Trusts
The creation and use of a local trust by Maltese residents for tax planning purposes will provide no fiscal benefit to such residents. By and large, Malta tax authorities adopt a “look through” approach and see through the trust and tax (or exempt from tax, as the case may be) any transaction or party to the trust in the same manner as they would have done in the absence of such a trust. From an international perspective Malta trusts may provide tax planning opportunities to non-residents, whilst also offering them the protection, security and estate planning benefits that come with the creation of trusts.
Generally, the settlement of foreign assets on trust by a non-resident settlor for the benefit of non-resident beneficiaries would not trigger off any Malta tax implications.
Where at least one of the trustees of the trust is resident in Malta for tax purposes, the tax shall be payable in Malta on all income attributable to the trust. This would comprise the total income or gains chargeable to tax under Maltese law which accrue to or are derived by the trustee at any stage in the life of the trust.
The inclusion in Malta’s tax legislation of a transparency model allows, in certain circumstances, for the tax authorities to look through the trust and tax the transaction (or exempt the transaction from tax, as the case may be), depending on the various factors that would attribute jurisdiction to tax to Malta or otherwise.
The Administration of a Trust
Income attributable to a trust is chargeable to Malta tax when at least one of the trustees of that trust is resident in Malta for income tax purposes.
The Malta tax residence of a trustee represents a relevant connection, connecting Malta and the income attributable to the trust of which he is a trustee and which suffices to justify Malta’s assertion of jurisdiction to tax income attributable to that trust. Malta exercises jurisdiction to tax income attributable to a trust by reference to the Malta tax residence of at least one of the trustees of that trust and regardless, therefore, of the place of residence of the settlor, beneficiaries, other trustees if any, and the location of the trust assets or the source of income.
This however does not mean that Malta will refrain from taxing chargeable income or gains derived by a trust when none of the trustees of that trust are persons resident in Malta for tax purposes. Such non-resident trustees would of course be chargeable to tax in Malta on domestic source income and gains.
Any flow or item of income chargeable to tax under Malta tax legislation and accruing to or derived by a Malta resident trustee of a trust in his capacity as such would effectively be taxable in Malta as income attributable to the trust. Moreover, Malta tax legislation adds chargeable gains realized by a trustee to the notion of income attributable to a trust.
Any income attributable to a trust accruing to or derived by a trustee would, where at least one of the trustees is resident in Malta for income tax purposes, be chargeable to tax under Malta tax legislation at the flat rate of 35%. No provisional tax is payable in respect of any income attributable to a trust. Furthermore no person would be chargeable to further tax under the ITA on any income attributable to a trust which has suffered tax in the hands of the trustee.
Transparency
When at least one trustee of a trust is resident in Malta, the Malta tax base in respect of income attributable to that trust is clearly designed to capture any and all chargeable income and gains accruing to or derived (or deemed to be derived pursuant to a distribution or reversion of chargeable trust property) by the trustee in his capacity as such, regardless of the number and place of residence of other trustees of the same trust (if any).
However, the approach adopted in the design of the Malta taxable base, is softened by the application of certain rules which result in the effective transparency of a given trust for tax purposes. In fact by virtue of the application of such rules, income otherwise attributable to a trust would be deemed to have been derived directly by the beneficiaries of that trust or would otherwise be allocated to the beneficiaries.
Income attributable to the trust deemed to have been derived directly by the beneficiaries
In certain defined circumstances Malta tax legislation would deem all income otherwise attributable to a trust to have been derived directly by the beneficiaries of that trust – irrelevant of the Malta tax residence of one or more of the trustees of the trust. As a result, to the extent that no income would be attributable to any such trust, that trust would be wholly and effectively transparent for local tax purposes. No Malta tax would be chargeable under the ITA in the hands of the trustee/s on any income or gains accruing thereto or released thereby.
Transparency is essentially achieved by reference to the nature of the trust property, the source of income or gains accruing to or derived by the relevant trust and the status of the beneficiaries as persons resident, ordinarily resident and/or domiciled in Malta. Chargeable income or gains otherwise characterized as constituting income attributable to a trust, are deemed to have been derived directly by the beneficiaries of that trust (despite the Malta tax residence of one or more of the trustees of the trust) and would thus not be chargeable to tax under the ITA in the hands of the trustees. For this to materialise, the following conditions ought to subsist:
- All income attributable to the trust consists of:
- income arising outside Malta; and/or
- income consisting in interest, discount, premium, royalties or capital gains; and
- All beneficiaries of the trust are:
- persons who are not ordinarily resident and domiciled in Malta; or
- persons whose income is totally exempt from tax such as philanthropic institutions, political parties and sports clubs.
