Creation of Bespoke Trust Structures
Malta ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition in 1994 and incorporated the terms thereof into domestic law by virtue of the Recognition of Trusts Act. As a result, a trust governed by a foreign law would be recognised in Malta even when all other elements of that trust were Maltese. The establishment and operation of Trusts was eventually regulated by the Trusts and Trustees Act, 2004, which has drawn upon several other developed trust jurisdictions to provide an advanced and sophisticated legal framework to accommodate modern trust practice.
Formation of A Trust
Trusts are usually constituted by means of a formal private agreement or a will but they may also be created by simple declaration or by operation of law or result from a court judgment. A trust is validly constituted when the trust property is transferred by the settlor to the trustee selected for this purpose. The trustee is then dutybound to hold and administer the said property for the benefit of the beneficiaries, whether named or identified by reference to a class of persons.
The trust property effectively constitutes a separate fund which is legally owned by the trustee but which is separate and distinct from the trustee’s personal property and from other property held by the trustee under any other trust. Consequently, the trustee’s creditors cannot exercise any claims against the trust property since it does not form part of the trustee’s estate. It is important however to emphasise that a trust is not has no legal personality (such as a company or a foundation). As a result, the trust property is managed via the legal personality of the trustee.
A trust may exist for a maximum of 125 years. This limit does not, however, apply in respect of a trust created for a charitable purpose or a unit trust or a qualifying retirement scheme set up as a trust.
The Participants in a Trust
The settlor who settles property on trust and transfers title over that property to the trustee – typically ceasing to have any active role in the trust thereafter.
The trustee who acquires the property settled on trust and holds the same on trust for the beneficiary/ies or for one or more charitable purposes and in accordance with the terms of the trust and the requirements of law.
The beneficiary/ies having an entitlement to benefit under the trust and whose rights in relation to the property settled on trust are generally dependant upon the terms and nature of the trust. A beneficiary has a beneficial interest in or to the trust property and would be entitled to sell, charge, transfer or otherwise deal with his said interest in any manner –subject, of course, to the terms of the trust.
The protector who may be appointed and who may be vested with certain supervisory powers.
Malta Tax Treatment of Settlements
The settlement of assets into a Malta-regulated trust is not chargeable to tax in Malta provided that one of the following conditions is satisfied:
- The settlor is not ordinarily resident and domiciled in Malta for Malta tax purposes and the assets settled on trust are situated outside Malta at the time of such settlement; or
- The assets settled on trust do not qualify as chargeable assets in terms of Malta’s capital gains tax rules (namely real estate, securities (excluding those having a fixed rate of return such as bonds), business goodwill, intellectual property including copyright, patents, trademarks and trade-names and a beneficial interest in a trust, whether in whole or in part).
Malta Tax Treatment of Trustees
The trustee of a Maltese trust is fully tax-transparent from a Maltese law perspective, meaning that all income and gains that would otherwise have been attributable to the trust would be deemed to have been derived directly by the beneficiaries of that. In order for such tax transparency to apply it is necessary that the following conditions apply:
- none of the beneficiaries of the trust are deemed to be ordinarily resident and domiciled in Malta; and
- the income or gains of the trust are sourced outside of Malta and/or comprise Malta sourced interest, royalties or gains realised pursuant to the disposal of shares in a Maltese non-property company.
Similarly, the trustee of a trust would treated as tax-transparent for Malta tax purposes when:
- none of the beneficiaries are deemed to be resident in Malta; and
- the income or gains of the trust consist of dividends distributed by a Malta company and/or have a foreign source and/or include Malta source interest, royalties or gains realised pursuant to the disposal of shares in a Maltese non-property company.
Should a Maltese trustee not qualify for tax transparency and at least one of the trustees of that trust is a person resident in Malta for tax purposes, then all income and gains attributable to the trust would be chargeable to tax in Malta at the flat rate of 35%.
Malta Tax Treatment of Transfers of Beneficial Interests
Malta tax would not be chargeable upon any transfer by a beneficiary of his/her beneficial interest in a trust when:
- the trust property does not include any assets chargeable to tax in Malta; or
- the transferring beneficiary is not deemed to be ordinarily resident and domiciled in Malta and the trust property does not include any assets chargeable to tax in Malta.
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