Malta: Trusts

Last Updated: 18 March 1997
A. INTRODUCTION - THE 1988 'OFFSHORE TRUST'

Trusts were introduced in 1988 as 'offshore trusts' intended solely for:

(i) settlors and beneficiaries who are non-residents, defined (i) in the case of individuals, as persons who are neither ordinarily resident nor domiciled in Malta, with an exception being made for persons ordinarily residing in Malta by virtue of a permanent residence permit (ii) A body of persons, on the other hand, would be considered resident in Malta if it were to be formed and registered in Malta or if it were to have its principal place of Business in Malta or be controlled, directly or indirectly, by a person/s resident in Malta - non-residence is defined 'a contrario sensu' and

(ii) any form of trust property whatsoever, excluding (i) shares, stock or debentures in or of a company whose assets include immovable property situated in Malta; (ii) shares, stock or debentures in or of a Maltese-registered company (sole exception - offshore companies); and (iii) immovable property situated in Malta.

Offshore trusts benefited from a beneficial tax regime guaranteed against claw-back for a period of 10 years from the date of the trust's registration with the MFSC, the most salient features of which are the following:

(i) Total income tax payable on the income of a trust and on any income distributed to any of its beneficiaries in any year of assessment is a flat rate of Lm200 (c.US$575). The nominee company, acting as trustee, may opt to submit a short declaration to the local Revenue rather than a tax return - in such cases, neither the trust, nor the trustee, nor any other person having an interest therein would be required to file an income tax return

(ii) Exemption from duty payable, including duty upon 'inter vivos' transfers, in respect of any document concerning a trust. Exemption from duty payable upon transfers on the death of a person, relative to the transfer of an asset held under a trust, or otherwise payable by any person relative to his interest as a beneficiary under a trust.

(iii) Exemption from customs duty relative to any property held under a trust.

(iv) Exemption from Exchange Control regulations relative to any transaction or operation concerning or relating to trusts or any property held thereunder.


B. THE 1994 AMENDMENTS

The 1994 "Recognition of Trusts Act" had a twofold objective:

(1) It reviewed the Offshore Trusts Act, 1988 so as to convert it into a Trusts Act, that is to say a general trust law rather than a law restricted to regulating a particular form of trust, the offshore trust. The amending act, besides introducing this general concept of trusts, also provided for a more streamlined classification of trusts; clear rules for the determination of the proper law of any trust, which would henceforth be determined with reference to the Hague Convention; several new and important concepts e.g. the protector; the principle of tracing; and so forth.

(2) It gave the force of law to the Hague Convention on the Law Applicable to Trusts and on their Recognition. In so doing, Maltese trust law was thus enriched with a comprehensive body of international conflicts-of-law rules regulating some of the most important aspects of trusts, namely (i) the proper law of the trust, being basically the trust law which is to regulate the trust and the legal relationships between the trustees and the settlor, beneficiaries, and third parties; (ii) recognition of trusts and its effects, (iii) enforceability of trusts. This 'measure' provides users of Maltese and foreign trusts in a Maltese context with a significant amount of reassurance as to the manner in which important aspects of trusts will be considered by Maltese courts.

C. THE 'NEW' TRUSTS ACT

Following such amendments, the Trusts Act now makes provision 'inter alia' for the following different types of trusts:

1. Maltese trusts

A Maltese trust is quite clearly a trust with the Trusts Act, 1988 as its proper law. A Maltese trust must (i) still satisfy the two conditions relative to settlors/beneficiaries and trust property referred to above, (ii) have a nominee company, issued with a warrant to so act by the MFSC, as one of its trustees, (iii) be registered with the MFSC. A Maltese trust automatically benefits from the abovementioned beneficial tax regime.

2. Foreign trusts

A foreign trust has a foreign proper law, determined with reference to the proper law of the trust indicated by the settlor in the trust document itself, in conjunction, if need be, with the Hague Convention. The users of a foreign trust in a Maltese context are thus afforded the comfort of 'using' a trust law with which they are familiar, supplemented, as a result of the Hague Convention having been given the force of law, by the equally important assurance as to the fact that the foreign trust would be recognised and enforced as such by the Maltese Courts.

