Malta has developed a well-established legal and tax framework for the establishment and administration of trusts. This framework is particularly relevant to international individuals and families where the settlor is resident outside Malta but the trust is administered by a Maltese-resident trustee.
For these structures, one of the principal questions is how the trust will be treated for Maltese tax purposes.
The fact that the settlor is not resident in Malta does not, by itself, prevent Maltese taxation. Where at least one trustee is resident in Malta, specific provisions of the Maltese Income Tax Act apply to income attributable to the trust.
The tax analysis must therefore begin with the residence of the trustee and then consider the nature and source of the trust income, the trust assets, the beneficiaries and any applicable transparency provisions.
The Basic Structure
A typical international structure may involve:
Foreign Settlor
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Maltese-Resident Trustee
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Trust Property
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Investments / Shares / Securities / Other Assets
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Foreign Beneficiaries
For example, an individual resident in Italy may establish a trust administered by a professional trustee resident in Malta, with beneficiaries resident in Italy, the United Kingdom or another jurisdiction.
The settlor’s residence remains relevant to the overall international tax analysis, but it does not determine the Maltese tax treatment by itself.
The appointment of a Maltese-resident trustee creates a specific connection with the Maltese tax regime and must therefore be considered from the beginning of the structure.
Does a Foreign Settlor Avoid Maltese Tax?
No.
The fact that the settlor is resident outside Malta does not, in itself, take the trust outside the Maltese income tax framework.
Article 27B of the Income Tax Act provides that where at least one trustee of a trust is resident in Malta, tax is payable on income attributable to the trust.
The legislation defines income attributable to a trust by reference to relevant income accruing to or derived by the trustee or trustees from property settled in the trust and property acquired in the administration of the trust, including income derived from the employment of that property.
The starting point is therefore not whether the settlor is foreign.
The relevant question is whether the trust has a Maltese-resident trustee and, if so, what income is attributable to the trust under Maltese law.
Who Pays the Tax?
The trustee has the central tax compliance role.
Under Article 27C of the Income Tax Act, the trustee is answerable for the matters required under the Income Tax Acts for the determination, assessment and payment of tax in connection with income attributable to the trust.
This distinction is important.
The trustee may be legally responsible for the administration, assessment and payment of tax arising in relation to the trust without the trustee personally being the economic beneficiary of the trust income.
In practice, the Maltese trustee therefore needs to establish the tax position of the trust, comply with the relevant registration and filing requirements and ensure that any tax due is properly dealt with.
The economic burden will depend on the applicable tax treatment of the trust income and, where relevant, the beneficiaries.
What Is Income Attributable to the Trust?
The concept of income attributable to the trust is central to Malta trust taxation.
The relevant provisions look at income arising from property settled in the trust and property acquired in the administration of the trust.
The tax analysis must therefore consider the actual assets held by the trust and the income generated by those assets.
For example, a trust may hold:
- shares in a company;
- an investment portfolio;
- bank deposits;
- real estate;
- intellectual property; or
- other investment or income-producing assets.
Different assets can produce different categories of income, and the Maltese tax consequences must be determined accordingly.
The value of the trust assets is therefore not, by itself, the relevant tax measure.
The focus is on the income attributable to the trust and the applicable Maltese tax rules.
Does It Matter Where the Trust Assets Are Located?
Yes.
The location and nature of the trust assets are relevant to the tax analysis, but foreign assets do not automatically place the trust outside the Maltese tax framework.
A trust may therefore have:
- a settlor resident in Italy;
- a Maltese-resident trustee;
- an investment portfolio held outside Malta; and
- beneficiaries resident in the United Kingdom.
The foreign location of the assets and the foreign residence of the settlor and beneficiaries do not eliminate the need to analyse Article 27B where the trustee is resident in Malta.
At the same time, the source and character of the income remain relevant in determining the precise Maltese tax treatment.
This is why the structure should be analysed before assets are transferred into the trust.