Another set of circumstances which afford transparency is when the chargeable income or gains otherwise characterized 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 under Malta tax legislation in the hands of the trustee. For such treatment to subsist, the following conditions ought to be present:
- all income attributable to the trust must consist of:
- dividends distributed by one or more companies registered in Malta; and/or
- income arising outside Malta; and/or
- income referred to in interest, discount, premium, royalties or capital gains; and
- all beneficiaries of the trust are persons who are not resident in Malta; and
- the trustee of the trust is licensed to act as a trustee; and
- the trustee provides the Director General of Inland Revenue (DGIR), with a certificate in writing confirming that he holds one or more shares in the Malta registered company/ies distributing dividends referred to above for the benefit of a person or persons all of who are not resident in Malta in terms of the ITA.
Provided, that the pertinent conditions are met the DGIR would effectively look through the trust for Malta tax purposes and deem all chargeable income and gains to have been derived directly by the beneficiaries of the said trust. Such income and gains would, as a result of the income being deemed to be derived directly by the beneficiaries, be chargeable to tax exclusively in the hands of the beneficiaries in terms of Malta tax legislation. At any rate, to the extent that no income would, in fact be attributable to the trust, no Malta tax would be chargeable in the hands of the trustee.
Income attributable to a trust and allocated to the beneficiaries
In addition to transparency models described above, resulting in the total look through of a trust for Malta tax purposes, Malta tax legislation further provides for the transparent treatment of certain specific items or amounts of income attributable to a trust. In the latter circumstances such specific items of income would fall to be characterized or treated as constituting income attributable to a trust which must be allocated to the beneficiaries, irrespective of the place of residence and / or domicile of the beneficiaries. An allocation to the beneficiaries of income attributable to a trust would only be made in respect of the following amounts of income:
- amounts over which the beneficiaries had a vested right in the year immediately preceding the year of assessment; and/or
- amounts over which an entitlement had been bestowed in favour of the beneficiaries by the end of the year immediately preceding the year of assessment; and / or
- amounts accruing to or derived by the trustee in a given year of assessment and which had been distributed to the beneficiaries by the end of the year immediately preceding that year of assessment.
In such case, the DGIR would disregard a given trust in respect of the amounts of income attributable to that trust but allocated to the beneficiaries. Given the pertinent conditions are met, the relevant items or amounts of income attributable to a trust but allocated to the beneficiaries would not be chargeable to tax in the hands of the trustee. Rather, such items of income allocated to the beneficiaries would be aggregated with the beneficiaries’ other chargeable income for tax purposes and taxed accordingly.
Tick the Box Provisions
Malta tax legislation affords the possibility for a licensed trustee to irrevocably elect to have a trust treated as a company ordinarily resident and domiciled in Malta for tax purposes. This election is possible where the trust has been established by an instrument in writing and where the income attributable to the trust solely consists of dividends, interest, royalties, capital gains and income from investments. Distributions effected by the trustees of such trusts to the beneficiaries would take the form of a dividend and be treated as such.
Foundations
For tax purposes, foundations are by default treated in the same manner as a company ordinarily resident and domiciled in Malta. Consequently, the rules pertaining to the taxation of companies shall apply. This implies that foundations are by default subject to a tax rate of 35%. Tax due is payable in the same manner as applicable to a Malta company. Furthermore distributable profits ought to be allocated in the same manner applicable to a Malta company, implying that the Malta tax accounting system, applicable to Malta companies is also applicable to foundations. Distribution of profits to beneficiaries are treated in a manner analogous to a dividend distribution to the shareholders.
The full imputation system is also applicable with respect to distributions made to beneficiaries of a foundation, akin to a Malta company scenario. Beneficiaries of the foundations are also entitled to claim the applicable Malta tax refunds. The participation exemption is also available at the level of the foundation, exempting income and capital gains derived from a participating holding. This makes the foundation an ideal asset or investment holding vehicle.
The general rule is that where at least one of the administrators of the foundation is resident in for Malta tax purposes, then tax shall be payable in Malta on all income or gains earned by the foundation which is chargeable to Malta tax.
However, on the basis that the Malta foundation satisfies the applicable conditions, the foundation may be treated as a look-through entity and the income is deemed not to be income attributable to the Malta foundation but income which is derived directly by the beneficiaries and taxable in the hands of such beneficiaries. For stamp duty purposes, the administrators of a Malta foundation may elect that the foundation be treated as a trust.
Foundations may also opt to be taxed in the same manner as a trust, in which case the relevant provisions governing the taxation of Malta trusts would apply. In the event that such an election is made, the profits received by the Malta foundation are still taxed at the corporate rate of 35%. However where the foundation’s income is all foreign sourced and all the beneficiaries are non-Maltese residents, the income of the foundation shall, for the purposes of Malta tax legislation, be deemed to have been received directly by the beneficiaries who will be directly liable to pay tax in Malta and no tax would be due at the level of the foundation. This mechanism is commonly referred to as tax transparency and is not available unless an express election is made. Nevertheless, once an election to this end is made, the election is irrevocable.