shall be payable in the same manner applicable to companies, and distributions of such allocated profits to beneficiaries of the trust shall be treated as if they were dividends distributed to shareholders of a company.
The non-resident beneficiaries would be entitled to claim a refund of the tax paid by the trust as if it were operating as a company resulting in a maximum tax leakage of 5%. In addition, such an option may be useful in those instances where the trustee wishes to claim relief from double taxation on income that has been subject to withholding taxes outside Malta.