Foreign trusts may opt to be registered with the MFSC in order to benefit from the abovementioned beneficial tax regime. Such registration is conditional upon the following (i) the two restrictions relative to settlors/beneficiaries and trust property referred to above must be satisfied, and (ii) a licensed nominee company must be appointed to act as one of its trustees. Foreign trusts opting not to be registered with the MFSC would be subject to standard Maltese tax law provisions.

D. TAX CONSIDERATIONS

1. Maltese trusts

(i) Maltese trusts may be used for the ownership, management or administration of a variety of assets, including works of art; intellectual property; immovable property situated abroad; shares in foreign-registered companies (which do not in turn own Maltese immovable property) e.g. IHCs, etc.

(ii) Maltese trusts may also hold shares, stocks or debentures in Maltese offshore companies, non-trading and trading offshore companies alike, and may in fact prove to be a useful tax-efficient dividend-receiver vehicle at the end of a more complex structure, than would perhaps a non-trading offshore company.

2. Foreign registered trusts

(i) Foreign registered trusts may obviously be used for any purpose whatsoever permitted by the relative foreign proper law. The beneficial tax regime which may be availed of by foreign registered trusts and the parties concerned (as well as the restrictions imposed as a condition for such MFSC registration) is to be noted.

(ii) Opting for a foreign registered trust may prove to be a more tax efficient alternative to a company which operates a Foreign Income Account (vide "Malta - An International Financial Services Centre", s.11.2, for more details):

3. Foreign non-registered trusts

The decision to opt for a foreign non-registered trust in a Maltese context may be based on one of the following considerations:

(1) A foreign non-registered trust may be used to own immovable property situated in Malta and shares in foreign companies owning immovable property situated in Malta (subject to certain restrictions), and shares in Maltese companies.

(2) Both the settlor, the trustee/s and the beneficiary/ies of a foreign non-registered trust may be domiciled and/or resident in Malta.

Accordingly, a foreign non-registered trust may 'inter alia' be used:

(i) To acquire and hold Maltese immovable property (subject to the necessary permits being issued);

(ii) To hold shares in a 'qualifying company' under the Industrial Development Act;

(iii) To hold shares in International Trading Companies and claim the relative tax refunds available to non-resident shareholders, (vide "Malta - An International Financial Services Centre, s.11.5).

There are potentially some problems in practice as a result of the fact that Maltese tax law does not provide clear indications as to whose non-resident status must be established in such a context. Indeed, whilst the trustee would in fact be the legal owner of the shares and his non-residence should suffice, Maltese tax law seems to imply that a 'look through' attitude is to be adopted so as to consider the residence status of the beneficiaries (which is hardly possible especially in view of the trustee's duty of confidentiality). These factors notwithstanding one may however venture to say that it should be possible for a foreign non-registered trust to benefit from the tax refund regime applicable to non-resident shareholders in ITCs (and IHCs too) if a number of conditions (which seek to ensure the non-resident status of trustees and beneficiary/ies) are satisfied.

E. COLLECTIVE INVESTMENT SCHEMES

A short comment refers to the possibility of setting up collective investment schemes as unit trusts, having either a Maltese or a foreign proper law.

Unit trusts which are issued a CIS licence by the MFSC benefit from a blanket tax exemption:

(i) The CIS's income and capital gains are both exempt from Malta tax - these CISs may not however benefit from Malta's double taxation agreements;

(ii) Distributions to unit holders are exempt from tax in the hands of non-resident shareholders. Non-resident unit holders are also exempt from the payment of tax on capital gains realised on the disposal of units in the trust.

THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ON THE SUBJECT MATTER. IT IS THEREFORE NOT A SUBSTITUTE OF PROFESSIONAL ADVICE AND IS NOT TO BE ACTED UPON WITHOUT PRIOR CONSULTATION WITH SPECIALISED CONSULTANTS.

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