The Role of the Beneficiaries
The beneficiaries become particularly relevant where trust income is distributed.
The Maltese tax rules contain specific provisions concerning the treatment of distributions to beneficiaries and the circumstances in which income may be treated as arising directly to beneficiaries.
The Malta Tax and Customs Administration has confirmed that beneficiaries receiving distributions which are taxable in Malta may have registration and filing obligations.
The fact that a beneficiary is resident outside Malta does not automatically determine whether a distribution is taxable in Malta.
The nature of the distribution, the underlying income and the applicable Maltese provisions must be examined.
The residence of the beneficiary must then be considered together with the tax law of the beneficiary’s home jurisdiction.
Tax Transparency
Maltese trust taxation includes specific transparency mechanisms.
In appropriate circumstances, income attributable to a trust may be treated as income arising directly to the beneficiaries rather than remaining taxable as income attributable to the trust.
This is an important distinction because it means that a Maltese trust should not automatically be treated as a separate taxable entity in respect of every item of income.
The statutory conditions must be examined carefully.
The analysis may therefore involve determining:
- the nature of the trust;
- the trust assets;
- the income generated by those assets;
- the identity and residence of the beneficiaries;
- whether the transparency provisions apply; and
- whether distributions have been made.
The correct result depends on the particular structure.
The 35% Tax Rate
Malta’s standard income tax rate of 35% is relevant to the taxation of trusts in certain circumstances.
However, it would be misleading to state that every Maltese trust is simply subject to a flat 35% tax on all income.
The Maltese trust regime contains specific rules concerning income attributable to trusts, transparency and the possible election for company treatment.
The applicable tax treatment must therefore be determined by reference to the actual circumstances of the trust.
For an international settlor, the headline tax rate is much less important than understanding which person or entity is ultimately subject to Maltese tax and on what category of income.
The Article 27D Election
Maltese legislation also provides a specific election under Article 27D of the Income Tax Act.
Subject to the statutory requirements, a qualifying trustee resident in Malta may elect for the income attributable to the trust to be treated as though it were income of a company ordinarily resident and domiciled in Malta.
The election is subject to specific conditions and should be considered carefully before being made.
It may be relevant in certain investment structures, but it should not automatically be regarded as a tax-saving mechanism.
The decision should take into account the nature of the trust assets, the income generated, the beneficiaries, expected distributions and the tax treatment in the jurisdictions of the settlor and beneficiaries.
A Trust with an Italian Settlor
Consider an individual resident in Italy who establishes a trust with a Maltese-resident professional trustee.
The trust holds an investment portfolio located outside Malta.
The beneficiaries include family members resident in Italy and the United Kingdom.
The settlor’s residence in Italy does not prevent the trust from falling within the Maltese tax framework because the trustee is resident in Malta.
The Maltese analysis must therefore determine the income attributable to the trust and the applicable tax treatment.
At the same time, the Italian tax position of the settlor and Italian beneficiaries must be examined separately, as must the United Kingdom tax position of any United Kingdom-resident beneficiaries.
This illustrates why the Maltese tax analysis cannot be undertaken in isolation from the tax laws of the jurisdictions connected with the structure.
A Trust with a United Kingdom Settlor
The same principle applies where the settlor is resident in the United Kingdom.
A United Kingdom-resident individual may establish a trust administered by a Maltese-resident trustee and appoint beneficiaries resident in the United Kingdom or elsewhere.
The settlor’s United Kingdom residence does not, by itself, determine the Maltese tax position.
The presence of a Maltese-resident trustee remains a central factor for the application of Article 27B.
However, the United Kingdom tax consequences may be significant, particularly in relation to the settlor, beneficiaries, trust income, distributions and succession or inheritance considerations.
A Maltese trust involving a United Kingdom settlor should therefore be reviewed under both Maltese and United Kingdom tax law before the structure is implemented.
Trust Registration and Tax Compliance
A trust administered by a Maltese-resident trustee may have registration and ongoing tax compliance obligations in Malta.
The trustee may be required to register the trust with the Malta Tax and Customs Administration and submit the relevant tax returns and information.
The trustee should also maintain appropriate records concerning the trust assets, income, expenses, beneficiaries and distributions.
The tax analysis is therefore not limited to the establishment of the trust.
The Maltese trustee has continuing administrative and compliance responsibilities throughout the life of the structure.
Changes in Trustees
The residence of the trustee can have a direct relevance to the Maltese tax position.
A trust initially administered by a Maltese-resident trustee may subsequently change trustees.
If the Maltese trustee is replaced by trustees who are all non-resident, the Maltese tax position may need to be reconsidered.
Conversely, the appointment of a Maltese-resident trustee to an existing foreign trust may create a Maltese tax connection.
Any change in trustees should therefore be reviewed before it is implemented.
The trustee’s residence should be treated as a structural tax consideration rather than merely an administrative matter.
Foreign Taxation Must Also Be Considered
Maltese tax treatment is only one part of an international trust structure.
The settlor’s country of residence may have rules concerning settlements, attribution of income, anti-avoidance, controlled structures and inheritance or succession taxation.
The beneficiaries’ jurisdictions may also impose tax on distributions or, in certain circumstances, attribute trust income to them before distribution.
A Maltese trustee cannot therefore determine the complete tax position of an international trust solely by applying Maltese law.
For a settlor resident in Italy, the Italian tax position must be considered.
For a settlor or beneficiary resident in the United Kingdom, the United Kingdom tax position must also be considered.
The international tax analysis should be completed before the trust is established and before assets are transferred.
Who Actually Bears the Tax Cost?
This is one of the most important practical questions for an international settlor.
The trustee may be responsible for determining and paying Maltese tax connected with income attributable to the trust.
However, that does not necessarily mean that the trustee bears the ultimate economic cost.
Depending on the applicable provisions, the tax burden may be reflected in the trust’s assets and income, or the relevant income may be treated as arising directly to beneficiaries.
The trust instrument and the administration arrangements should therefore be reviewed together with the tax position.
The distinction between the person legally responsible for tax compliance and the person economically bearing the tax is particularly important when negotiating trustee fees, indemnities and distribution arrangements.
Why the Settlor’s Residence Is Only One Part of the Analysis
For an international client, the question is often framed as:
“Is the settlor resident in Malta?”
That is not the correct starting point.
Where a trustee resident in Malta is involved, the Maltese tax legislation specifically requires consideration of the income attributable to the trust.
The correct analysis should instead consider:
- the residence of the trustee;
- the residence of the settlor;
- the residence of the beneficiaries;
- the governing law of the trust;
- the nature and location of the trust assets;
- the income generated by those assets;
- the application of the transparency provisions;
- any distributions to beneficiaries;
- any Article 27D election; and
- the tax consequences in the relevant foreign jurisdictions.
Only by considering these elements together can the actual tax position be established.
Why Use a Maltese Trustee?
For an international settlor, appointing a Maltese trustee can provide access to Malta’s established trust and fiduciary framework and to professional administration within an European Union jurisdiction.
It may also provide a clear regulatory and administrative framework for the ongoing management of the trust.
However, the appointment of a Maltese trustee should never be made solely for tax reasons.
The trustee’s residence can itself have tax consequences, and the trust should be structured with those consequences in mind.
The legal, tax and administrative functions of the trustee should therefore be considered before the trust instrument is finalised.
How Promethean Can Assist
Promethean advises international individuals, families, trustees and professional advisers on the establishment and administration of Maltese trusts.
Our team assists clients with trust structuring, the appointment and role of Maltese trustees, Maltese tax considerations, trust registration and compliance requirements, the treatment of trust income and distributions, and the coordination of Maltese trust arrangements with the tax and succession rules applicable in the settlor’s or beneficiaries’ jurisdictions.
For further information regarding Maltese trusts, trust taxation and structures involving foreign settlors and Maltese-resident trustees, please contact us.
